Refinancing Risk and Optimal Debt Maturity

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

There are two ways to define the refinancing risk. The narrow definition is based on the small likelihood that the company cannot refinance its maturing debt at any price because the investors feel that the risk is too high. In normal times, this risk exists only for smaller and less mature companies, but at moments of credit crisis, such as in 2008, this risk becomes significant for many more companies. A more general definition of refinancing risk, which applies to all companies at all times, is the risk that the cost of debt will increase compared to a baseline scenario. This is the definition of refinancing risk that we consider in this chapter.

MATCHING THE MATURITY OF ASSETS AND LIABILITIES

In a 2002 study based on a survey of 392 CFOs from the Fortune 500 company list (Graham and Harvey, 2002), one of the questions was: “How do you decide on the debt maturity?” Figure 5.1 shows the poll results.

One thing is clear: although companies use a variety of considerations to decide on their debt maturity, a significant majority is focused on matching the maturity of assets and liabilities.

Why is this important? Figure 5.2 shows three possible situations. The main message

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: