Debt Management

• Financing


  The process of providing funds for business activities, making purchases, or investing
• Financial institutions


  • Banks are in the business of providing capital to businesses, consumers, and investors to help them achieve their goals
• The use of financing is vital in any economic system, as it allows companies to purchase products out of their immediate reach
• Types of financing

  • Equity financing
  • Debt financing
• Treasurer


  Usually called upon to either manage a company's existing debt or procure new debt
• Treasurer's knowledge


  • Broad variety of debt instruments available
  • Dealing with credit rating agencies
  • Accounting, controls, policies, and procedures used to manage debt
• Debt management


  The planning of controlling debt in a business by securing unsecured debts. It helps minimize the company's outstanding and unsecured obligations and regain control of the finances.
• Debt planning


  1. Reworking on budget by prioritizing debts

  2. Reviewing loan terms

  3. Increasing cash flows

  4. Increasing sales
• This section contains descriptions of more than a dozen forms of financing
• Commercial paper


  A company uses it to meet its short-term working capital obligations. It is commonly sold at a discount from face value, with the discount (and therefore the interest rate) being higher if the term is longer.
• Short-term Commercial Papers (STCPs)


  Securities issued by SEC-Registered Philippine corporations typically to fund short-term financial obligations such as payroll, purchase of inventory, among others. Tenors of STCPs vary can range from 30 days to 1 year.
• Factoring


  Allows a business to obtain immediate capital or money based on the future income attributed to a particular amount due on an account receivable or a business invoice.
• Warehouse financing


  A form of inventory financing that involves a loan made by a financial institution to a company, manufacturer, or processor. Existing inventory, goods, or commodities are transferred to a warehouse and used as collateral for the loan.
• Floor planning


  The initial investment needed to buy a particular unit is a fraction of the vehicle's actual purchase price. As soon as that vehicle sells to a consumer, floor planning dealers have the ability to immediately realize profits, pay back the initial value of the loan plus interest and fees, and had the flexibility to keep their funds working for their dealership.
• Lease


  A contract outlining the terms under which one party agrees to rent an asset—in this case, property—owned by another party. It guarantees the lessee, also known as the tenant, use of the property and guarantees the lessor (the property owner or landlord) regular payments for a specified period in exchange.
• Operating lease


  A type of lease that allows one party, called as lessee; to use the asset owned by another, the party called as lessor, in return for the rental payments for a particular period that is less than the assets economic rights and without transferring any rights in ownership at the end of the lease term.
• Financial lease


  A type where the lessor allows the lessee to use the former's asset instead of a periodical payment for an extended period. The ownership transfers to the lessee.
• Under a financial lease

  The contract is called a loan agreement/contract
• Under an operating lease

  The contract is called a rent agreement/contract
• In a financial lease

  An asset purchase option is given at the end of the contractual period
• Under an operating lease

  There is no asset purchase option at the end of the contractual period
• Line of credit


  A commitment from a lender to pay a company whenever it needs cash, up to a preset maximum level. It is generally secured by company assets, and for that reason bears an interest rate not far above the prime rate.
• Line of credit


  • The bank can cancel the line or refuse to allow extra funds to be drawn down if the bank feels the company is no longer a good credit risk
  • The bank may require a compensating balance in an account at the bank, increasing the effective interest rate
• Asset-based loan


  A loan that uses fixed assets or inventory as its collateral. Lenders typically require minimal covenants, giving corporate management more control over company operations.
• Bond


  A loan to a corporation, government agency or other organization to be used for all sorts of things – build roads, buy property, improve schools, conduct research, open new factories and buy the latest technology.
• Bridge loan


  A form of short-term loan that is granted by a lending institution on the condition that the company will obtain longer term financing shortly that will pay off the bridge loan
• Economic Development Authority Loans

  Various agencies of state governments are empowered to guarantee bank loans to organizations that need funds in geographic areas where it is perceived that social improvement goals can be attained.
• Long-term loan


  A loan issued by a lending institution to smaller companies that do not have the means to issue bonds. To reduce the risk to the lender, these loans typically require the company to grant the lender senior status over all other creditors in the event of liquidation.
• Long-term debt


  • A company can lock in a favorable interest rate for a long time, and keeps it from having to repeatedly apply for shorter-term loans during the intervening years, when business conditions may result in less favorable debt terms
• Receivable securitization


  The process of pooling various types of financial assets, such as loans, mortgages, or receivables, and then selling them to a special purpose vehicle (SPV) or a trust. The SPV or trust issues securities backed by these assets, which are then sold to investors.
• Key components of asset securitization

  • Originator
  • Special Purpose Vehicle (SPV) or Trust
  • Assets
  • Securities
• The Securities and Exchange Commission (SEC) regulates asset securitization activities to ensure transparency, investor protection, and market integrity. The Bangko Sentral ng Pilipinas (BSP) may also have regulations governing certain aspects of asset securitization, particularly for banks and financial institutions.
• Sale and leaseback


  A company sells one of its assets to a lender and then immediately leases it back for a guaranteed minimum time period. The company obtains cash from the sale of the asset that it may be able to use more profitably elsewhere, while the leasing company handling the deal obtains a guaranteed lessee for a time period that will allow it to turn a profit on the financing arrangement.
• Treasurer's role


  • Represents the company to the credit-rating agency
  • Discussions with the analyst team
  • Managers of the company's operating divisions may be asked to participate in meetings with the analyst team or assist them with tours of key company facilities
• Debt management policies


  1. Require approval of the terms of all new borrowing agreements

  2. Require supervisory approval of all borrowings and repayments

  3. Require written and approved justification for the interest rate used to value debt

  4. Report to the board of directors the repayment status of all debt