Accounting Help/Questions

[bax]

Not sure if this is the right place for this, but here it goes.

Im in my final year of university and have been struggling through a mandatory finance class in order to get my degree. I have a large project in which I need to analyze the financial statements of a given company and then present my findings to the class.

I am currently analyzing the Cash Flow Statement and am struggling with making sense of it. The company has an increase in cash from long term debt of almost 50 million dollars, but then they also spent almost 40 million on the "repurchase of convertible debentures."

What the heck does this mean?

[Slava]

It means they issued debt (borrowed money), so they have an influx of cash. Then they spent cash buying back the other debentures.

Not sure if that's clear, but that's what it means basically.

[bax]

Originally Posted by Slava

It means they issued debt (borrowed money), so they have an influx of cash. Then they spent cash buying back the other debentures.

Not sure if that's clear, but that's what it means basically.

What exactly is a debenture in this case? Is this like buying shares back?

Why would a company do this?

[bizaro86]

They issued long term debt (ie, borrowed money) so they had $50 MM in cash coming in.

They used $40 MM in cash to buy back convertible debentures, which is just another type of debt that is convertible into equity, generally at the option of the person who bought it.

So they had a net increase of $10MM in debt, which resulted in $10MM of cash inflow.

[calf]

http://www.investopedia.com/terms/d/debenture.asp

[Ace]

Possibly because of interest rate differential (think 1% on 10,000,000), that's an expense savings of $100,000.

There could be a whole host of reasons why the new debt is more attractive than the debentures

[Slava]

Yeah could be that or they didn't want the convertibles sitting out there and diluting the nu!ber of shares overall. Its pretty hard to say from this bit of information.

[calf]

Read the notes to the financial statements...tons of useful information in there (the what...not necessarily the why, but it could lead you in the right direction). If you have an MD&A available, read that as well.

[CorsiHockeyLeague]

^An MD&A or an Annual Report even might discuss them, also you can find the prospectus for the debentures themselves on SEDAR if this is a real company.

Originally Posted by Slava

Yeah could be that or they didn't want the convertibles sitting out there and diluting the nu!ber of shares overall. Its pretty hard to say from this bit of information.

This is more likely the case given that your debenture rate is usually going to be lower than the rate of a $50M long term facility.

[mrkajz44]

Fun side note:

MM to represent 1 million is stolen from roman numerals - you are essentially saying "thousand, thousand", which is a million.

[Locke]

Originally Posted by mrkajz44

Fun side note:

MM to represent 1 million is stolen from roman numerals - you are essentially saying "thousand, thousand", which is a million.

Thanked for interesting trivia.

Fun fact: the word 'Trivia' comes from the Roman usages of 'tri' and 'via' which doesnt mean 'three way' or 'menage a trois' as the conclusion that one might naturally jump to but rather an intersection or fork in the road and eventually a 'public place' or 'commonplace.'



Now, what were we talking about again?

[DoubleF]

As far as I can tell it's an exchange of debt for different debt. Situations like this are kinda like borrowing money from a friend to pay a credit card kind of idea at times. Or you just hate the guy you owe money to, so you borrow money from someone to pay him out so you don't have to deal with him any more.

How complex is this course? At a more complex level (not sure if you're at this level of classes) they may want to go deeper.

Spoiler!

IIRC, convertible debt often has a debt and equity portion to it. I wonder if there's some kind of funny curve ball in terms of a debt to equity ratio in there as well? I agree with Slava's comment about the dilution of shares (though I think I remember in University they generally simplified the situation to "if not redeemed by X time, debenture holder can take over the company, so this situation would be getting rid of this "risk"). Also, sometimes these exercises involve the possibility the interest rate difference makes it a good financial decision in the sense you pay less interest in future years forecasts. (ie: 1% savings means $400k in savings or vice versa spending $400k more next year which could mean losses rather than income?)

Is there some type of debt to equity ratio that the company has to maintain that it might violate by doing this deal? This would be higher level stuff. Not sure the course is that complex.

[BigNumbers]

Pretty simple - they spent $40MM buying back their converts and issued $50MM of debt. So $40MM to buy back the converts and then they likely used the other $10MM in operations/financing activities - look at the working capital change in the cashflow and you'll find the other $10MM likely (if this is some example for school).

Source of cash - $50MM in new long term debt (think bank debt)

use of cash - $40MM buying back more expensive converts.


They would do this likely because they don't want to see the convert holders convert to equity and dilute the shares, so they are buying them back before they convert, avoiding equity dilution.

[IliketoPuck]

Originally Posted by bax

Not sure if this is the right place for this, but here it goes.

Im in my final year of university and have been struggling through a mandatory finance class in order to get my degree. I have a large project in which I need to analyze the financial statements of a given company and then present my findings to the class.

I am currently analyzing the Cash Flow Statement and am struggling with making sense of it. The company has an increase in cash from long term debt of almost 50 million dollars, but then they also spent almost 40 million on the "repurchase of convertible debentures."

What the heck does this mean?

In the most simplistic terms possible:

Step 1. The company issued new long term debt for proceeds of $50MM. I.e. cash on hand has increased by $50MM. Think of this like drawing down your line of credit and transferring the proceeds to your chequing account.

Step 2. The company has re-paid outstanding debt (convertible debentures) of $40MM with a portion of cash on hand. Think of this like you've paid off your credit card with the cash in your chequing account from step 1 above.

End result is your total debt has increased by $10MM (from $40MM to $50MM), and your cash position has increased by $10MM (+$50MM - $40MM = $10MM). Assets and Liabilities balance.

Companies do this for several reasons, including:

1. The convertible debentures are nearing their maturity date.
2. Cheaper debt (i.e. 3.5%/year) is available to re-finance higher yield debt (7%/year), resulting in interest payment savings, while pushing out maturity dates.
3. The company no longer wishes to utilize a specific debt instrument (i.e. convertible debentures), and wants to instead use bank debt, or another form of long term debt.

[puckedoff]

The trick will be when they ask whether it was dilutive or non-dilutive and the related impact to their reported EPS.
Don't worry, as long as you get the first half right you can skip this part of the question and still pass.

[IliketoPuck]

Originally Posted by puckedoff

The trick will be when they ask whether it was dilutive or non-dilutive and the related impact to their reported EPS.
Don't worry, as long as you get the first half right you can skip this part of the question and still pass.

Baby steps.

Let's get him/her understanding the flow of funds first.

[Locke]

Originally Posted by IliketoPuck

Baby steps.

Let's get him/her understanding the flow of funds first.

*shudder*

I just had a creepy University flashback.