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On the corporate debt financing and risk prevention

Author: XuBo From: www.yourpaper.net Posted: 2009-06-15 07:36:25 Read:
Paper Keywords: debt financing, risk prevention
Abstracts: debt financing is a way of corporate finance. In this way can solve financial pressure, it also enabled companies in trouble, and even lead to bankruptcy. The first debt financing and its pros and cons, discussed the causes of the debt financing risk on this basis, and companies how to guard against the risk of debt financing recommendations.



The debt financing is one of the major funding of the modern enterprise. Through debt financing, not only can solve the problems of the business capital, and allows businesses to sources of funding presents a wide range of trends. Debt financing is a double-edged sword, and at the same time to meet the corporate demand for funds, bring financial benefits, but also bring the risk to the enterprise, even cause serious financial crisis facing bankruptcy. Therefore, how to correctly understand the corporate debt financing, and it is particularly important to establish risk prevention measures.

First, the meaning of corporate debt financing

Corporate debt financing risk in corporate debt financing behavior. Corporate debt financing enterprises through bank loans, bonds, commercial credit issued to raise the enterprise funds needed behavior.
Debt financing is a double-edged sword, pros and cons for enterprises. Debt financing major benefits to the enterprise, including: (1) reduce the weighted average capital. Mainly reflected in the rate of debt financing the cost of capital is lower than the cost of capital, and equity capital financing companies through debt financing can make the real burden of debt interest is less than the dividends paid to investors. (2) give investors the financial leverage effect. That when the total yield of corporate assets is greater than the debt financing interest rates, debt financing can increase the yield for investors. (3) can quickly raise funds to make up for internal insufficient funds. Debt financing relative to other financing, the procedures are more simple, faster of funds, corporate financial difficulties can be solved quickly. (4) in favor of the retention of corporate control over. Debt financing does not have the role of equity dilution, usually the debtor is not entitled to participate in the operation and management and decision-making, business activity does not have the right to vote, there is no entitlement to corporate profits and retained earnings, is conducive to maintaining the existing shareholders control capacity.
The main shortcomings of debt financing, including: (1) increase the risk of payment. Enterprises must ensure that investment income is higher than the cost of capital, debt financing Otherwise, there will be income over expenditure or loss occurs. (2) increase the operating costs, the impact of the capital flow. Performance in the interest of the corporate debt financing to increase the cost of doing business; same time, if the repayment period of debt financing is relatively concentrated, short-term enterprise must raise huge amounts of money for debt repayment, which will affect the current turnover and use of corporate funds. (3) reduce the excessive debt refinancing ability, and even endanger the viability of the enterprise. Enterprise once the debt is excessive, will make funding risk increases sharply, any business will lead to business debt settlement or even bankruptcy. (4) Long-term debt financing generally have restrictions on the use and time. Way of financing long-term loans, the banks in order to ensure the security of the loan, the borrower use attached to many of the terms of the binding of these terms and conditions in a certain sense, limit independent deployment and use of funds.

Second, the causes of the debt financing risk analysis

Debt financing risk is mainly due to the impact of a variety of uncertainties, makes enterprise risk encountered in the process of financing, as well as the solvency risk of future production and operation process. The risk of debt financing in the corporate debt financing behavior, its causes including the following aspects.
1. Managers do not know the full debt financing risk. Risk of debt financing generally include two aspects, first, the risks posed by the financing process; future solvency risk. Judging from the current situation, the enterprise management attaches great importance to the risk posed by the financing process, concerned about the ability to raise funds, raise funds, what is the condition of the fund-raising, but to raise the debt how to use the funds in the future to repay and how to repay the lack of a more detailed and mature consideration. Investment project and the halfway change the situation in China's listed companies often cases of bad investment decisions is also not uncommon.
2. Corporate investment decisions. The need to invest a lot of capital investment projects, if the the policy mistakes projects fail for various reasons can not be built quickly and form a production capacity can not be as soon as possible to recover the funds to repay the principal and interest, will enable enterprises to bear the huge financial crisis. However, due to poor decisions lead to the case of the financial crisis is a frequent occurrence. "Qin pool", "dragon" enterprise failed almost all due to investment failure.
3. Changes in market interest rates and the exchange rate. Enterprises in financing, may face the risks of changes in interest rates or exchange rates. The level of interest rates and exchange rates directly determines the size of the corporate cost of capital. In recent years, due to the country to implement the "tight" policy, that tighter fiscal policy and monetary policy, shrinking the supply of money, the loan interest rate continues to increase, which also makes the burden of operating costs to improve enterprise. Similarly, changes in the exchange rate of the international currency market the receipt and payment of foreign currency risk to the enterprise.
4. Inadequate supervision of bank corporate debt. High liabilities of enterprises in China is an indisputable fact, but such high debt and did not play the governance role of debt, it not only failed to effectively motivate and constrain the behavior of the business, but distort the relationship between banks and enterprises. System design of the relationship between banks and enterprises in China to guard against financial risks, which led to the deviation of the understanding that the bank supervision of the business behavior can only external oversight main banks to participate in the company's internal cause greater financial risk . In this case, the bank is only a negative attitude to participate in corporate governance. So our bank debt enterprises constraint is soft. 5. The system is not perfect. Since our current financing system is still not fully market-oriented, most banks and listed companies are state-controlled, there is no fundamental conflict of interest, some banks by the intervention of the state, its loan administrative decision-making, because the countries involved in the financing the establishment of the contractual relationship between the enterprises and banks, leading to state-owned enterprises have intrinsic high debt motives. For managers, business success will bring them huge benefits, business failure, but will not lose a lot of business, often like to run a great risk.

Guard against the risk of corporate debt financing strategy

1. Establish the correct debt financing risk awareness. Establish a correct debt financing risk awareness includes two aspects, one aspect is to establish a corporate the independent risk awareness, with the further deepening of the reform of the socialist market economy, the relationship between business and government will become increasingly clear, and then the possibility to rely on government support and help will be getting smaller and smaller, Therefore, companies must first have an independent bear risk awareness. On the other hand, debt financing not only to consider the risks posed by the financing process, but also to consider the future solvency risk. In fact, the future solvency risk is the corporate debt risk considerations focus.
2. Optimize the behavior of corporate debt financing. Enterprises moderate gearing ratio should be determined to maintain a reasonable debt structure and debt maturity structure. Enterprises moderate debt management refers to the debt ratio to be compatible with the specific circumstances of the enterprise, to achieve the optimal combination of risk and reward. Choose the proportion of debt financing is not the same for different scale and nature of the enterprise, production and operation, marketable products, corporate cash flow fast, liabilities ratio can be higher liability ratio can be higher; In contrast, the operating situation is not very ideal enterprise its proportion should be lower, otherwise it will enable enterprises to increase funding risk on the basis of the original commercial risk. The current debt ratio of China's enterprises, in order to ease the pressure of the outside world, should reduce the proportion of the balance. Similarly, companies also deal with the long-term debt and short-term debt and debt repayment reasonable arrangements to prevent the risk of principal and interest payments in the course of business in the future of the enterprise.
3. Give full consideration to the market interest rate, exchange rate, and make the appropriate funding arrangements. For the financing risks of changes in interest rates, the enterprise must examine the supply and demand in the period in which China's economic development and capital market changes, correct grasp of the future path of interest rates. When interest rates at a high level, or in high-to-low transition period, should be minimal funding, must raise the funds, we should try to take the floating rate interest-bearing. When the interest rate at a low level, financing is more favorable, but should avoid financing for excessive. Should be kept to a minimum fund-raising or operations only raise much-needed financing for adverse short-term funds. When interest rates in the transition from low to high, should be based on the demand for funds to raise long-term funds to maintain a lower cost of capital and maximize the use of the fixed-rate interest-bearing. Similarly, the risks of the fund-raising foreign currency funds should focus on the trend of the forecast and analysis of movements in the exchange rate, the development of the foreign exchange risk management strategy, to grasp the development trend of the exchange rate changes through its inherent laws, to take effective measures to prevent the financing risk. Such as the raising of dollars of foreign exchange funds to minimize, because relative to the RMB devaluation increasingly obvious, otherwise it will generate more foreign exchange losses.
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