FINANCIAL ANALYSIS

Financial Analysis



Question One:

Globally, the bond market serves as the primary channel for debt funding of large corporations and government bodies.

TerraVerdi (TV) is a plastics company that diversified, more than a decade ago, into the manufacture of artificial grasses and lawns. These products are manufactured from recycled plastics. During this time, the company grew rapidly and has gained international prominence in its field. TV grew from its origins in Italy to having subsidiary operations in ten other countries and agents representing the company in a further 27 countries.

The company was family owned during the above period and the firm relied, for much of its finance, on support from the company's bankers, Banco Blanco. Accordingly, the firm's founders have a strong sense of loyalty to the bank. At present, the bank loans total €1.1 billion principal and have an average interest rate of 8.5% p.a. and average maturity of 5 years. However, the company listed on the stock exchange two years ago and the new CEO - who is very profit-oriented - intends to propose to the board that the company should issue bonds to replace the bank loans. Accordingly, the CEO has requested that you write a few brief points that he should take to the board in support of his proposal.

a) Explain briefly why the company would most likely need a bond rating and what it would have to do to get that rating.

A debt instrument is an investment tool in which an investor lends money to a corporation that issues loan notes or debentures to fund its operations for a fixed determined period and at a fixed interest rate. Such instruments are used by corporations, financial institutions, governments to fund their ventures and projects. Sometimes such investments are used to fund the day to day operations of the company when it faces liquidity issues. Bonds or debentures are sometimes referred to as fixed income bearing securities. The funds raised are a liability to the corporation and is represented as long term liabilities in the Statement of Financial Position.

The issuer of the bond issues the loan notes which states the terms of interest and the principle amount to be repaid at a specified period of maturity. Usually the interest on bonds is required to be paid half yearly. The major types of bonds include the debentures, certificates of investments, loan notes, preferred share redeemable and many more.

Every bond that is issued by corporation is graded. The grade given to a bond is similar to the credit ratings of an organisation. This grade is an indicative of the credit quality of bonds. These ratings are provided by private organisations for rating services such as Standard & Poor's, Moody's and Fitch through the analysis of the issuers financial strengths, or it's the ability to pay a bond's principal and interest in a timely fashion. The ratings for the binds are expressed as letters ranging from “AAA”, as this represent the highest grade to “C”, which is the representative of ...