By Alastair Graham

Themes contain: investment recommendations on hand to managers * fairness investment * debt investment * hybrid monetary tools * versions at the optimum capital constitution * debt profile administration * refinancing.

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Capital Structuring (Glenlake Risk Management)

Themes contain: investment ideas to be had to managers * fairness investment * debt investment * hybrid monetary tools * versions at the optimum capital constitution * debt profile administration * refinancing.

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Commercial Financial Comment risk risk (leverage) HIGH LOW HIGH HIGH LOW LOW LOW HIGH New funding requirements should be met by a mixture of debt and equity that keeps leverage levels quite low A high-risk company. The cost of any new funding could be high. e. increase financial leverage by raising new capital in the form of debt. If the return on new investments by such a company exceeds the cost of new debt, the income for equity stockholders will be enhanced. There are some exceptions to the rule of avoiding high leverage when commercial risk is high.

A borrower has to decide the required term (maturity) for each new debt. For a major corporate borrower, debt can be of almost any duration. Walt Disney, the entertainment group, issued $300 million of bonds in July 1993 with a maturity of 100 years. Most companies, however, can arrange debt funding with maturities ranging from overnight up to ten years. The majority of companies are generally unable to raise funds for maturities over 10 years because lenders and investors are unwilling to accept the higher risk of default that is inevitable with longer-term debts.

A loss-making company must either obtain new finance or suffer a long-term reduction in capital and assets. In the long term, the company must expect a return to profitability, and can hope to rebuild equity through retained profits. Without the prospect of a return to profits, there would be no reason to continue in business. In the short term, however, the reduction in equity capital could have serious repercussions, because financial leverage will rise. Quite Funding options 33 possibly, the company will breach loan covenants as a result of losses, and consequently be exposed to action by its bankers or bondholders.

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