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Chapter 8:

Sources of Medium and Long


Term Financing
Presented by:

Jennybabe B. Santos, CPA


Master in Business Administration
Major in Financial management

Basic Feature of : Common,


Preferred and Debt Equity
COMMON EQUITY

No Maturity date
Capital Gains / Share
on Losses
Limited Liability
Ownership Rights
Right to earnings
Voting Right
Preemptive right
Transferability

PREFERRED EQUITY
Hybrid Securities

Cumulative / Non
Cumulative

DEBT EQUITY
Fixed Term to Maturity
Indenture and
Covenants

Callable

Par Value/ Principal

Convertible

Interest Income (Coupon


Rate or Nominal Rate)

Participating
No voting right

Zero-Coupon Bonds
Step-Up Notes
Deferred Coupon
Bonds
Floating-Rate
Securities
Accrued Interest

DEBT EQUITY

Pattern of Corporate
Financing
CORPOR
ATE
FINANCE
Investme
nt
Analysis

Working
Capital
Manageme
nt

The area of finance dealing with the sources of


funding and the capital structure of corporations
and the actions that managers take to increase
the value of the firm to the shareholders, as well
as the tools and analysis used to allocate financial
resources.

Capital Budgeting

- is the planning of value-adding, longterm corporate financial projects relating to investments funded
through and affecting the firm's capital structure

Capital
Structure
Trade- Off Theory
Firms are assumed to trade-off the tax benefits of debt with the
bankruptcy costs of debt when choosing how to allocate the company's
resources.

Pecking Order Theory (Stewart Myers)


Suggests that firms avoid external financing while they have internal
financing available and avoid new equity financing while they can engage in new
debt financing at reasonably low interest rates.

Capital Structure Substitution Theory


Based on hypothesis stating that management manipulates the capital
structure such that earnings per share (EPS) are maximized.

Structural Corporate Finance ( Right Financing)


An active area of research in finance which tries to translate the
models above as well as others into a structured theoretical setup that is timeconsistent and that has a dynamic set up similar to one that can be observed in
the real world.

Capital
Structure
Market Timing Hypothesis
Firms look for the cheaper type of financing regardless of their current levels of
internal resources, debt and equity; Capital structure is the outcome of the historical
cumulative timing of the market by managers.

SOURCES OF CORPORATE
FINANCING

Examples:
Debt Capitalbank loans, notes
payable, or bonds
issued to the public
Equity Capital
Hybrid
Instrument

The Philippine Financial


Markets: Capital, Bank Loan,
Bond Market and Equity
Market
BANK LOANS

The most common form of loan


capital for a business
Provides medium or long term
finance. The bank sets the fixed
period over which the loan is
provided (e.g. 3, 5 or 10 years),
the rate of interest and the
timing and amount of
repayments.

CAPITAL MARKETS

Where long- term funds are raised through


the bond market, which deals with long
term debt securities such as bonds; the
stock market which deals with equity
securities or stocks
Institutions operating in capital markets stock exchanges, commercial banks and all
types of corporations, including nonbank
institutions such as insurance companies
and mortgage banks

EQUITY/ STOCK MARKET


A legal document that
certifies ownership of a
specific number of shares or
stock in a corporation.

Philippine Stock Exchange


Eight Constituent Indices:

The Philippine Stock Exchange, Inc. (PSE


or the Exchange) is a private organization
created to provide and maintain a fair, efficient,
transparent and orderly market for the
purchase and sale of stocks and other
securities..

PSE
PSE
PSE
PSE
PSE
PSE
PSE
PSE

All Shares Index (ALL)


Composite Index (PSEi)
Financials Index (FIN)
Holding Firms Index (HDG
Industrial Index (IND)
Mining and Oil Index (M-O
Property Index (PRO)
Services Index (SVC)

PHILIPPINE SETTING: EQUITY/


STOCK MARKET

Top 30 Public Listed


Companies
1.

Aboitiz Equity Ventures, Inc. sector:


Holding Firms
2.
Aboitiz Power Corp. sector: Energy &
Utilities
3.
Alliance Global Group, Inc. sector:
Holding Firms
4.
Ayala Corporation sector: Holding
Firms
5.
Ayala Land, Inc. sector: Real Estate
6.
Bank of The Philippine Islands
sector: Finance
7.
BDO Unibank, Inc. sector: Finance
8.
Bloomberry Resorts Corporation
sector: Tourism
& Leisure
9.
DMCI Holdings, Inc. sector: Holding
Firms
10.
Emperador Inc. sector: Food &
Beverages
11.
Energy Development Corporation
sector: Energy
& Utilities
12.
First Gen Corporation sector: Energy
& Utilities

16. JG Summit Holdings, Inc. sector:


Holding Firms
17. Jollibee Foods Corporation sector: Food
& Beverages
18. LT Group, Inc. sector: Holding Firms
19. Manila Electric Company sector:
Energy & Utilities
20. Megaworld Corporation sector: Real
Estate
21. Metro Pacific Investments Corporation
sector:
Holding Firms
22. Metropolitan Bank & Trust Company
sector: Finance
23. Petron Corporation sector: Energy &
Utilities
24. Philippine Long Distance Telephone
Company sector:
Telecommunications
25.Robinsons Land Corporation sector:
Real Estate
26.San Miguel Corporation sector: Food &
Beverages

The BOND MARKET


- A place where debt securities are issued and traded ; Alternatively referred to as the debt,
credit or fixed-income market.

MAIN GROUP :

Debt Instrument in which an investor


loans money to an entity (corporate or
governmental) that borrows the funds
for a defined period of time at a fixed
interest rate; commonly referred to as
fixed-income securities and are one of
the three main asset classes, along with
stocks and cash equivalents.

BOND

Corporate Bonds
Convertible Bonds
Callable Bonds
Term Bonds
Amortized Bonds
Adjustment Bonds
Junk Bonds
Angel Bonds

GOVERNMENT
BONDS
Fixed Rate Treasury Notes
(FXTNs)

Treasury Bills (T-bills)


Issuer

Republic of the Philippines

Issuer

Republic of the Philippines

Tenor

91, 182, and 364 days

Tenor

2, 3, 4, 5, 7,10, 20, and 25 years

Currency

Philippine peso

Currency

Philippine peso

Interest Payment

Zero coupon, issued at a discount.


Day count convention is
Actual/360.

Interest Payment

Fixed-rate coupon paid semiannually.


Interest accrual basis and day count
convention is 30/360.

Minimum Amount of
Tender

PHP10 million

Minimum Amount of Tender

PHP10 million

Method of Sale in the


Primary Market

English Auction Style (multiple


price auction) via Government
Securities Eligible Dealers (GSEDs)
and through negotiated sale.

Method of Sale in the Primary Market

Dutch Auction Style via Government


Securities Eligible Dealers (GSEDs)
and through negotiated sale.

Who may bid

Bank and non-bank financial


institutions licensed to deal in the
primary market GSEDs.

Redemption

Bonds are redeemed at par upon


maturity.

Taxation

Interest income subject to 20%


withholding tax. Primary market
transactions are subject to
documentary stamp tax with
exemptions provided for secondary
market trading.

Secondary Market Trading

Over-the-counter via GSEDs and nonaccredited dealers such as banks,


brokers, dealers and other selling
agencies that are SEC-licensed.

Who may bid

Bank and non-bank financial


institutions licensed to deal in the
primary market - GSEDs.

Redemption

Bills are redeemed at par upon


maturity.

Taxation

Interest income subject to 20%


withholding tax. Primary market
transactions are subject to
documentary stamp tax with
exemptions provided for
secondary market trading.

Secondary Market
Trading

Over-the-counter via Securities


and Exchange Commission
registered brokers and dealers
with membership in a Self
Regulatory Organization.

GOVERNMENT
BONDS
Retail Treasury Bonds (RTBs)
Issuer

Republic of the
Philippines

Tenor

3 and 5 years

Currency

Philippine peso

Interest Payment

Fixed-rate coupons paid


quarterly in arrears.
Interest on Accrual Basis
and Day Count
Calculation is 30/360.

Minimum Amount of
Purchase

Variable up to
PHP100,000

Method of Sale in the


Primary Market

Book-building and Public


Offering through
appointed underwriters.

Who may buy

Individual investors
through appointed
underwriters. No
restriction on foreign
investors.

Redemption

Bonds are redeemed at


par upon maturity.

Taxation

Interest Income is subject


to 20% withholding tax.
Exempt from
documentary stamp tax.
Over-the-counter via

Sample :

CORPORATE
BONDS
A. Long-term Commercial Paper (LTCPs)
Instruments
B. Private Corporate Bonds
Issuer

Private Corporations

Tenor

2 - 7 years

Currency

Philippine peso

Interest Payment

Usually, floating with reprised quarterly


with payments based on the actual
number of days in an interest period on
the basis of a 365-day year.

Average Issue Size

PHP1 to 3 billion

Minimum Amount of Bid

For issues of up to two years PHP100,000; issues between two years


and four years - PHP50,000 and for
issues of four years and over PHP20,000.

Method of Sale in the Primary


Market

Underwritten basis by financial


institutions licensed by the Securities
and Exchange Commission and
authorized by the issuer

Who May Apply

Institutional and retail resident and


nonresident investors.

Redemption

LTCPs and corporate bonds are


redeemed at par upon maturity.

Taxation

Interest income subject to a 20% final


withholding tax.

Secondary Market Trading

Extremely limited, mostly between


financial institutions on behalf of retail
investors.

The financially healthiest Philippine


companies dominate the private debt
market. Manufacturers and financial
intermediaries/holding companies are by
far the largest issuers of domestic
commercial paper. These are local
conglomerates such as the Ayala
Corporation and San Miguel
Corporation.