Introduction to Funding and Capital Structure

Stanley Myint and Fabrice Famery

Contents

Foreword

Introduction

1.

Theory and Practice of Corporate Risk Management

2.

Theory and Practice of Optimal Capital Structure

3.

Introduction to Funding and Capital Structure

4.

How to Obtain a Credit Rating

5.

Refinancing Risk and Optimal Debt Maturity

6.

Optimal Cash Position

7.

Optimal Leverage

8.

Introduction to Interest Rate and Inflation Risks

9.

How to Develop an Interest Rate Risk Management Policy

10.

How to Improve Your Fixed-Floating Mix and Duration

11.

Interest Rates: The Most Efficient Hedging Product

12.

Do You Need Inflation-linked Debt?

13.

Prehedging Interest Rate Risk

14.

Pension Fund Asset and Liability Management

15.

Introduction to Currency Risk

16.

How to Develop Currency Risk Management Policy

17.

Translation or Transaction: Netting Currency Risks

18.

Early Warning Signals

19.

How to Hedge High Carry Currencies

20.

Currency Risk on Covenants

21.

Optimal Currency Composition of Debt 1: Protect Book Value

22.

Optimal Currency Composition of Debt 2: Protect Leverage

23.

Cyclicality of Currencies and Use of Options to Manage Credit Utilisation

24.

Managing the Depegging Risk

25.

Currency Risk in Luxury Goods

26.

Introduction to Credit Risk

27.

Counterparty Risk Methodology

28.

Counterparty Risk Protection

29.

Optimal Deposit Composition

30.

Prehedging Credit Risk

31.

xVA Optimisation

32.

Introduction to M&A-related Risks

33.

Risk Management for M&A

34.

Deal-contingent Hedging

35.

Introduction to Commodity Risk

36.

Managing Commodity-linked Revenues and Currency Risk

37.

Managing Commodity-linked Costs and Currency Risk

38.

Commodity Input and Resulting Currency Risk

39.

Offsetting Carbon Emissions

40.

Introduction to Equity Risk

41.

Hedging Dilution Risk

42.

Hedging Deferred Compensation

43.

Stake-building

The sine qua non of every business and personal endeavour is the necessary funding. No matter how great the business idea or how brilliant its people, companies cannot exist if nobody will invest in them. Therefore, the first and arguably most important source of risk for every company is lack of funding.

Funding, in the broadest sense of the word, means the provision of monetary resources for a project or company. Funding can take many forms, and this chapter will focus on two main sources of unsecured fixed income funding (or simply “debt”): bonds and loans. Since this book is about risk management and not funding on its own (as well as for obvious reasons of space), we examine debt here rather than other types of funding instruments. This excludes equity, convertibles and other hybrid instruments, secured bonds, and many other types of funding instruments. One could write a whole book about each one of these topics, and in fact many such books have been written.11 See for example, Quiry, Le Fur, Salvi, Dallochio and Vernimmen (2011) for a general overview, or Woodson (2002) for a look at convertible bonds.

Corporate funding and risk management are intricately connected

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