Corporate Securities Info
Looking forward
By Raul J. Palabrica
Philippine Daily Inquirer
First Posted 02:56:00 01/02/2009
Filed Under: World Financial Crisis, Economy and Business and Finance
What a difference a year makes.
When the year just ended began, the international financial community was in a generally upbeat mood.
The on-and-off adverse reports about the subprime mortgage market in the United States hardly caused a stir in developed countries. They had faith in the ability of the world’s biggest economy to quickly and effectively lick that problem.
The confidence vanished in mid-September when several banking and investment icons of Wall Street floundered and begged for — and were granted — billions of dollars in bailout money from the US Congress.
What was initially thought of as a US-confined financial infection turned out to be a worldwide contamination.
Although the affected countries have taken appropriate measures to minimize the effects of the contagion, there is a general feeling that the worst is yet to come.
So, unlike in 2008, the financial world is entering the New Year with apprehension and unease about the future.
If it’s any consolation, the price of oil has gone down to around $40 a barrel, as against an all-time high of $147 in July last year.
There is guarded optimism that the assumption to power of President-elect Barack Obama would presage the resuscitation of the US economy and, hopefully, that of the rest of the world.
Way of life
Here at home, the effects of the US financial meltdown have already been felt by employees of some local manufacturing outfits that have ties with US companies that have cut down their operations due to poor consumer demand.
The number of Filipino overseas workers who have returned due to job losses are expected to increase as more companies abroad retrench or realign their business plans in preparation for a long US economic malaise.
The executives of the business processing offices here are keeping their fingers crossed that their staff will not be adversely affected by the slowdown in the countries that avail of their services.
In the face of this uncertainty, the ordinary household cannot be faulted for ignoring the advice of government economic advisers to maintain their normal way of life (read: continue to spend their money as they used to) to keep the economy going.
With the holiday spending over and done with, the name of the game now for the typical Filipino family is to cut down on expenses and save as much money as possible for the rainy days.
Undoubtedly, the scrimping would drag down the economy but try preaching the “virtue” of spending to somebody who lives on a payday-to-payday basis and the least harmful reaction you’ll get is a sarcastic response.
Financing
For people who need money to maintain or expand their business, 2009 is going to be a challenging year in terms of raising funds from outside sources.
Tapping the capital market through an IPO is a dicey idea. The stock market has not been doing well since the US economy suffered from a credit squeeze.
Foreign direct investments, the principal driver of the local bourse, are not expected to return until things have stabilized in the US. And that could take a long time.
Of course, banks and other lending institutions are available for funding. But whether they would be liberal in opening their lending window is a different story.
With the present global financial crunch, the loan processing system has become tighter and more stringent.
Borrowers have to forcefully convince the banks of the viability of the projects for which financing is sought, and their capability to pay the amortizations as they fall due, not after receipt of demand letters.
Unless the borrower is confident he meets these criteria, he’s better off looking for other sources of funds because rejected loan applications have a nasty way of spreading around in the community, with lingering adverse consequences.
Creative
With the traditional sources of funding already strained, prospective fund raisers have to be more creative in meeting their objectives.
They have to come up with more effective ways of encouraging managers of mutual, pension, insurance and UITF funds, including publicity-averse multimillionaires, into investing their money in their business.
The fundraising schemes have to go beyond offering preferred shares or other forms of corporate investments that promise to pay fixed rates of interest that are subject to conditions that can be manipulated by the issuing company.
Or floating bonds or certificates of corporate indebtedness whose terms and conditions, through some fine print susceptible of varying interpretations, tilt heavily in favor of the issuer to the prejudice of the unknowing subscriber.
The “rights offer” (giving stockholders the right to subscribe to additional stocks depending on the number of stocks they own) approach has to be refurbished to make them more attractive to their target market.
To use the lingo of corporate finance, all these measures have become “plain vanilla” type or ordinary. They have been in use for so long and have outlived their usefulness in the present financial climate.
The new fundraising scheme must be transparent, assures the investor a fair return on his investment, and devoid of the features of derivatives, credit default swaps and other exotic financing instruments that caused the near collapse of the US economy.
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For feedback, please write to rpalabrica@inquirer.com.ph.
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