@rainmaker, You speak much sense, here. Good work mate.
Sure , it is good work to raise these issues for discussion , However does it make sense?
Here are my views .“The profit drop from 31/12/2011 to 31/12/2012 will impact shareholders rather than debt holders. “
When there is reference to profit of a listed company , it is normally profit attributable to the shareholders , which is arrived after deducting interest cost. As such , If there is a drop in profit , the impact is directly to shareholders, ( not in any way to debt holders ) in any financial year.
With regard to LOLC profit in 2012, one pertinent question is , of the profit before tax of nearly Rs 3 billion, around 44% is represented by Negative Goodwill , which is not an earned income. “The profit is still high enough to meet debt payments - at current levels. “
Debt payments are not made out of profits. Its’ made out of cash flow. “Any further decline in profit has to be met with a decline in finance costs.”
It’s the other way. If finance costs decline , profit will increase. I think LOLC has done what every SL firm should do. Expand the balance sheet with debt. In a high inflation environment debt wins - speak to those who bought houses on debt in the 1990s.
Can’t understand , Why should every SL firm should expand balance sheet with debt ? Isn’t it foolish to compare with a listed company’s debt /equity financing ,with a home owner ?
There is a optimum level for debt :equity for any company, based on the business they are engaged in and the volatility of outside economic environment. That’s why these reserve requirements and Tier I ,Tier II Capital requirements in respect of Banks, financial service companies , strictly monitored by Central banks. Besides lenders will not provide unlimited debt as borrower requests. They also look at business prospect, optimum debt :equity levels for the particular industry based on their past experience and norms. In case of bank borrowings ,there has to be collateral to the satisfaction of lender.
A company’s borrowing decisions are not based on whether it is high inflation or low inflation environment . They are primarily based on future business prospects , revenue \profit forecasts, and financing structure is decided based on those facts. If it is low inflation environment , company is in a position to finance major /entire cost through equity ( based on their tax status).
My observation is LOLC asset side has expanded by only 10% during 2012, and the liabilities has grown by mere 3 %. Hardly any evidence to say balance Sheet has expanded with debt.
They should now develop a "debt sinking fund" to cushion the impact of redemption payments. They must replace $ and LKR debt with Yen debt as the long term outlook is the Yen being weaker.
If they can be so sure about long term Yen /dollar exchange rate what’s the need to engage in lending / leasing to risky Sri Lankan clients ? Better to switch to currency market . This is applicable to investors in CSE also !!!
I have a feeling that those 1B debentures given by the controlling family have an option to convert debt into equity. Maybe a hidden card if they have to dilute the stake with a private placement ????
My opinion is …You don’t have to feel, you can check. For a listed company debenture terms ( even terms of bank loans ) are public information . How can they go for a private placement diluting existing shareholders , without a right issue or consent of existing shareholders ?