By William B. Allen
Today, Asian corporations, banks, and governments are scouring the world?s capital markets for efficient sources of financing. Yet, how should these issuers decide what is best amongst the many choices that range from equity to equity-linked to debt structures in either local Asian or international markets and how to develop a cogent financing strategy?
Not only the issuers but also Asian and international bankers, dealers, sales and trading product professionals, research analysts, buy-side institutional investors, accountants, and legal professionals should understand and be able to analyse the wide spectrum of available capital markets structures and strategies.
The first level of choice often focuses on the trade-off between increasing financial flexibility versus lowering the cost of capital.
In this choice, equity and equity-linked financing structures provide more financial flexibility at a higher cost of capital ? that is, these types of transactions will enhance the companies ratios or ratings and improve the likelihood that the issuer will be able to raise money going forward in strategically important decisions (such as financing mergers in an industry consolidation) or in tough market conditions (when financing liquidity is harder to find).
Issuers needing to improve their financial flexibility generally look first to equity or equity-linked ? if either or both of these markets are open to them.
The choice between some type of equity deal (such as a follow-on primary offering ? either listed locally or in a GDR format on international markets ? carve-out IPOs, various types of secondary sales, M&A, etc.) versus equity-linked transactions (such as convertible bonds or preferred, mandatory converts, structured converts, exchangeables, etc.) often comes down to the immediacy of the need for flexibility.
Equity offerings provide immediate increases in financial flexibility whilst equity-linked deals are often viewed as a way to build more financial flexibility over time.
Issuers who believe that they have adequate financial flexibility will typically choose some type of debt financing as a way of achieving a low cost of capital.
But what type of debt capital? Should they consider short-term commercial paper or bank loans? Or longer-term public bonds, medium-term notes, private placements, or securitised debt? And should they look to issue in their local markets or in the international markets?
Many issuers look first at the all-in cost of various debt financing alternatives ? including the yield to investors plus issuing fees and expenses ? which is a first approximation of the marginal cost of debt capital. But sophisticated issuers today view their financing exercises in an integrated and comprehensive way that considers both objectives and constraints.
The objective is usually to find financing that provides the lowest cost of capital.
However, this objective is subject to issuer-specific constraints that might include any or all of the following: the need for a minimum level of financial flexibility, a ratings target, a desired maturity (or liquidity) spectrum, a minimum diversification of capital providers, efficient use of tax shields, a manageable level of interest rate and foreign exchange market risk, establishing name recognition in markets to help in future issuance, an acceptable level of disclosure, a reasonable amount of time and invested effort in the process until the close of funding, and (particularly for financial institutions today) a required amount of regulatory capital.
And different issuers ? even the same issuer across different time periods or market conditions ? will place different priorities on these constraints.
The challenge in structuring a capital markets transaction or designing a financing strategy is to learn how to analyse the opportunities available in order to make the best decisions in light of the objectives and prioritised constraints.
Only by using this type of disciplined and comprehensive process can the issuers become comfortable that they have made the best choice(s) possible ? and bank advisors, dealers, sales and trading product professionals, research analysts, buy-side institutional investors, accountants, and legal professionals be able to express opinions on the attractiveness of individual capital markets transactions.
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