Abmf5154 Ctm l2 Funding 1

7/31/2019 Abmf5154 Ctm l2 Funding 1

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ABMF5154 CTM L2 FUNDING MANAGEMENT (1)

Topics to be covered: sources of finance

Share (equity) capital (ordinary, preference, reserves)

Raising share or equity capital the stock market

Debt finance debenture, convertibles, warrants etc.

Medium term financing term loans, leasing, lease or buy

decisions, venture capital, business angels, trade finance,

government assistance.

A. Equity shares

a. Ordinary ordinary equity shareholders are the owner of the

business, usually represented by ordinary shares. Sometimes they

are referred to as risk capital. Ordinary shareholders take most

of the business risks.

Par value/nominal value (in Singapore, no par value

requirement, same as in US).

book value

Market value how to determine.

b. Preference entitled their shareholders to a fixed rate of dividend.

c. Reserves includes share premium, revaluation reserves and

retained profits.

Raising share or equity capital the stock market and Bursa

Malaysia:

the main boardb. the second board (SESDAQ in Singapore, AIM in London)

c. the MESDAQ board (NASDAQ in the US).

What are the main criteria for listing under the 3 boards? (Tutorial

question course rep to assign to groups).

Methods of raising equity capital:

a. new issues through

Offer for sale (normally under a prospectus) either of

completely new shares or may derive from the transfer to

the public of shares already held privately by the offerors.

They are normally underwritten.

Offer for sale by tender issue price is not fixed, depending

on the tender price offered.

Prepared by Chin Yok Fong B.Soc.Sc.(Econs)Hons., MBA(Applied Finance &Investment), MMIM, MICM

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Private placement, especially under S. 132D of the

Companies Act, 1965.

b. Rights issues an offer by a company to its existing ordinary

shareholders of the right to subscribe for new ordinary shares

or other convertible securities having an equity element in

direct proportion to their existing shareholding.

Selection of an issue price factors to consider

Selection of an issue quantity factors to considerany

sweeteners?

Terms of issue e.g. 1 for 4 @ RM1.50 each.

The theoretical ex-rights price: say terms of issue are: one new

share @ RM1.50, 4 old shares @ RM2.00 (market price),

therefore:

1 new share @1.50 = 1.50

4 old shares @ 2.00 = 8.00

--- --------

5 9.50

TERP = 1.90

The value of the right: TERP ISSUE PRICE

i.e. 1.90 1.50 = 0.40 per new right share.

Theoretically, the existing shareholder can sell the right atRM0.40 to interested parties to subscribe for the share.

Or in formula terms:

TERP = PpNo/N + PnNn/N

Where:

Pp = pre-issue price

Pn = new issue price

No = no. of old shares

Nn = number of new shares

N = total no. of shares

What about yield adjusted ex-rights price? We shall practice in tutorial

sessions.

Ways to handle rights:

Do nothing.


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- Less risky than ordinary shares (prior to

conversion) due to priority of ranking in times of

liquidation.

- Can be secured or unsecured.

C. Medium term financing:

What are the differences between short, medium and long-term

finance?

Types of medium term financing:

1. Term loans normally for a fixed amount with a fixed repayment

schedule. Nowadays, bankers are very creative, you can have

variable term loans (something like an Revolving Credit), with

derivative features e.g. fixed / floating rates running

concurrently on different portions of the loan.

2. Leasing-2 parties are involved i.e. lessor and the lessee (i.e. owner

vs. hirer).

- Common in high cost capital assets e.g. aircraft (e.g.

Air Asia recently leased / purchasee from AirBus

(previously from Boeing), ships (MISC, MMM,

HALIM MAZMIN), other industrial equipments

etc.

-Normally associated with tax benefits, in the form ofclaim on capital allowances by the lessor, which

will then pass on to the lessee in the form of lower

lease rental, though not always necessarily so. You

are normally required to evaluate between buy or

lease decisions (will practice in tutorial sessions)

- Off balance sheet financing (because lessee rents the

asset, not owns the asset)

- Differences between operating and finance lease:

1. a finance lease: is one under which the lessee

obtains the use of the asset for the whole, orsubstantially the whole, of the assets useful life,

with the present value of the minimum lease

payments amounting to 90% or more of the

present value of the assets fair value.

- Implication of a finance lease must be reflected on

to the balance sheet, with the corresponding asset


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and liability entries, with depreciation and financing

charged against profits. Maintenance is on the

lessees account.

2. Operating lease: the lease rentals will not cover

the full cost of the asset leased, with the lessor

hoping to lease the asset several times over the

useful life of the asset.

- Implications of an operating lease very much

like contract hire. Does not appear on lessees

balance sheet, with lease rentals charged directly

against profits. Normally incorporates maintenance

and other service charges/fees.

Industry dynamics will also determine a lease or buy decision e.g.

complexity and dynamism of a particular industry.

3. Lease or buy decision will practice in the tutorial session.

4. Sale and lease back decisions rationale behind: to convert certain

assets owned into cash yet still able to use the assets through

paying lease rental. Normally adopted by cash-strapped entities

e.g. Sun Inc.s 2005 ABS issue.

5. Venture capital normally given in the form of equity finance, to

young unquoted businesses e.g. our countrys MAVCAP. They

are high-risk ventures and therefore require high returns by theventure capitalists.Log on to the website and find out more.

6. Business angels normally are private individuals, with the time

and expertise available as well as the cash. Factor that would

persuade them to put in capital include the forward and outward

looking considerations e.g. strategic vision, intuition, sources of

competitive advantage, the skills required etc.

7. Trade finance / trade credits - acceptance credits, bills of exchange,

CPs, MTNs, invoice discounting, factoring etc.

8. Government assistance e.g. our famous CGC scheme targetted

at SMEs. There are many other government-funded schemes. Logon to www.abm.org.my or www.bankinginformation.org.my

website to find out more.

Note: the importance of correct classification of financial instruments: in

particular, in relation to:

Convertible debt securities i.e. hybrids;


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Operating vs. finance lease;

Sale and lease back;

Redeemable preference shares;

Financial instruments with contingent settlement features e.g. where

shares are issued that give the holder the right to requireredemption, in cash or another financial asset, upon the

occurrence of an uncertain future event such as failure to achieve

a certain level of profits etc, such instrument should be classified

as debt;

their consequential effect on significant accounting ratios.

(The above are covered under IAS 32- Financial instruments:

presentation)

What about share-based payments e.g. ESOS that enable employees to

exercise the option and convert to equity of the company and becomeperpetual capital of the company? Where payment for goods and

services is in the form of shares or share options, the transaction should

be classified in the financial statements as follows:

There should be charge to the income statement where the goods

or services are consumed;

Where the payment is equity-linked, the corresponding credit

should be to equity;

Where the payment is cash-settled, with cash value being based on

the price of the share (or other equity instruments), thecorresponding credit should be to liabilities.

(The above are covered underIFRS 2 share-based payment).


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Abmf5154 Ctm l2 Funding 1