Tài chính doanh nghiệp - Chapter 9: Sources of short - Term debt

Chapter 9Sources of Short-Term DebtLearning ObjectivesIdentify the main forms of short-term borrowing by Australian companies.Understand the characteristics of trade credit and calculate the implied interest rate.Understand the main forms of bank lending and appreciate when each may be suitable to a borrower’s needs.Learning Objectives (cont.) Understand debtor finance, inventory loans and bridging finance, and be able to distinguish between them.Understand the basic features of the interbank cash market.Understand the process of using promissory notes and bills of exchange to raise funds.Calculate prices and yields for promissory notes and bills of exchange.Introduction‘Short-term debt’ is defined as debt due for repayment within a period of 12 months.The major short-term borrowing choices available to Australian companies are:Trade credit.Borrowing from banks and other financial institutions.Issuing short-term marketable debt securities such as promissory notes and bills of exchange.Trade CreditWhen companies sell goods or services to other businesses ‘on credit’.Usually, the seller allows the purchaser several weeks to pay.Thus, trade credit is, in effect, a form of short-term debt in which the seller lends the purchase price to the purchaser.Borrowing from Banks and Other Financial InstitutionsBank overdraftAn overdraft permits a company to run its current (cheque) account into deficit up to an agreed limit.The cost of a bank overdraft includes the interest cost and fees.The interest rate charged is usually at a margin above an indicator rate, published regularly by the bank, and only on the amount by which the account is overdrawn.Borrowing From Banks and Other Financial Institutions (cont.) Debtor financingDebtor finance allows a company to raise funds by selling its accounts receivable on a continuing basis to a financier (called a discounter), who is then responsible for managing the sales ledger and collecting the debts.The discounter earns a return by discounting the value of the receivable and charging a fee. Borrowing From Banks and Other Financial Institutions (cont.) Debtor finance with recourseAgreement in which the discounter is reimbursed by the selling company if the debtor defaults.Debtor finance without recourseAgreement in which the discounter is not reimbursed by the selling company if the debtor defaults.Invoice discountingA discounting agreement in which the debtors of the company seeking finance are unaware of the existence of the discounting agreement.Borrowing From Banks and Other Financial Institutions (cont.)Inventory loansKnown as floor-plan or wholesale finance.A loan, usually made by a wholesaler to a retailer, that finances an inventory of durable goods, such as motor vehicles.Bridging financeA short-term loan, usually in the form of a mortgage, to cover a need normally arising from timing differences between two or more transactions.Interbank DepositsInterbank market is a loan market that operates between banks that lend to each other overnight.Facilitated by exchange settlement accounts that all banks hold with RBA.These funds can be lent to (borrowed from) another bank at the interbank cash rate.‘Interbank cash rate’ is the rate changed on overnight interbank loans which is closely tied to the RBA’s cash rate.Short-Term Marketable DebtCompanies can obtain short-term debt funding by issuing (selling) securities such as promissory notes and bills of exchange.The securities are a promise to pay a sum of money on a future date.These are generally discount securities.A secondary market exists for the exchange of such securities.Promissory NotesA promise to pay a stated sum of money on a stated future date.Also known as ‘one-name paper’ and ‘commercial paper’.Face valueSum promised to be paid in the future on the debt security.DiscounterPurchaser of a short-term debt security such as a promissory note or a bill of exchange.Promissory Notes (cont.)To calculate the price P of a promissory note: Promissory Notes (cont.)Example 9.2:90-day promissory note, $500k face value, and a yield of 4.926% p.a. What is the price? Promissory Notes (cont.)A promissory note can be underwritten, banks and other financial institutions are usually involved.To facilitate trading it is usual for promissory note issues to have a credit rating from a ratings agency.For example, Moody’s Investors Service assigned a long- and short-term rating to a WMC Resources $500m promissory note program.Bills of ExchangeA marketable short-term debt security in which one party (the drawer) directs another party ( the acceptor) to pay a stated sum on a stated future date.Figure 9.1Bills of Exchange (cont.)A company will struggle to issue and sell a promissory note if it does not have a credit rating from a ratings agency.This is one of the reasons that bills of exchange have been developed — in order to enable an unrated entity to borrow by issuing marketable securities.In addition to the issuer of the bill, there is an acceptor who promises to redeem the bill in the event that the issuer defaults.Bills of Exchange (cont.)The face value is paid to whoever holds the bill on the maturity date.The discounter has the choice of either holding the bill until maturity, when payment will be received from the acceptor, or selling (rediscounting) the bill.However, if the bill is sold, the seller normally endorses the bill at the time of sale, creating a chain of protection for the bill holder.Bills of Exchange (cont.)Endorsement: Acceptance by the seller of a bill in the secondary market, of responsibility to pay the face value if there is default by the acceptor, drawer and earlier endorsers. Bills of Exchange (cont.)Normal process of repaymentFigure 9.2Bills of Exchange (cont.)Bank accepted billsBills of exchange that have been accepted or endorsed by a bank.Non-bank billsAny bill of exchange that has been neither accepted nor endorsed by a bank.Bills of Exchange (cont.)Bill facilitiesBill discount facilityAgreement in which one entity (normally a bank) undertakes to discount (buy) bills of exchange drawn by another entity (the borrower). Bill acceptance facilityAgreement in which one entity (normally a bank) undertakes to accept bills of exchange drawn by another entity (the borrower).Bills of Exchange (cont.) Fully drawn bill facilityBill facility in which the borrower must issue bills so that the full agreed amount is borrowed for the period of the facility.Revolving credit bill facilityBill facility in which the borrower can issue bills as required, up to the agreed limit.SummaryVarious sources of short-term finance are available to companies.The simplest is trade credit; however, cash discounts are forgone.Banks and other financial institutions offer a range of short-term finance:Banks offer overdrafts, which are a common and flexible form of short-term finance.More specialised forms of finance include debtor finance, inventory loans and bridging finance.Summary (cont.)A company can issue short-term marketable debt such as promissory notes and bills of exchange.Promise to pay face value at a future date and sold at a discount to face value.Promissory note, promise/guarantee made only by issuer of note.Bill of exchange, there is an acceptor who guarantees the loan.Secondary market for these debt instruments exists.