GROUP 1
DEBT
MANAGEMENT
ELEC 4-TREASURY MANAGEMENT
TYPES OF DEBT
01 COMMERCIAL PAPER
unsecured debt that is issued by a company and has a fixed maturity ranging from
1 to 270 days. A company uses commercial paper to meet its short- term working
capital obligations.
02 FACTORING
is a financial transaction in which a company sells its accounts receivable to a
finance company that specializes in buying receivables at a discount (called a
factor).
FIELD WAREHOUSE FINANCING
03 uses a company's inventory as collateral for a loan. The inventory to be used as
collateral is segregated from the rest of the inventory by a fence, and all
inventory movements into and out of this area are tightly controlled.
TYPES OF DEBT
04 FLOOR PLANNING
is a method of financing inventory purchases, where a lender pays for assets
that have been ordered by a distributor or retailer, and is paid back from the
proceeds from the sale of these items.
05 LEASE
a contract outlining the terms under which one party agrees to rent an
asset. There are two types of leases:
Capital Lease
Operating Lease
06 LINE OF CREDIT
a commitment from a lender to pay a company whenever it needs cash.
TYPES OF DEBT
LOANS
07 ASSET BASED LOAN
is a fixed asset or inventory as its collateral is a common form of financing by banks.
BONDS
classified as fixed-income instruments
a. Collateral trust bond g. Income bond
b. Convertible bond h. Mortgage bond
c. Debenture i. Serial bond
d. Deferred Interest bond j. Variable rate bond
e. Floorless bond k. Zero-coupon bond
f. Guaranteed bond l. Zero-coupon convertible bond
BRIDGE LOANS
a form of short-term loan that is granted by a lending institution on the condition that
the company will obtain long-term financing shortly that will pay off the bridge loan.
ECONOMIC DEVELOPMENT AUTHORITY LOANS
extended by the government to guarantee bank loans.
LONG-TERM LOANS
3- 10 years or up to 20 years.
TYPES OF DEBT
08 Receivables Securitization
a well-established funding method
09 Sale and Leaseback
a transaction where the owner of an asset sells the asset and
then immediately turns around and leases the asset back from
the person who purchased it.
CREDIT RATING AGENCIES
CREDIT RATING DEBTOR
company or individual that owes
score or grade that a
money.
company gives to a potential
It is a company that assigns credit
customer that indicates how
ratings, which rate a debtor’s ability
likely the borrower is to
to pay back debt by making timely
repay the loan.
principal and interest payments and
the likelihood by default.
CREDIT RATING AGENCIES
Credit Rating Agencies that the Securities and Exchange Commission (SEC) allows to
issue debt ratings are Moody’s, Standard & Poor’s, and/or Fitc
Moody’s Standard & Poor’s Fitch Ratings
DEBT-RELATED
CONTROLS
The recordation of debt-related transactions is somewhat
technical, and therefore subject to some degree of
calculation error. Several of the following controls are
designed to verify that the correct interest rates and
calculation dates are used. In addition, there is some
possibility that the deliberate timing of gain and loss
recognition related to debt transactions can be used to
manipulate reported earnings.
1
GENERAL DEBT 2 INTEREST RATE
TRANSACTIONS
CONTROLS CALCULATIONS
Require approval of the terms of all Require written and approved
new borrowing agreements. justification for the interest rate used
Require supervisory approval of all to value debt.
borrowings and repayments. Include in the month - end closing
Investigate the reasoning for revenue procedure a task to record interest
recognition related to attached rights expense on any bonds for which
that is not recognized ratably. interest payments do not
correspond to the closing date.
3
EXTINGUISHMENT 4 CONVERTIBLE
OF DEBT DEBT
Verify the market value of equity on
Include in the debt procedure a line
conversion dates when offsetting
item to charge unamortized
equity entries are being reversed.
discounts or premiums to expense
Include a review of accrued interest
proportionate to the amount of any
expense of all recently converted
extinguished debt
debt
Report to the board of directors the
Verify expense calculations
repayment status of all debt.
associated with sweetened
conversion offers.
DEBT-RELATED
POLICIES
The policies set forth in this section define the issuance and
buyback of debt, control the timing of expense recognition,
the setting of interest rates used for expense calculations,
and similar issues. The intent of the bulk of these policies is
to issue and buy back debt only when it is in the best
business interest of the company to do so, as well as to
ensure that debt - related transactions are recorded fairly.
GENERAL DEBT
TRANSACTION
CONTROLS
All notes and bonds shall only be issued subsequent
to approval by the board of directors
Debt sinking funds shall be fully funded on scheduled
dates
Recognition of unearned revenue for attached rights
shall match offsetting discount amortization as
closely as possible
EXTINGUISHMENT CONVERTIBLE
OF DEBT DEBT
Debt shall not be extinguished Debt conversions to equity shall
early if the primary aim is to report always be recorded using the
a gain or loss on the book value method
extinguishment.
When interest rates allow, the
company shall repurchase its debt
with less expensive debt.
DEBT MANAGEMENT
Quiz
Time!!
ELEC 4 QUIZ
IDENTIFICATION
1. Who is the person that can manage the company's debt or
produce a new debt?
2. What method can an investor use when the arrangement is most
commonly used for large asset, such as automobiles or
household appliances are involved?
3. It is a type of bonds that subordinated debenture is one that
specifies debt that is senior to it.
4. It is a type of bonds that associated with firms having short-
term cash flow platforms, the fill-term interest rate can be high.
5. It is a method whereby assets such as credit card receivables or
other financial assets are packaged.
6. It is a type of bonds that attracts to a company is the
expectation of conversion to stock presents enough value to
investors.
ELEC 4 QUIZ
Today's
IDENTIFICATION Agenda
7. An agency may rate the creditworthiness of issuers of debt of
obligations, of debt instruments, and in some cases, of the servicers of
the underlying
Revision: debt, but not of individual consumers.
01 Conditional
8. It includes inSentences
the debtType 04 Coffee Break
I and II a line item to charge unamortized
procedure
discounts or premiums to expense proportionate to the amount of any
Presentation: Production:
02
extinguished debt.
Conditional Sentences Type III 05 Creative Hypothetical Past Scenarios
9. It is the policies set forth in this section define the issuance and
buyback of debt, control the timing of expense recognition, the setting
of03 Practice:
interest
Conditional Sentences (all types) 06
rates used for expense calculations, and
Wrap-up: similar
Exit Ticket issues.
10. It require supervisory approval of all borrowings and repayments
11. The recordation of debt – related transactions is somewhat
technical, and therefore subject to some degree of calculation error.
12. It verifies the market value of equity on debt retirement dates when
offsetting equity entries are being reversed.
ELEC 4 QUIZ
TRUE OR FALSE
13. If an agency issues a low credit rating or downgrades an
existing rating, the best reaction by the company is to not
publicly challenge it.
14. When interest rates allow, the company shall repurchase its
debt with less expensive debt.
15. Recognition of earned revenue for attached rights shall
match offsetting discount amortization as closely as possible.
Activity
Activity
ESSAY. Answer briefly and comprehensively.
1. How important is debt management to the stability and
growth of a company?
2. In your own words, explain at least three (3) different types
of debt, emphasizing their importance as well as the risk/s
associated with each of them.
3. Imagine you’re a treasurer. How can you make informed
decisions on the costs and risks of debt?
Thank
you!
Group 1
