• Home
  • Archive by category "Debt"

FED Rate Hike And Its Effect on Global Markets

US bonds are believed to be the safest debt instruments in the world. If there is a hike in the interest rate there, that will definitely affect the global markets in proportion. Here, markets mean not only the bond markets, but also include currency, derivative and equity.


What is ‘FED Rate Hike’

Us Fed plays the similar role in the US, as that of the Reserve Bank of India in India. The US Monetary Policy is determined and decided by a committee called ‘The Federal Open Market Committee’. The committee-meet has so much global importance that, investors, analysts and policy makers, unanimously cross their fingers and wait for the result. That’s the impact of FED rate has on Global Markets.

Queries Details
Headquarters

Established

Chair

It’s a Central bank of

Currency

Reserve requirements

Bank rate

Interest rate target

Interest on reserves

Interest paid on excess reserves?

Eccles Building, Washington, D.C., U.S

December 23, 1913 (104 years ago)

Janet Yellen

United States

United States dollar
USD (ISO 4217)

0 to 10%

0.6% to 1.50%

1.25% to 1.50%

1.25%

Yes

US, being the world’s biggest economy, Federal Reserve of US and its actions has the capacity to stir the Global Markets. The dollar being the world’s reserve currency, decides the value of other world currencies against its value. FED rate hike /cut has the power to control its value in global markets.
US Fed Rate Hike – means, Federal Bank of US is willing to provide the banks of US with the hiked interest rates, for their lending and borrowing activities. Which, in turn, leads to hiked /increased interest rates on bonds, saving deposits, loans etc.

Due to rise in interest rates in the US, the value of Dollar becomes increased, making it more attractive to the investors, in comparison with others currencies, including Rupee.

 

What is FITL /Funded Interest Term Loan And WCTL /Working Capiatl Term-Loan

Due to the burden of non-performing assets and debt problems, companies may fail to perform well, irrespective of their best performance track record. In-order to tackle this problem and provide the companies, a breathing space, RBI has bought a fixing tool called a ‘Funded Interest Term-Loan’ (FITL).


At times, when businesses feel the need for extra capital to run the day-to-day operations of the business (Working Capital), RBI has facilitated a provision called WCTL / Working Capital Term_Loan. Under this provision, RBI guided the Banks and Financial Institutions, to extend a relief /concession to potentially sick SSI Units (Small Scale Industries), under a rehabilitation program. Companies mostly utilize this facility to avail the extra capital, based on the opportunities /threats present in the market.

Working capital is a money, that is used to fund the short-term (usually less than a year) operations of a firm. This is the capital that’s generally rotated to generate earnings. The other areas of employment of the working capital include, the purchase of the necessary inventory and receivables financing.

The Working Capital can be classified as CAPEX (Capital Expenditure) and OPEX (Oerating Expenditure). CAPEX covers long-term fixed assets, whereas the OPEX covers the capital required to run the day-to-day operations of the business. Both CAPEX and OPEX is catered by the WCTL.

The working capital finance is available in both Indian as well as foreign currencies.

The WCTL can be categorized into funding facilities and non-funding facilities.

Under funding facilities, banks /financial institutions provide the direct funding and the necessary assistance to purchase the assets and /to meet the business expenses.

The non – funding facility is an indirect help provided by the banks and financial institutions to the companies. Under this facility, banks issue companies, a letter of credit (LC) /guarantee to their suppliers /customers (Government /Non-Government) for procurement of goods and services on credit.

Stock Shots

Lakshmi Energy and Foods Ltd. Q4 results reveal that an amount of Rs. 924,53 Cr., has been paid towards the interest of FITL and WCTL. The time given to payback, is 8 years, which is usually not more than 5 years. Approved by the IEC under RBI guidelines, hopefully the company is utilizing the funds successfully. The overall annual income from operations has grown by Rs.10.67 Cr. Which is not reflected in the overall profit due to the payment of Rs. 924.53 Cr towards interest costs of FITL and WCTL. So, we have to consider it as an effective employment of funds acquired, for its progress.  Hopefully the next quarter will be far better than this and so as our returns.

Technically the chart is bullish. Stay invested.

*******************************************

Happy Investing Only With Investockist

*******************************************************

Reply form is waiting for your reply. You too, write something.

 

 

 

 

 

 

 

Corporate Debt And Its Variations

There are four basic activities that companies usually show as the  sources of generation and use of cash. They are – the income from operations, cash generated by selling assets and /investments (if any), capital generated by issuing new shares and finally the cash flow due to debt. Most of the companies generate cash flows by using all these 4 mediums. But, few differ from, heavily relying on any particular one and less on the others.


As a part of expansion /fastening the growth, companies mostly rely either on debt or issue equity, either to the public or private players to accumulate the required capital. In the case of debt, interest cost adds-up to the borrowed capital. The result is that there is a negative cash-flow number on the balance-sheet. So, the borrowed funds need to be utilized efficiently, to make the overall cash flow a positive good number. Lets discuss about it in detail.

What is ‘Debt’

Whether it is an individual or a company, when the current finances don’t allow to make large purchases /harnessing the business activities, the most preferred alternative is making debt /borrowing the amount required, from the lender. This happens under an agreement that, the borrower will pay back the borrowed amount, later in the future, usually with along with an interest and that too at an agreed rate.

Hence, debt can be defined as the process of borrowing, a certain amount of capital, by one party (either by an individual or a company) for the purpose of financing the current needs, from an another party, usually called, the lender, under an agreement that, the borrowed party repays the borrowed amount called the debt, along with an agreed rate of interest, later in the future.

In the case of businesses, debt is a good alternative method of making the business a successful one, if utilized properly for its growth.

Types of Debt

Personal Debt

Credit Card Debt, Mortgages, Auto Loan and personal Loan fall in this category. Here the banks are the lenders /creditors, and the investors are the borrowers.

Corporate Debt

This type of debt is done by the companies rather than the individuals. Companies when they need funds, issue Bond and Commercial Papers. Through bonds and commercial papers they collect the required funds and utilize the same for the growth of their businesses. This type of debt facility is particularly in the corporate sector and not available to the individuals. Here, investors are the lenders /creditors and companies are the borrowers.

Types of Corporate Debt

Bonds

Bonds are a type of debt instruments, that allows companies to collect funds in a very amicable manner from the investors. Here investors may be either individual /institutional investors. Once the bonds are issued by the company, they are available to the public as well as institutional investment firms through banks and other financial investment channels.

A bond is a written agreement between the issuer company and the investor. Through bonds companies sell a ‘promise of repayment’ in the future. This repayment includes an interest rate called Coupon and the original amount received. The coupon rate is decided by the company at the time of issuance itself.

Each bond has its face value and the coupon rate. The purchaser of the bond receives the basic amount that’s invested at the end of the maturity period. And, the Coupon Rate, periodically at an intervals fixed at the time of issuance /at the end of the maturity period.

Commercial Papers

When companies are in scarcity of funds to pay off the accounts receivable, inventories and to meet all the short-term liabilities, they usually issue commercial papers.  During 1985 – 1990 there, the world economy witnessed a trend called the liberalization. This was the background push for the introduction short-term monetary instruments called the commercial papers in the Indian Money Market. An effective reform to avail the funds for short-term obligations by the corporate companies. This can be considered as an innovation in the financial system of India.  These are the most short-term instruments in Indian Money Market since 1990 onwards.

Prior to injection of commercial paper in Indian money market, that is before 1990, the corporate companies had to borrow the working capital from the commercial banks. Under this traditional process, companies were pledging the inventory as a collateral security. The introduction of commercial paper in the Indian money market avoided, all the hassles of borrowing the working capital, from the commercial banks. But, because of not backed by any form of collateral, here there are chances of default risk by the companies. This is usually called the corporate default problem. That’s the risk associated with these monetary instruments.

Role of Credit Rating Agencies

Credit Rating Agencies rate the companies depending on their secured credit. Hence it is always desirable to invest in commercial papers of companies with high credit ratings. That’s a company with high credit rating has, less chances of default risk. Others are riskier.

Companies with high credit rating has the advantage of finding buyers without discount to their cost. Whereas low credit companies need to offer a substantial discount (higher cost) for their debt.

In India, the maturity period of commercial papers ranges from 15 days to 1 year. Whereas in the United States, it’s no longer than 270 days.

Debentures

A debenture is just like a bond, but not not backed by any collateral. The credit and faithfulness of the issuer company are its underlying security. Debentures are issued to raise the short-term capital. Companies when they are expected to pay for future expenses or for expansion plans, they raise the capital through the issuance of debentures.

In corporate finance, a Debenture is a medium to long-term debt instrument, used by large companies to borrow money, at a fixed rate of interest.

In other words, a debenture is a movable property, issued by a company in the form of indebtedness, specifying the dates of redemption, repayment of principal and interest. Debentures may or may not create a charge on the assets of the company.

[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]

FMP’s | Are Not Guaranteed Return Schemes?

Fixed Maturity Plans /FMPS are also known as ‘Fixed Term Plans‘. These are ‘Close Ended Schemes’ floated by various Mutual Funds. The maturity period ranges from 1 month to three/five years. The tenure is fixed. Even though, almost all the FMPs are predominantly debt oriented, some of them may have small equity component. The objective behind this is to protect the investor’s investments from market fluctuations and to ensure the guaranteed returns over a predetermined fixed tenure /maturity period.


How Do Fund Managers Manage The FMPs

Fixed Maturity Plans are passively managed by the Fund Managers in the favor of investors to generate a fixed income over the fixed investment tenure. Fund Managers lock the investments in the debt securities, whose maturity period coincides with the maturity period of the plan.

As said before, FMPS are the closed ended debt mutual fund schemes with fixed tenure. So, these closed end schemes typically invest the major portion of about 80% in risk free debt instruments like AAA rated bonds, and the remaining 20% is routed towards the riskier avenues like equity.

It is the very structure of FMPs, that ensures the protection of capital as well as the expected return. By the end the stipulated period, the debt portion of the total investment grows to give back the principal along with its interest return. The return on the equity portion is related to the existed market situation. And the return fluctuates as per the fluctuations in the market. In the up market condition the return is good and the equity portion brings the potential upside. Similarly unfortunate market crashes may bring back the minimum, but the corresponding unfortunate loss.

Where Do The FMPs Make Their Investments

The debt portion of FMPs usually invests in commercial papers (CPs), money market instruments, certificate of deposits (CDs), corporate bonds and sometimes even in bank fixed deposits. Depending on the tenure of the FMP, the fund manager invests in a combination of the above mentioned instruments of similar maturity. Say, if the tenure of the FMP is about a year, then the fund manager invests in paper maturing in one year. The expense ratio, usually varies from 0.25 to 1 per cent.

Why FMPs Are Not ‘Guaranteed Return Schemes’

It’s true that FMPs offer many advantages over other fixed income products. But, at the same time, there are several risk factors that need to be concerned. These risk factors, sometimes may adversely affect the returns. That’s why FMPs are ‘Not Guaranteed Return Schemes’. In other words, the returns that the plan promises at the time of investment is only indicative.

To get back the indicative returns, we need to avoid those risk factors anyhow. Few risk factors that we need to be concerned are mentioned below.

Default Risk

Bank Certificates Of Deposits are the safest debt instruments with zero default risk. Whereas Commercial Papers offer higher interest rates with more risk. So, indicative portfolios with the major portion 0f corpus in less /zero risk instruments like Bank CDs is best to choose to avoid the default risk. If, one has the capacity to bear the default risk, then indicative portfolios with predominantly invested in Commercial Papers are best to invest. One can expect more returns.

Credit Risk

You should also check the scheme’s offer document for the minimum credit rating of the securities the fund intends to invest into. The investors should also note that the higher the credit ratings of their securities, the lower the returns would be for the FMPs and vise versa. However lower credit rating securities have higher credit risks; hence investor should keep in mind the same.

Expense Ratio

The higher the expense ratio the lesser are the returns. The high costs will eat up the total returns, reducing the overall return benefit.

So, FMPs with lower expense ratios are preferable over the FMPs with higher expense ratios.

Growth Or Dividend Option

There are two options to choose between while investing in FMPs. They are the growth and dividend options. Investment tenure is the main criteria to choose between these two options.

Growth option is good for long-term investment, that’s most probably more than a year. Because, the capital gains taxed @SST, if the tenure is under 1 year. For more than 1 year tenure period, the investor can be benefited from the long-term capital gains tax rate. Which is @10% without Indexation benefit, and @20% with Indexation benefits.

Dividend option is best for, under one year investment tenure. Under this option returns are in the form of dividends. These dividends are charged by the dividend distribution tax, which is @12. 5% for retail investors.  This, along with education cess and applicable surcharges are paid by the fund. And are tax-free in the hands of individual investors.

Maturity Of  The Scheme And Indexation Benefit

Some of the FMPs launched between January and March every year, offer double-indexation benefit. As the scheme is purchased in one financial year and the matured after two financial years, these schemes are benefited by the double indexation.

Under double indexation, the overall tax liability gets reduced, as the long-term capital gains are adjusted for inflation. That means, for two years the capital gains are adjusted @rate inflation and only the pure capital gains are taxed. Thus, the overall tax liability is reduced.

For example, a scheme is launched in March 2011 i.e. FY10-11, it will mature in April 2013 i.e. FY12-13. While the investment is made in FY10-11, the redemption takes place in FY12-13. Thus, by investing in FMPs with the maturity of a little over a year, the purchase and sale years are spread over two financial years, called double indexation, which effectively reduces one’s tax liability.

 

Return On Debt (ROD) | Its Impact On The Company Performance

‘Return On Debt’. Spells short. But it’s as important as any other financial ratio, and also tells a  lot about the financial health of a company. Especially when there are big number of debts that peeps out of the balance sheet. So easy to analyze, but difficult to manage, ROD ratio has its own impact on any company’s performance.


Let’s try to have a few important points – What it may otherwise indicate the impact of ROD on any company’s performance as well as on our returns.

What Is ‘ROD’ Or The ‘Return On Debt’ Ratio

The ROD is a financial ratio, that compares the company’s net earnings to its long-term debt.

‘Return On Debt’ = Net Earnings / Net Long Term Debt

Here, debt means either taken /issued by the company. And sometimes the both the cases. And this ‘long-term-debt’ is in various forms and in distinctive interest rates depending on the creditor or the issuer. Anyhow, what we need to calculate is the ratio of the net earnings of the company to its net debt.

This ratio shows the amount of net earnings that is generated, for each coin that a company holds in debt. And, this ROD can either be positive /negative.

A positive ROD has been always beneficial to the company. And, it indicates that some income is being generated by the debt issued /taken by the company. Where as a negative ROD is a threat.

We can locate the long term debt data on the balance sheet as well as the notes to financial statements. The information explains the amount of debt taken out /issued and the number of years related to it.

How Important Is ‘Return On Debt’ In Any Company’s Financial  Analysis

Mostly, the ratio of ‘ROD’ is not used in the simplest financial analysis. But, it’s an important calculation that needs to be performed, while evaluating company’s solvency. It is generally used by the owners of the company while making a decision on, which financing sources would be better for the company.

It’s common to carry a certain amount of debt by any company. But, the amount should be limited. The more the debt to its earnings level, the more the credit risk’ is.

Moreover, companies carrying a significant amount of debt related to capital and/or assets are more prone to economic downturns during a decline in earnings.