BWFF 6013 SEMINAR IN FINANCE

LONG TERM FINANCING

TH FEBRUARY 2014
DATED 8TH

PREPARED BY :
NORAINI BINTI HARUN (812921)
TEW CHOON POH (816302)

Topics :-

Definition of Long Term

Financing.
Purpose of Long term
Financing.
Factors Determining Long
Term Sources of Financing.
Sources / Forms of Long

Definition of Long Term

Financing: Long term financing is a form of financing that

is provided for a period of more than a year.

Long term financing services are provided to

those business entities that face a shortage of

capital , i.e. to raise funds to purchase an asset
or make an investment.

Purpose of Long Term Financing : To finance Fixed Assets

- Asset-liability mismatch, interest rate risk, liquidity

risk.
To finance the permanent part of Working

Capital
- Long term vs. short term(working capital) funds
requirements.
To finance the Growth and Expansion of a

business
- For modernization, expansion, diversification; huge
quantities requirements, irreversible decision

Factors Determining Long Term Sources

of Financing :Nature of business :
Example : Partnership vs. Public listed company. Raised funds via

issues of shares to public only applicable for public listed

company, whereas partnership may need to raise funds via term
loan.

Nature of goods produced :

Example : Property vs. consumable goods. Company engaged in

Property development will be able to get longer financing

compared with consumable goods.

Technology used :

Example : Knowhow company vs. Trading company. High

technology based company which involves capital intensive may
suitable for leasing financing ( such as Singapore Airline which
they leased their airplanes) compared with trading company .

Sources / Forms of Long Term

Financing :
1) Equity Capital :
Ordinary Shares
Preference Shares.
The Initial Public Offering (IPO)
2) Internal Accrual
3) Term Loan
4) Bonds
5) Lease Financing
6) Venture Capital

Ordinary Shares
Equity shareholders are the owners of the

business. They enjoy the profits of the

company after having paid to preference
shareholders and other creditors of the
company.
Their liability is limited to the amount of
share capital they contribute to the company.
Equity capital is a permanent capital with the
company and no obligation for dividend
payments.
However cost of equity capital is higher than
other capital.
Equity shareholders enjoy the voting rights.
Excess equity capital leads dilution of
effective control.

Ordinary Shares
( continue )..
Authorised, Issued, Subscribed and Paid

up capital

Par/face/book value, Issue Price and

Market Value

Rights of equity shareholders

-Right to Income :PAT less preferred

dividends
-Right to Control: voting rights
-Pre-emptive Right: for additional issues,
rights issue in the same proportion
-Right in liquidation: residual claim over
assets

ORDINARY SHARES

PREFERENCE SHARES
Preference shares have some attributes

similar to ordinary shares and some to

debentures.
Preference shares have first right on the
dividend payment and assets in the event of
liquidation, over the equity shareholders.
Preference shareholders get fixed rate of
dividend e.g. 18% preference shares.
Preference shares holders do not have voting
rights except certain cases.
Preference capital might include call feature,
where an issuing company has an option to
redeem the shares, wholly or partly, prior to
the maturity date and at a certain price.

TYPES OF PREFERENCE SHARES

Cumulative Preference shares, where dividends

are paid on a cumulative basis in case they remain

unpaid in any financial year due to insufficient
profits or loss. The company have to pay up all the
arrears of preference dividends before declaring
any equity dividends.
Non-cumulative Preference Shares do not
enjoy above right to dividend payment on
cumulative basis.
Redeemable Preference Shares will be
redeemed after a given maturity period.
Perpetual Preference Shares capital will remain
with the company forever.
Convertible and Non-convertible Preference
shares, whether to convert into equity shares or
not, after certain period.

PREFERENCE SHARES
Hybrid form of Financing.
Ordinary shares Features:

-Out of distributable profits

-Dividends not tax deductible
-However, Priority over ordinary
shares in the event of winding up.
Debenture features:

-Dividend rate is fixed

-Capital is redeemable depends on
the type of preference shares.
-Normally no right to vote

PREFERENCE SHARE( S
continue).
Example :
The Board of Directors of Octagon
announced that Octagon Consolidated
Berhad, Green Energy and Technology
Sdn. Bhd. (GreenTech) and KNM
Renewable Energy Sdn. Bhd.
(KNMRE) had on 6th December 2011
entered into a Share Subscription
Agreement for GreenTech to issue
10 million of Redeemable Convertible
Preference Shares (RCPS) to KNMRE
for a total cash consideration of RM 10
million of RM 1.00 per RCPS.

PREFERENCE SHARES

THE INITIAL PUBLIC OFFERING (IPO)

The initial public offering (IPO) is the

process of selling stock to the public

for the first time.
2014 IPO listed / tentatively to be

listed on Bursa Malaysia :

IOI Properties Group Berhad, listed on
15th January 2014. (main market
Property ) at RM 1.76 per unit.
SCH Group Berhad , tentatively to be
listed on 13th February 2014. ( ACE
market trading/services ) at RM 0.23
per unit.

TYPES OF OFFERINGS :
Primary Offerings :
The new shares are sold in the IPO in order
to raise new capital.
Secondary Offerings :
The existing shares are sold by the current
shareholders as part of their exit strategy.
Best-Efforts IPO :
The underwriter does not guarantee that the
stock will be sold, but instead tries to sell the
stock for the best possible price. It applies for
smaller IPOs.

TYPES OF OFFERINGS (continue).

Firm commitment IPO :
The underwriter guarantees that it will sell all the
stock at the offer price. In this case, the underwriter
purchases the entire issue and then resell it at the
offer price.
Example : In January 2014, OUE Commercial REIT
offered an IPO , consist of 433,000,000 units of
shares at SGD 0.80 per unit , listed at Singapore
Exchange Securities Trading Limited (SGX-ST) The
said IPO is jointly underwritten by OCBC, Standard
Chartered , CIMB, DMG & Partners and JP Morgan.
Auction IPO :
In recent years, the investment banking has
attempted to change the IPO process by selling new
issues directly to the public using an online auction
IPO mechanism called open IPO.
Example : In Malaysia, the public can apply IPO on
line via Maybank2U.com..

ADVANTAGES OF GOING IPO :

Greater liquidity :
By going public, companies give their
private equity investors the ability to
diversify.
Better access to capital :
Public companies typically have access
to much larger amounts of capital
through the public market, both in the
initial public offering and in subsequent
offerings.

DISADVANTAGES OF GOING IPO :

Widely dispersed :
When investors diversify their holdings, the
equity holders of the corporation become
more widely dispersed. This lack of ownership
concentration undermines investors ability to
monitor the companys management.
Costly and time-consuming :
Several high-profile corporate scandals ( such
as New York Stock Exchange and the NASDAQ)
during the early part of the twenty-first
century prompted tougher regulations
designed to address corporate abuses.
However, compliance with the new standards
is costly and time-consuming for public
companies.

INTERNAL ACCRUALS

Retained
Earnings

Depreciation
Charges

INTERNAL ACCRUALS
Retained Earnings :
The retained earnings make a portion of

the equity earnings that are reinvested in

the business.
Depreciation Charges :
Depreciation refers to the capital

expenditure allocation to various time

periods for which the expenditure is
expected to improve the financial
condition of the company.

INTERNAL ACCRUALS

TERM LOAN
A term loan is a monetary loan that is repaid in
regular payments over a set period of time.
Provided by commercial bank / Financial Institutes.

Example : Term loan, Commercial Paper etc.

Usually involves specific repayment schedule, a

floating interest rate, maturities, security,

restrictive covenants.
Special note : In Malaysia, Bank Negara Malaysia

imposed a regulation on the maximum tenor of the

term loan of 10 years.

Term Loan (continue)..

Bonds :
Intermediate to long term debt

agreements issued by governments,

corporations, and other organizations.
Issued in units of $1,000 principal value
per bond
Comprise of Two promises, i.e. :
Repay $1,000 principal value at
maturity
Pay stated interest rate (coupon
rate) when the bond is due.

Different types of Bonds issues :

Mortgage bonds :

Mortgage bonds are collateralized by a mortgage on

some of the companys fixed asset . Example :
building, land, plant and machinery, equipment etc.

Debenture :

Debenture is an unsecured bond that is baked by full

faith and credit of issuer

No specific assets are pledged as collateral

If default or bankruptcy occurs, debenture holders
become general creditors of the issues.

Subordinated Debenture:

Subordinated debenture is specifically subordinated to

some other debt issue

If default or bankruptcy, junior debt has no claim on

issuers assets until senior debt is satisfied

Different types of Bonds issues (continue)

.:
Convertible bonds:
Convertible bonds means that the corporate bonds that may be
converted into common stock at the option of bondholder.
It will involves Conversion rate , i.e. the number of shares of stock
into which bond may be converted
Income bonds:
Income bonds means interest is paid only when corporation earns a

specified level of income.

Floating-rate bonds:
Floating-rate bonds are like the regular bullet bonds except that
coupon rate is tied to some variable rate benchmark . Example :
LIBOR: London Interbank Offered Rate.
Zero coupon bond:
Zero coupon bond is sold at substantial discounts from par buy pay no
current interest
Investors earn their rate of interest from interest accreting as bond
approaches maturity.
Example : Treasury bills.

Different types of Bonds issues

(continue) :

Call Provisions:
Call Provisions defines as the issuing corporation has the right
to call in bond for retirement prior to maturity
Normally, it may not be called until some number of years after
the original issue and must be called at a premium above par
value
Sinking Fund:
Sinking fund establishes procedure for orderly retirement of a
bond over life of issue
Requires periodic (usually annual) repurchase of stated
percentage of outstanding bonds
Repurchasing corporation may either buy bonds in open market
or call in bonds for redemption
Bonds to be called are determined by lottery based on serial numbers of
bonds
When high interest rates drive bond prices down, open-market
purchases at discounts from par value are more attractive

Bonds (continue)

Lease Financing
Leasing is a form of debt financing which consist

of Capital Lease and Operating Lease.

Capital Lease :
Title is transferred to lessee at end of
lease term.
Lease contains bargain purchase option
(an option to buy asset at very low
price).
Term of lease is greater than or equal to
75% of estimated economic life of asset.
Present value of minimum lease payment
is greater than or equal to 90% of fair
value of leased property.

Lease Financing (continue)

Operating

It

Lease :

is more like true rentals rather than means to finance

long-term use of asset. As such, neither asset nor liability
are created.

Normally, it will substantially less than expected useful life

of asset and provide for both financing and maintenance
clauses and contain of the cancellation clauses so that
lessee is not locked into long-term agreement.

Tax benefits from depreciation and may increase lessees

overall credit availability since they do not appear on the
balance sheet.

Example : In February 2014, Malaysia Airlines (MAS) will

begin receiving the first two its four new Boeing 737-800
aircraft from GE Capital Aviation Services Ltd (Gecas) via
the commercial aircraft leasing and financing arm of
global conglomerate General Electric.

Venture Capital
Venture capital is the form of the financial capital
which provided to early-stage, high potential, high
risk and the growth startup of the companies.
The venture capital fund makes money by owing
equity in the companies it invests in, which usually
have a novel technology or business model in high
technology industries such as biotechnology, IT and
software.
A business arrangement in which two or more
parties agree to pool their resources for the purpose
of accomplishing a specific task , i.e. new project or
any other business activity. Each of the participants
is responsible for profits, losses and costs
associated with it.

Venture Capital ( continue )..

Example :
The Board of Directors of Malayan Flour Mills

Berhad announced that the company had on

29th January 2010 entered into a Joint Venture
Agreement with Toyota Tsusho Corporation
and Toyota Tsusho (Singapore) Pte. Ltd. In
order to establish a joint venture company
named Premier Grain Sdn. Bhd..
The purpose of the said joint venture is to carry
out the trading of raw materials for animal
feeds.