1

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 board b. 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

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 at RM0.40 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.
Prepared by Chin Yok Fong B.Soc.Sc.(Econs)Hons., MBA(Applied Finance &Investment), MMIM, MICM

sell the rights take up the rights tail-swallowing i.e. sell sufficient of the rights to provide the cash to take up the balance. Common sense calculation see example above on TERP:
Value of rights / ex-rights price * no. of shares allotted.

(Continue from (a) above) c. Share splits and bonus issues very common in Bursa Malaysia nowadays. - What are the reasons? d. Warrants options to buy shares in the company, normally issue in conjunction with an equity issue i.e. new shares or rights issue so as to sweeten the issue. e. Equity options not common in our country. Debt finance: a. Debentures: - Is a written acknowledgement of debt; - can be secured or unsecured; - Can be in the form of loan stock, bonds etc. - Must be registered with the CCM under our Companies Act, 1965 in order to be ranked as a secured creditor. - Can be deeply discounted e.g. issue price of RM6000 per RM100 nominal, i.e. deep-discounted bonds, or zero coupon. - With zero coupon, all of the investors returns are wrapped up in capital gain on redemption. b. convertibles: - Kind of hybrid between equity and debt finance, with the feature of convertibility into ordinary shares at fixed terms e.g. the past issues by YTL Power International, USD Exchangeable Bond, offshore.

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

- 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 of claim 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, or substantially 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

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

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

5.

6.

7. 8.

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. 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 the venture capitalists. Log on to the website and find out more. 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. Trade finance / trade credits - acceptance credits, bills of exchange, CPs, MTNs, invoice discounting, factoring etc. Government assistance e.g. our famous CGC scheme targetted at SMEs. There are many other government-funded schemes. Log on 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;
Prepared by Chin Yok Fong B.Soc.Sc.(Econs)Hons., MBA(Applied Finance &Investment), MMIM, MICM

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 require redemption, 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 become perpetual 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), the corresponding credit should be to liabilities. (The above are covered under IFRS 2 share-based payment).

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