Finance

Raising finance by issuing debt securities



Table of Contents

Part One2

Financial Analysis of United Utilities PLC2

Bullet Bon: Advantages and disadvantages, Pricing, and Costs to the Issuer3

Callable and Puttable Bonds for United Utilities PLC5

Convertible bond issue for United Utilities PLC: Mechanics, Cost and Payoff Implications6

Inflation linked bond for United Utilities PLC: Mechanics, Cost and Payoff Implications8

Risks to investors of the bonds discussed above and the quantification of risks10

Default risk11

Risk of interest rate changes11

Currency risk / foreign exchange risk11

Inflation risk11

Part Two13

References17

Appendix19

Raising finance by issuing debt securities

Part One

Financial Analysis of United Utilities PLC

United Utilities PLC has enjoyed a strong financial position in the previous years; however, in the recent years, it has showed dismal financial management. Year on year revenues or sales have fallen to disappointing levels. Subsequently, net income has also fallen and a growing percentage of general, selling and administrative expenses of total revenues is the most important reason for decrease in revenue. Conclusively, dividend per share increased on comparative basis for recent years; however, when viewed on a long term period trend, dividend per share for United Utilities PLC is lower than its peers. Despite the lower DPS, it is a positive factor, because very few companies provide DPS to its investors.

As far as the cash flow of United Utilities PLC is concerned, the company was successful enough in increasing its cash reserves during the fiscal year 2011 - 2012. The company showed a healthy sign of generating GBP 559.08 million from its operating activities, while investing GBP 498.40 million in financing activities, while generating a mere GBP 5.80 million from financing activities. A comprehensive analysis of cash flow shows that the company is capable of issuing bonds.

A comprehensive analysis of the balance sheet of United Utilities PLC for the year 2011 - 2012 shows that the management at the company was successful in reducing the burden of debt from a Debt to Capital ratio of 310.20% for the year 2010 - 2011 to an impressive ratio of 76.84% during the year 2011 - 2012.

All of these facts point towards the fact that the company is financially capable of generating additional capital through issuing bonds. Another fact which points to the viability of issuing debt is the fact that the company operates in water and wastewater utilities, which is subject to less fluctuation as compared to other areas of the society. The company possesses an excellent operational financial statement; however, it subject to certain financial risks, as it is already moderately geared. The company enjoys an excellent credit rating as compared to its peers due to relatively less gearing and a solid liquidity position and a healthy CAPEX.

There are multiple advantage for the issuer of a bond, most importantly the ability to pay usually lower interest rates than those case of financing from a bank of equal maturity. Investors, in turn, benefits from a higher return than an investment in cash and with the possibility, if listed, to liquidate the investment in the secondary market (Netter & Poulsen ...