The Company Background
Introduction
Companies usually needs to have a various types of the debt financing in order to have a principal that he will be using in the diversification of its business. It’s just like water that needs to fill up the container with the aide of the other one to make it full, but needs to give it back as soon as there is an excess in the container. This also holds true in the field of the business and in the firm wherein every firm needs a principal in order to meets its customer’s needs and wants.
There are many types in the financing of the debt, one of which is the secured lender that had been look in the repayment of the normal from cash flow or the assets’ liquidation which was held as the security. This is also the cheapest in obtaining this because it has definitely the low risk for the lender. The subordinate debt is also one of the types in debt financing wherein the banks provides the subordinate debt wherein there is the not sufficient security in covering the loan if the past cash flow is much sufficient to have a service in the future payments. Other possible methods in the debt financing which the company will going to choose include the convertible debenture, the bonds, the leveraged buy outs and the industrial development bonds. Though the most commonly used of the debt financing is the loans which can be as long term, the short or the medium term. This must be signed by the co-signers which were guaranteed by the government and it should be secured by the collateral. This includes all the accounts receivables, the real estate, the inventory, the life insurance, the savings, the stocks and the bonds and the items which were purchased in the loans.
Vodafone group is one of the companies who needs a debt financing in order to diversify its business and can expand its products to meet its goal in meeting into the other clients. It was indeed a great challenge for the telecommunication company to divert its business to the other countries that is why it needs a financing to have a capital in its plan. Debt financing of the company got from the share holders. It has been founded that the major sources of the liquidity of the group for the past years has generated from its operations, from the long term borrowing as well as from the issuance of the short term in the capital markets and the borrowings that had been drawn from the bank. It has also come from the dividends which came from the associated undertakings. The group also does not use the off-balance sheet which is a special purpose as an entities and a source of the liquidity in the other financial purpose.
Vodafone Group
The Vodafone is the company which is primarily involve in the mobile phones. It is the group who has the guts to pursue this kind of business in the field of the telephony and the telephonic transmission. The group has its own subsidiaries in the different countries all over the countries such as in the North and South America, Asian Countries and in the Africa. From its former name Vodafone Air Touch had emerged the Vodafone and became the leading and prominent in the field of the mobile phone operator not only just in Germany but also holdings as SFR, Vodafone, K.K., Swiss Mobile. This group also offers mobile phones services and the communication services organizations.
The finance team of the company consists of the 350 people; the department comprises the commercial finance, the Finance Operations, the Supply Chain Management and the Internal Audit. This is a forward thinking and a energetic environment with a true and honest commitment to the people which was reflected in the internal communications as well as the flexible working policies. The company is expected to have a benchmark status in the terms of the efficiency and meeting the customers needs to have diversified its business.
Debt Financing
Debt financing is simply the money that the manager will borrow to run his business or to diversify its products as well as its services. It is also the money that one raises for his working capital and for the capital expenditure in the process of selling the bonds, the bills, or even the notes to the individuals to the institutional investors. In relation to this, the institutions or the individuals can become the creditors and will receive the promise which says that the principal as well as the interest on the debt will have a repayment. One of the factors in raising this kind of the capital is to have an issue in the shares of the stocks in the public offering. This is simply means the equity financing.
There are many source of the debt financing; these can also be divided into two categories which are the private and the public sources. The private sources includes the banks, the consumers, the credit unions, the friends and relatives, the consumers finance company, the trade credit, the commercial finance companies, the insurance companies, the leasing companies and the factor companies. The public sources of the debt financing include the loan programs which was state and federal government provided in order to provide all the business.
There are many advantages of the debt financing, these advantages include of not giving up the any manager’s ownership or the future profits in the business. The only requirements are paying the loan back of the manager. Through these borrowed money it has been obtained the business assets that will allow the business in keeping its profit in the company or it can use those profit in the payment of a return to the company owners. The interest that had been paid on the loan is normally the tax deductible. There are certain disadvantages of these debts financing wherein the company must have enough cash flow to the repayment of its loan. Most of the cases it will require to the cash profits that needs to pay back the cash loans. Dealing to the lenders will have their criteria that one must obtain wherein if it is riskier then it has the higher interest rate. Majority of the lenders will require collateral to the security of the loan. Having much debt will definitely weaken the rating of the credit.
Short Term Debt Financing
Short term is to the time wherein a loan is required as well as the period over which the expected repayment going to take place. Short Term Loans often takes the operating term loans which is less than one year and revolves lines of credit. These will finance the everyday operations of the business, which includes wages of employees as well as purchases of inventory and the supplies. The supplies are used up quickly and the inventory is sold resulting to stock-turns. Also, the bridge financing can be used to finance the accounts receivable contracts which are risk-free, but they are delayed for one to three months.
In short term operations the money can be secured against any unencumbered physical assets of the business which is unencumbered, additional funds coming from the shareholders or the personal guarantees from principals. The inventories also can be used as temporary security for the operations loans. Bridge financing is commonly secured by the assignment of the whole receivables as well as personal guarantees. On the balance sheet, it had shown up the accounts receivable, the inventory and supplies stocks in the current assets section. On the other hand, the counterpart loan information is written in the current liabilities section.
Medium Term Debt Financing
The medium term debt financing are the bonds or the other debt instruments that can be used in the medium term of borrowing for the financing of the whole business which is for about 4 to 10 years. The improvement to be done should have a minimum life expectation for about four (4) years or even longer that is implemented by the government. The company will going to know and should utilize the least costly methods of financing which is available. These debt arrangements should be paid by in the process of the diversification which has to be done.
Long Term Debt Financing
The Long term financing is normally used to the application of the assets in the business purchasing wherein the equipment, the land, the machinery and the building. In using this kind of debt financing it was scheduled to have the repayment in the loan and the useful estimation of the assets that was extended in over greater that one year. Long term debt financing usually use in the large capital equipment purchase, in the fixed assets, in the large scale equipment purchase, and in the expansion of the facilities.
There are advantages of using this kind of the debt financing such as low after-tax in its deductibility of the interest, the firm’s owners ability in controlling the and maintaining its business, through the financial leverage there was an increased in the earnings per share. Some of the disadvantages of this firm include the increased of the financial risk of the firm that will result in the use of the debt. There was a lenders restriction in the place of the firm.
I. The Short Term, Medium and Long Term Financing Of Vodafone
The key sources of liquidity of the group for the future outlook are all the cash generated which came form the operations and the borrowings through the long term and the short-term issuance at the capital market and the committed bank facilities. In addition, the group had put option which has a relation in the interest in the Verizon Wireless which will provide them cash flow material. This liquidity and its working capital can be affected by the decrease in the material through the cash flow due to the factors including the litigation, the timing of the tax payment, the competition, and the resolution of the tax issues which are outstanding as well as the regulatory rulings, the inability in receiving the revenue which are expected from the new services introduction, the delays in the new services and networks developments, the associates reduced dividends, and the dividends or the investment that had payments in the shareholders. The group is also open in the options agreements and can make results in a cash outflow. If possible, the groups surplus funds may transferred in the treasury department trough the repayment of the borrowings, the deposits and the dividends. These are all on-lent or the contributed in the equity of the fund of the group’s operations that will be using in the external as well as it could be invested externally.
For the past three years the group that increased its net cash flow from the operating activities for about 11% to the 12,317 million and had generated 1,069 million of its net cash flow. The Group also have a liquidity investment which is in according to its counterparty and the settlement risk limits which was approved by the Board treasury policy. During the 31st of March 2004 the forms of the liquid investment were collateralized deposits market funds and the euro commercial paper.
Vodafone’s Cash Flow for 1st quarter 2004
Year ended (2004) Yearended (2003)
Net cash inflow from operating activities (Note 28) 12,317 11,142 Purchase of intangible fixed assets (21 ) (99 ) Purchase of tangible fixed assets (4,508 ) (5,289 ) Disposal of tangible fixed assets 158 109 Net capital expenditure on intangible and tangible fixed assets (4,371 ) (5,279 ) Dividends from joint ventures 7,946 5,863 Taxation (1,182 ) (883 ) Interest on group debt 31 (475 ) Dividends from investments 25 15 Dividends paid to minority interests (100 ) (91 ) Net cash outflow for returns on investments and servicing of finance (44 ) (551 ) Free cash flow 8,521 5,171 Other net capital expenditure and financial investment 104 (80 ) Net cash outflow from acquisitions and disposals (1,312 ) (4,880 ) Equity dividends paid (1,258 ) (1,052 ) Management of liquid resources (4,286 ) 1,384 Net cash outflow from financing (700 ) (150 ) Increase in cash in the year 1,069 393 The expenditure and the financial investment was decreased thru the net cash outflow in the capital expenditures as well as the financial investment is due to the cash payment timing for the tangible assets. In the end the first quarter of the 2004 there are millions had spent in the intangible assets which are in respect for the other subsidiaries in Italy. During this time the group the group’s tangible fixed assets were reduces. In the 2005 financial year the company is expecting to have the capitalized tangible assets due to the expenditure of the 3G. The dividends from associated groups of the undertaking are normally paid at the discretion of the Board of directors or the shareholders of the operating companies. The wireless’ distributions can determine in the terms of partnership agreement distribution policy and will comprise income distributions as well as tax distributions. In the shares and programme the board reviews all the free cash flow that was anticipated the cash requirements and also the gearing of the group when there in increased returns to the shareholders that can be provided in the form of the dividend. On the meeting, the directors decided to have a share purchase. The maximum price payable for the share that have been purchase should not be greater than 105% in the average closing price of the middle market in the company’s chare market. In the consideration of the shareholders returns can also be provided in the form of dividends and the purchases. In the companies acts it permits the whole company to have purchase all their own sales which out of the distributable reserves and had been hold its shares in the nominal value that is not exceeding to 10% of the nominal value.
Payments due by period m
Contractual obligations(1) Total <1 year 1-3 years 3-5 years >5 years
Short term debt(2) 392 392 - - -
Long term debt(2) 11,613 - 3,620 4,019 3,974
Interest on debt(3) 4,432 444 901 705 2,382
Operating lease
commitments(4) 3,074 630 758 554 1,132
Capital commitments(5) 749 748 1 - -
Purchase commitments(6) 1,242 1,152 87 1 2
Preference shares
(including dividends) 1,560 45 90 90 1,335
Share purchase
programme(7) 565 565 - - -
MobiFon and Oskar
acquisition agreements(8) 1,858 1,858 - - -
Total contractual cash
obligations(1) 25,485 5,834 5,457 5,369 8,825
Notes:
1. The table of contractual obligations does not include the commitments in respect of options over the interests in the Group businesses which was held by minority shareholders and the obligations to pay the dividends to minority shareholders. The table also excludes the obligations under the post employment benefit schemes.
2. Future interest of payments in the Group’s gross overall debt reflects the fixed as well as the floating rate interest payments. The floating rate payments are calculated in the basis with market derived forward rates and actual interest payments also vary from the amounts in the table.
3. The capital investment are only estimated that represent approximately 15% of the Groups in the total capital expenditure’s financial year and definitely related to the network infrastructure.
4. As it was described, the group had assumed of approximately .9 billion (0.5 billion) of the net debt on the completion of acquisition.
Liquidity and the Capital Resources
The Company’s Cash Flow and Funding
For the past six months the net cash flow from the operating activities had fell by about 2.3% to the £4,860 million and the Group had been generated by £2,661 million for the free cash flow.
Six months to Six months to 30 September 30 September 2007 2006 £m £m % Net cash inflow from operating activities 4,860 4,975 (2.3) …………………………………………………………………………….. - Continuing operations 4,860 4,840 0.4 - Discontinued operations - 135 …………………………………………………………………………….. Add: Taxation 1,487 1,217 Purchase of intangible fixed assets (320) (298) Purchase of property, plant and equipment (1,902) (1,892) Disposal of property, plant and equipment 13 11 ——– ——– Operating free cash flow 4,138 4,013 3.1 …………………………………………………………………………….. - Continuing operations 4,138 4,021 2.9 - Discontinued operations - (8) …………………………………………………………………………….. Taxation (1,487) (1,217) Dividends received from associated undertakings (1) 476 371 Dividends paid to minority shareholders in subsidiary undertakings (66) (34) Dividends received from investments 72 57 Interest received 240 256 Interest paid (712) (499) ——– ——– Free cash flow 2,661 2,947 (9.7) ======== ======== …………………………………………………………………………….. - Continuing operations 2,661 2,955 (9.9) - Discontinued operations - (8) …………………………………………………………………………….. 30 September 31 March 2007 2007 £m £m Cash and cash equivalents (as presented in the consolidated cash flow statement) 2,873 7,458 Bank overdrafts 28 23 ——— ——— Cash and cash equivalents (as presented in the consolidated balance sheet) 2,901 7,481 ——— ——— Trade and other receivables(1) 291 304 Trade and other payables(1) (465) (219) Short term borrowings (5,673) (4,817) Long term borrowings(2) (20,307) (17,798) ——— ——— (26,154) (22,530) ——— ——— Net debt as extracted from the consolidated balance sheet (23,253) (15,049) ——— ——— The Group’s credit ratings enable it to have an access to the wide range of the debt finance which includes the commercial paper, the bonds and the committed bank facilities. In the aggregation, the Group recorded committed facilities of approximately £8,821 million, wherein £5,726 million of which was undrawn and £3,095 million drawn. The Group has gain a €25 billion Euro Medium Term Note (“EMTN”) programme as well as a US shelf programme which used in meeting the medium to the long term funding requirements. The nominal value of bonds which was outstanding was about £17,101 million. The bonds issued during the six months were as follows: Date bond issued Maturity of Currency Amount US shelf programme or bond million EMTN Programme 6 June 2007 6 June 2014 EUR 1,250 EMTN Programme 6 June 2007 6 June 2022 EUR 500 EMTN Programme The Group had bonds of outstanding with a nominal value of about £17,206 million. The aggregate of0 million principal amount of bonds were issued under the US shelf programme. The Group also acquired a controlling interest in Vodafone Essar. The operating companies which are acquired in this transaction are funded by the external facilities which are the non-recourse to the other Group companies. On the 3rd quarter of this year a total of INR62.1 billion (£765 million) had been drawn from committed bank facilities that will mature at various dates up to July 2012. On the other hand, companies are funded by the fully drawn external bank facilities of the INR16.4 billion (£202 million) that will mature at various dates up to February 2010. Total Shareholders returns Dividends The company also provides its returns in the shareholders through its dividends. Historically, the company paid its dividends it such a way that it has a regular interim dividends semi annually and it was respected by the directors. The board is aware and also in favor of the company’s policy of distributing 60% of the adjusted earnings per share in the dividend’s way. But, as a result of the dilution of earnings which arise from the Vodafone Essar acquisition and it was expected to rise above of 60% in the near term to have a better reflection in the business’ underlying trends. The directors are also interested in the dividend of 2.49 pence, which represents the year’s 6.0 percent increase for the past years. In allowing the dividends to grow, the company is still strong and confidence enough in growth of the business. Other Returns The directors of this company has no plans for the further purchases share or the other shareholders returns because it has reviewed its free cash flow, the dividends, the credit profile and the gearing are considered shareholder returns additional. Conclusions Considering the Vodafone’s debt financing is indeed a great effort and a needs further analyzation to study for that such kind of issues. Though every company needs a debt financing for it will be able to diversify and it will expand its products and its services in the other land. The debt financing of the Vodafone are considered as the same of to the other companies, the dividend, the bonds and others are the common methods that the Vodafone Group had used in order to survive its business and expand it worldwide. Using such kinds of methods will definitely allows the company and has the chance to move to another step of its business. These methods also are the best method which I could say that will help it to not only to merge to the other companies but to be able for it to overcome its competitors. Using whether short, long, or either medium debt financing will provide the group a wide range of options and will generate it to the applicable way of diversification. In the group’s gearing policy it was considered as the true and the enough to survive this business and it will allow other investors to encourage investing in this kind of business and also will have a positive and large percentage of income returns. This gearing policy also allows seeing the business strategy in pursuing its plan to go beyond the border of its natural plan and get into account for the next level of its business. Many theories had been acquired by this incident especially the directors which will help their company to be excel and will expand worldwide. In taking to this account, there risk to encounter such as the level of competition, the changes as well as the decisions in the regulatory environment, the non-achievement of the expected benefits, the expected benefits in the networks investment, the geographic expansion, the strategy may be impeded and the services of the major supplier may affect,
Bibliography:
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