MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECNOMICS HOCHIMINH CITY ---- K --- NGUYEN THI THANH THAO DEBR FINANCING – A CASE STUDY Ò AMATA POWER (BIEN HOA) LIMITED MASTES’S THESIS In Banking Ology code: 60.TRUONG TAN THANH Ho Chi Minh City – 2010 TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENT The research is completed due to the contribution of many people. First of all, I would like to express my deepest gratitude to my supervisor, Dr. Truong Tan Thanh, for all he has done for me. The thesis could not been finished without his great encouragements and kind helps.
Again, I would like to extend my sincere appreciation to him. I would like to express my thanks to Dr. Nguyen Minh Kieu for his valuable advices. He always took care, encouraged and supported us during our course.
I acknowledge all instructors at Faculty of Banking Finance and Postgraduate Faculty, University of Economics of Ho Chi Minh for their valuable knowledge. My gratitude is extended to my classmates for their enthusiastic supports in conducting the research, especially Ms. Nguyen Thi Kim Dung and Mr. Duong Binh Hung.
Finally, I sincerely thank my parents and my husband who have always tried their best to help me overcome difficulties during the time of attending the course as well as preparing the thesis. 1 TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT The economy has been developing more and more strongly, the competition among firms is fiercer and fiercer. In order to run the firm’s business operation in the competitive market, capital is one of necessary elements to speed up the development. It likes the blood of the firm.
There are three financing alternatives to set up the capital which are retained earnings, capital from shareholders and loans from credit institutions. The choice of internal or external financing is an extremely vital decision. Some of firms like the internal financing (retained earnings, capital from shareholders) due to avoiding the financial risks. Some of firms prefer the external financing (loans from credit institutions) due to taking advantages of tax shield and controlling management position.
However, too much debt can result in increasing dramatically capital costs due to financial distress in terms of increased bankruptcy and agency costs. So, the careful consideration to the advantages and disadvantages of each financing resource should be conducted to balance between returns and risks. And financial analysis should be done in order to minimize financial risks in case of debt financing. The purpose of this thesis is to evaluate the effectiveness of debt financing process of a defined firm, Amata Power (Bien Hoa) Limited.
The research is conducted by collecting and analyzing the empirical data in order to understand debt repayment ability as well as the impacts of debt on expenses and profits. 2 TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS Acknowledgement. 2 Table of contents. 6 List of figures.
7 List of tables .4 Significance and scope of the study .5 Structure of the study. 12 Chapter 2: Theoretical background .1 The Miller and Modigliani theory .2 The trade-off theory .3 The pecking order theory (Myers, 1984) .2 An overview of debt financing .3 Financial ability to repay debt .4 Financial risks of debt financing in a foreign currency .1 Interest rate risk .2 Foreign exchange risk. 28 Chapter 3: Research methodology .2 Analysis of debt settlement ability. 30 3 TIEU LUAN MOI download : skknchat@gmail.3 Debt management ratios .5 Profitability measurement ratios .3 Analysis on financial risks of debt financing in a foreign currency .1 Interest rate risk .2 Foreign exchange risk .4 Impacts of debt financing on profit.
35 Chapter 4: Introduction to Amata Power (Bien Hoa) Limited .1 An overview of Amata Power (Bien Hoa) Limited .4 Debt management policy .3 Recent development and outlook. 43 Chapter 5: Analysis on debt financing of Amata Power (Bien Hoa) Ltd.2 An overview of debt financing of APBH .1 Short-term borrowings .2 Long-term borrowings .3 Analysis on debt settlement ability .1 Debt settlement ability .2 Debt control method .3 Method of cash flow management .4 Analysis on debt impacts .1 Impact of debt on expenses .2 Risks related to debt in a foreign currency .1 Foreign exchange risk. 57 4 TIEU LUAN MOI download : skknchat@gmail.2 Interest rate risk .3 Impact of debt on profits. 65 Chapter 6: Research conclusion .1 Summary of study .2 Implications and recommendations .3 Future research and limitations.
70 5 TIEU LUAN MOI download : skknchat@gmail.com ABBREVIATION APBH Amata Power (Bien Hoa) Limited AP Amata Power Limited Amata VN Amata Viet Nam Joint Stock Company BP Banpu Public Company Limited BIDV Bank for Investment and Development of Vietnam DEG Deutsche Investitions - Und Entwicklungsgesellschaft MBH EBIT Earnings before interest and tax KfW Kreditanstalt fur Wiederaufbau ROA Return on assets ROE Return on equity ROIC Return on invested capital ROS Return on sales TIE ratio Times-Interest-Earned ratio VCB Bank for Foreign Trade of Vietnam (Vietcombank) 6 TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 2.1: Effect of leverage on the value of a firm’s stock.3: Analysis on debt repayment ability .1: Structure of shareholders of APBH as of December 31, 2009 .2: Growth of assets and resources of APBH from 2005 to 2009 .3: Growth of revenue and profit/loss of APBH from 2005 to 2009 .4: Profitability ratios of APBH from 2002 to 2009 .5: Profitability of APBH from 2004 to 2009 .1: Liquidity ratios of APBH from 2002 to 2009 .2: Growth of current assets and current liabilities .3: Debt management ratios of APBH from 2002 to 2009 .4: Earnings coverage ratios of APBH from 2002 to 2009 .5: Cash conversion cycle of APBH from 2002 to 2009 .6: The cash conversion cycle model in 2009 .7: Assets – equity turnover of APBH from 2002 to 2009 .8: Financial expenses of APBH from 2008 to 2010 .9: Impact of debt on expenses of APBH from 2002 to 2009 .10: Interest rate risk of APBH from 2005 to 2009. 60 7 TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 2.1: Summary of financial ratios from the lending viewpoint .2: Summary of financial ratios from the investors’ viewpoint .3: Financial ratios combining ratio analysis with cash-flow analysis .4: Foreign exchange risk of Pha Lai Thermal Power JSC .1: Financial analysis of APBH from 2002 to 2009 .1: Capital Structure of APBH as of December 31, 2009 .2: Growth of assets and resources of APBH from 2005 to 2009 .3: Growth of revenue and profit/loss of APBH from 2005 to 2009 .4: Profitability ratios of APBH from 2002 to 2009 .5: Comparison ROE and free-risk interest rate .1: Loan disbursement and repayment schedule of APBH .2: Liquidity ratios of APBH from 2002 to 2009 .3: Growth of current assets and current liabilities .4: Debt management ratios of APBH from 2002 to 2009 .5: Earnings coverage ratios of APBH from 2002 to 2009 .6: Activity ratios of APBH from 2002 to 2009 .7: Assets – equity turnover ratios of APBH from 2002 to 2009 .8: Costs structure of APBH from 2008 to 2010 .9: Impact of debt on expenses of APBH from 2002 to 2009 .10: Foreign exchange rate (USD/VND) on settlement date to creditors .11: Interest rate of creditors and two banks in Vietnam .12: Comparison with firm in the same industry in 2009 .13: Components of return on equity for APBH .14: Extended Dupont System Analysis for APBH: 2002-2009. 63 8 TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 1 INTRODUCTION 1.1 INTRODUCTION The globalization has brought countries together and made countries integrate deeply into the world. Nowadays the economic competitiveness does not limit in the national border, it has extended to the international market.
The capital is means to create favourable conditions for the successful business. Most firms prefer the capital mobilization from debt. There are many kinds of debt which are bank loans, sponsor loans, bonds, and account payable. In comparison with equity, debt is cheaper and has more tax advantages.
In the upturn, using leverage helps companies to maximize their profit. But in the downturn, the debt management becomes more difficult. Facing with huge debts, only a little downtrend can lead to insolvency. Borrowing to run business is not wrong, but too much debt is problematic.
Brigham and Ehrhardt (2002, p.619) also indicated that debt has two important advantages. First, the interest paid is a tax deduction, which lowers debt’s effective cost. Second, debt holders get a fixed return, so stockholders do not have to share the profits if the business is extremely successful. However, debt also has disadvantages as following: First of all, the higher the debt ratio, the riskier the company, hence the higher its cost of both debt and equity.
Secondly, if a company falls on hard times and operating income is not sufficient to cover interest charges, its stockholders will have to make up the shortfall, and if they cannot, bankruptcy will result. In this thesis, debt financing in form of loans from credit institutions and parent companies is mainly discussed. In order to get bank loans and sponsor loans, the company needs to demonstrate its financial solidity to its bankers by the financial analysis. The goal of analysis is to assess an obligor from a financial 9 TIEU LUAN MOI download : skknchat@gmail.com perspective to confirm that company will be able to meet its obligations when they are due, to identify the potential risks, and to perfect the security and collateral and loan documentations in order to optimally manage these inherent risks.
Besides financial analysis is a tool which is used to evaluate company’s business operation which is volatile or stable in order to define the level of debt financing.2 RESEARCH PROBLEM Amata Power (Bien Hoa) Ltd. (named briefly as APBH) is a joint-venture company of which the capital comes from Thai, Swiss and Vietnamese parties. APBH has produced and supplied power to all customers in Amata industrial park. APBH’s capital is made up of contributed capital from shareholders and debts in form of bank loans and sponsor loans from other foreign companies.
APBH is a suitable choice to conduct this study. Because one of factors influencing debt financing in form of bank loans is ability to receive bank loans, APBH is a manufacturing company which has many fixed assets that can serve as securities for bank loans. Besides APBH obtains loan guarantees from the parent company, Amata Power Limited in Thailand. APBH has high sale stability because it does business in monopoly sector.
Determining the optimal amount of debt is a complicated process. Many researches in this area are conducted, but yet there is no optimal combination of debt and equity for firms to apply. This study makes no effort in trying to solve this issue, but it will discuss some specific research questions as follows: • How good are the firm’s financial abilities to settle debt? • How does debt financing impact on profit? The purpose of this study is to evaluate financial abilities of the firm to meet its short- and long-term debt obligations and the effects of debt on profit in order to assess the effectiveness of debt financing process. 10 TIEU LUAN MOI download : skknchat@gmail.3 METHODOLOGY A case study is conducted at APBH by the quantitative approach.
The secondary data is retrieved from annual auditing reports and loan dossier of the firm. The data is collected from Y2002 to Y2009.4 SIGNIFICANCE AND SCOPE OF THE STUDY Efficient debt management is an extremely difficult problem. It requires the leaders have talent management skills and exact estimations. One of recent typical examples for bad debt management is the Vinashin case.
“Vinashin fell into financial trouble in 2008 when the global economic meltdown started. The main reason was the weak management of group’s leaders. Currently, Vinashin’s total debts are $4.5 billion, while total assets are $5.