Debt Servicing Capacity Research Articles

Canada

This Technical Note on Financial Safety Net and Crisis Management for the Canada focuses on housing finance. Housing finance is broadly resilient, but pockets of vulnerabilities exist. Mortgage finance is dominated by domestic systemically important financial institutions (D-SIFIs) and supported by the government via mortgage insurance, securitization guarantees, and other policies. With a market share of about 70 percent, D-SIFIs focus on prime borrowers, and their lending is backed by their strong balance sheets. The cost of prime mortgage financing is low and little differentiated, with credit risk being under-priced in some segments. Aspects of Canada’s mortgage finance may amplify procyclical effects of falling house prices during severe downturns. Core lenders focus on low-risk mortgage lending. In response to deteriorating household debt-servicing capacity, they may constrain new lending or renewals of maturing uninsured mortgages, potentially adding pressures on the housing market. Alternatively, a sudden adoption of risk-based pricing to accommodate financially weak borrowers might amplify household debt servicing fragility.

A Novel Housing Price Misalignment Indicator for Germany

AbstractFrom 2014 until present, housing prices in Germany have been rising faster than consumer prices in all quarters except one, raising concerns about an excessive overheating of the housing market. To assess the vulnerability of the German housing market to a future realignment of prices or even a housing bust, this paper develops a housing price misalignment indicator that is composed of seven indicators, which are commonly associated with the fundamental value of residential property. An empirical application to the most recent data suggests that the German housing market exhibits an overvaluation of approximately 11%, where interest rate risk and a relatively advanced stage of the housing cycle are identified as the main factors fueling these imbalances, while a rather solid debt-servicing capacity mitigates these imbalances since end-2009.

The capital structure puzzle – evidence from Indian energy sector

PurposeThe purpose of this paper is to determine the factors affecting the capital structure of companies engaged in the Indian energy sector.Design/methodology/approachCapital structure theories and empirical literature have been reviewed to formulate propositions concerning the factors/variables determining the capital structure of Indian energy companies. The examination is done using panel data techniques for the sample 141 companies operating in the Indian energy sector.FindingsThe results show firms’ age, asset turnover ratio, liquidity and firms’ size to be significant determinants of capital structure for the Indian energy companies, while profitability, debt service capacity, sales growth, non-debt tax shield and tangibility ratio to be insignificant determinants. Historically, profitability has shared a significantly negative relationship with debt ratio; however, the relation here is not significant.Research limitations/implicationsThe focus of the current study is on Indian energy sector, the results obtained will not be applicable for other sectors.Originality/valueThe current research gives an insight into the determinants of capital structure of the companies engaged in the Indian energy sector, which are mostly overlooked due to the laws, policies and regulations governing the sector as a whole.

Factors affecting financial leveraging for BSE listed real estate development companies in India

Purpose The real estate sector in India has assumed growing importance with the liberalisation of the economy. Developments in the real estate sector are being influenced by the developments in the retail, hospitality and entertainment (e.g. hotels, resorts and cinema theatres) segment, economic services (e.g. hospitals, schools) and information technology-enabled services (such as call centres), and vice versa. This paper aims to study the determinants of capital structure by taking into account 125 major Bombay Stock Exchange (BSE) listed real estate companies selected on the basis of their market capitalisation. Design/methodology/approach To discover what determines capital structure, nine firm level explanatory variables (profitability-EBIT margin, return on assets, earnings volatility, non-debt tax shield, tangibility, size, growth, age debt service ratio and tax shield) were selected and regressed against the appropriate capital structure measures, namely, total debt to total assets, long-term debts to total assets, short-term debts to total assets, total liabilities to total liabilities plus equity, total debt to capital used and total debt to total liabilities plus equity. A sample of 125 real estate companies was taken and secondary data were collected. Consequently, multivariate regression analysis was made based on financial statement data of the selected companies over the study period of 2009-2015. Findings The major findings of the study indicated that profitability, size, age, debt service capacity growth and tax shield variables are the significant firm-level determinants. Research limitations/implications The present study is carried out by taking data of only 25 companies listed on the BSE and time period covered from 2009 from 2015. Time period and sample size may be limitations of the current study. Practical implications The present study is an empirical analysis of the determinants of leverage of real estate sector in India with most recent available data. Different regression equations have been formed to develop the models using firm-specific determinants and different measures of leverage or capital structure. Data were regressed using SPSS application software, and the resulting (or obtained) regression outputs are analysed. This study will help the Indian real estate companies to the know the impact of different variables while raising short-term and long-term loans. Social implications The current study will benefit all stakeholders of society who are fascinated to be acquainted with the financing of real estate companies and the factors affecting long-term and short-term financing of this sector. Specifically, public engrossed in different modes of investment and financial institution will be the prime gainers. Originality/value The present study has been completed using authentic data from the annual reports and database. This study uses explanatory variables and different measures of leverage which were limited in use in previous studies. Moreover, this research is a comprehensive study that deals with developing different regression models by using diverse measures of leverage.

Determinants of Capital Structure : An Exclusive Study of Passenger Car Companies in India

Capital structure decision is one of the core financial decisions in a firm. Theoretically, composition of capital structure has a significant stake in determining the earnings available to equity holders and thereby, the market value of a firm. If it is so, a better understanding about the determinants of capital structure is inevitable to manage the decisions of a firm. This study attempted to identify the determinants of capital structure of passenger cars companies listed on the Bombay Stock Exchange (BSE) of India. The long-term debt to total capital ratio was considered as the dependent variable representing the capital structure. The determinants of capital structure which were considered as the independent variables are : (a) size of the firm, (b) profitability, (c) tangibility, (d) growth in assets, (e) non-debt tax shield, (f) debt service capacity, and (g) dividend payout ratio. A panel regression was run to identify the determinants by following a logical procedure for establishing the relationship. Though the independent variables were sensibly and carefully chosen from the existing literature, none of these determinants were found to have a statistically significant relationship with capital structure in the case of passenger car companies in India. However, the overall F - statistics confirmed that the specified model with the above explanatory variables had more predictability power and could explain more than what the intercept only model could explain.

Kondycja finansowa jednostek samorządu terytorialnego – koniec wpływu spowolnienia gospodarczego?

Since 2013, the financial standing of local governments (LG) has been gradually improving in Poland. Their debt ratios have decreased and debt service capacity improved remarkably. The analysis of individual LG categories indicates that the progress is not uniform. The most modest recovery was in the category of towns with county rights. The new statutory debt limit created a space to increase their debt, which was not accompanied by adequately strong growth in operating surpluses. At the end of 2015, ca. 15% of towns with county rights crossed the alarming values of debt indicators and they are noticeably exposed to a risk of interest rates increases. The differences between LGs with sound risk profile and LGs with inferior risk profile are growing also for the rural boroughs and the counties. As a result, despite an average improvement in financial ratios for the LG sector, several dozen entities remain in the financial situation even more difficult than in the years 2011–2012.

Determinants of capital structure: an empirical study of manufacturing firms in India

PurposeThe purpose of this paper is to explore the most significant determinants of capital structure of manufacturing firms in India and to investigate whether the capital structure models derived from foreign research provide convincing explanations for capital structure decisions of Indian firms by using multiple regression model.Design/methodology/approachDifferent conditional theories of capital structure like trade off theory, pecking order theory and agency theory are reviewed to formulate testable propositions concerning determinants of capital structure of manufacturing firms. Multiple regression model and correlation matrix have been used as statistical tools to investigate the most significant determinants of capital structure of manufacturing firms in India with the help of SPSS Software for a sample of top 100 manufacturing firms listed in BSE.FindingsThe results suggest that variables like asset composition, business risk and return on assets are positively related to debt ratio whereas firm size and debt service capacity are negatively related to debt ratio. The asset composition, business risk and return on assets appear to be significant determinants of capital structure, while firm size and debt service capacity are insignificant determinants.Research limitations/implicationsThe findings of this study are consistent with predictions of trade off, pecking order and agency theory of finance which helps in understanding financing behaviour of firms in India.Practical implicationsThis study has laid some ground work to explore the determinants of capital structure of Indian firms upon which a more detailed evaluation could be based. Furthermore, empirical findings should help corporate managers to make optimal capital structure decisions.Originality/valueTo the authors’ knowledge, this study is the first that explores the most significant determinants of capital structure of manufacturing firms in India by using the most recent data. Moreover, this study also confirms that same factors affect the capital structure decisions of firms in developing countries as identified for firms in developed economies.

Risk assessment of the local government sector based on the ratio analysis and the DEA method. Evidence from Poland

The local government (LG) sector plays an important role in the EU economies. Besides providing a vast range of public services, it accounts for over 8% of total investment. The crisis, which started in 2008, resulted in increased LG indebtedness and raised concerns over the sector’s debt repayment capacity. This paper proposes an alternative methodology of risk assessment of LGs to statutory debt limits, the Altman model and non-financial indicators. Firstly, it employs a corporate finance approach to evaluate the financial standing of individual entities. The measures are based on free operating cash flow and net debt. Next, Data Envelopment Analysis is used to derive the relative performance of LGs in debt utilization. The indicators used are available from the LG financial reports and also allow risk to be monitored on a quarterly basis. The proposed approach allows the ranking of the risk of individual LGs according to both their debt service capacity and long-term ability to manage costs and carry out a rational investment policy. The results obtained using the DEA method also enable the identification of LGs with persistently inferior risk profile. The quantitative analysis is conducted for the local governments in Poland for the period 2008–2015.

Emerging Market Nonfinancial Corporate Debt: How Concerned Should We Be?

Nonfinancial corporate (NFC) debt in emerging market economies (EMEs) has tripled since the global financial crisis (GFC), reaching roughly $25 trillion, or 112 percent of GDP, in mid-2016. In this note, we assess corporate vulnerabilities by looking at two common metrics related to debt-servicing capacity: leverage (the ratio of debt to equity), and the interest coverage ratio (the ratio of earnings to interest expense).

How corruption affects loan portfolio quality in emerging markets?

Purpose The purpose of this paper is to empirically investigate the impact of corruption on the asset quality of banks operating in emerging market economies over the period 2008-2012. This issue is of crucial importance given the role of banking systems in economic development and the worldwide spread of corruption. Using panel data set of 22 countries, our findings provide a strong and robust support to the hypothesis according to which corruption aggravates the problem with non-performing loans. This evidence suggests that corruption may hinder economic development through the misallocation of loanable funds. Other results are as follows: economic expansion and capitalization level improve the loan portfolio quality. By contrast, unemployment deteriorates the debt servicing capacity of borrower which in turn contributes to lower the bank asset quality. Design/methodology/approach The authors use panel data techniques on a sample of 22 emerging market economies over the period 2008-2012 to test the relevance of corrupt practices on the soundness of banks. Findings Their findings reveal a robust positive relationship between corruption and non-performing loans (NPLs). This evidence corroborates previous results on the detrimental effect of corrupt practices on financial development. The subdivision of our main sample into two groups on the basis of the level of corruption reveals the importance of the effectiveness of collateral and bankruptcy laws in reducing the effect of corruption on loan portfolio. Moreover, we find that the accessibility to more credit information is helpful only in low corrupt countries since it enhances the soundness of banks by facilitating lending decisions. Originality/value The novelty of this paper is to take into consideration the implications of corruption in investigating the determinants of credit risk.

Farmland Ownership and Its Impact on the Debt Servicing Capacit Among U.S. Married-Couple Farm Households

Farmland ownership among U.S. farm businesses constitutes the major type of farm tenure arrangements as only about 8 percent of all farms are operated under full rental agreements. This research seeks to discern the impact of full-ownership of farmland, which accounts for nearly two-thirds of how farms are operated, on the debt servicing capacity of married U.S. farm couples. Findings based on data from the 2004-2013 Agricultural Resource Management Survey along with regression procedures indicated a strong and statistically significant positive impact of farmland ownership on the ability of these farm households to service their debt. Increases in unemployment rates and the occurrence of the 2008 economic recession were among the factors that were found with a strong adverse impact on debt servicing capacity.

Corporate Leverage in China: Why Has It Increased Fast in Recent Years and Where Do the Risks Lie?

Our analysis based on firm-level data indicates that China’s corporate sector does not appear to be over-leveraged in aggregate despite rapid credit growth following the global financial crisis. However, some industries, particularly real estate developers and firms in industries with substantial over-capacity, have continued to increase leverage. By ownership, it is mainly state-owned enterprises (SOEs) that have increased leverage, while private enterprises have deleveraged in recent years. Using a corporate finance model, our research shows that SOEs’ leveraging has been mainly driven by implicit government support amid lower funding costs than private enterprises. If SOEs, particularly the real estate developers and firms in overcapacity industries, had borrowed without such support, their leverage would have been much lower. Moreover, some SOEs did not use credit obtained via formal financing channels to expand their businesses, but instead conducted credit intermediation.Leveraging driven by government support has resulted in a weakening in fund-use efficiency and a deterioration in corporate debt-servicing capacity. Meanwhile, non-financial corporate credit intermediation activities not only add risks to banks’ asset quality but also mislead policy makers. Specifically, headline figures of credit expansion would overstate credit allocated to the real economy and understate credit allocated to the financial sector. Our analysis suggests that, if corporate credit intermediation activities are taken into account, the credit intermediation chain would be longer than indicated by the headline figures. This also suggests quantity indicators, such as credit growth, may have become less informative of China’s monetary conditions.

Design and impacts of securitized leveraged buyouts

AbstractPrivate equity investors have traditionally used innovative financial methods in structuring their leveraged buyouts (LBO) deals. In recent years, they have frequently employed securitization to raise funds on the back of their acquisitions’ operating assets. A distinctive feature of these transactions is that they aim to enhance the securitizing LBO’s debt pay capacity through a set of structural enhancements including operating debt covenants. Operating covenants—supported by legal security arrangements—mitigate an LBO’s financial and operating risks and improve its cash generation potential. We test this hypothesis by examining changes in the operating income of Hertz LBO. The results show that, within the operating framework adopted by Hertz LBO, securitization improved the transaction’s debt service capacity.

Financial Leverage and its Determinants: Evidence from Indian Cement Industry

In this study an attempt has been made to examine the determinants of capital structure in companies belonging to the Cement Industry of India. The companies listed in the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) has been used for the study. The study has been conducted for the period from 1999-2000 to 2010-2011. To study the influence of various independent variables on the capital structure, Multiple Regression Analysis has been carried out taking the ratio of average total debt to average total assets as dependent variable and seven variables, which might have some impact on the capital structure, as independent variables. These seven variables are namely business risk, size of the firm, growth rate, debt service capacity, degree of operating leverage, dividend payout, and earning rate. It is observed from the study that size of the firm, debt service capacity, business risk and growth rate are statistically significant to have an influence in taking capital structure related decisions and considered as determinants of capital structure of the listed companies belonging to the Indian Cement

Determinants of Capital Structure – A study of selected Pharma Companies

Capital structure is fundamentally permanent long term financing of a firm. The objectives of this study are to identify the significant determinants of capital structure of the listed Pharmaceutical companies in NSE/BSE during the period 1999–2013. In relation to the study determinants are considered are profitability, tangibility, growth, size, debt service capacity, tax rate, non debt tax shields, financial leverage cost of debt and cost of equity. The study uses correlations and multiple regression analysis, to find the relationship between Debt-equity ratio (i.e., Dependent variable) and determinants of capital structure (independent variables), The policy implication is that the financial managers should consider these determinants as yardsticks before taking the leverage decisions in order to choose the most favorable capital structure for the company so that it maximizes the shareholders’ value.

Disciplining Management or Guiding Management: Aligning Interests in Securitized Leveraged Buyouts

Leveraged buyouts (LBOs) are generally explained in terms of a governance mechanism that disciplines management. It is operationalized by increasing the leverage of a firm, which has an implicit consequence of constraining management in the use of free cash flows. However, under a relatively new form of LBO known as securitized leveraged buyouts, private equity firms raise funds on the back of the acquired company's operating assets. A securitized LBO imposes explicit restrictions on management with regard to its freedom for carrying out strategy decisions. Using the case study of Hertz, we show how a securitized LBO can be structured more efficiently and what important decisions must be made in order to improve its debt service capacity.

Determinants of Corporate Financial Performance Relating to Capital Structure Decisions in Indian Iron and Steel Industry An Empirical Study

This study is basically undertaken so as to investigate the independent variables on which the dependent variable, i.e., the profitability depends upon for the firms belonging to the Indian iron and steel industry. The nine independent variables taken into consideration for the study which might have some impact on the profitability of the Indian iron and steel industry are “business risk”, “size of the firm (log(sales))”, “growth rate”, “debt service capacity (interest)”, “dividend payout”, “financial leverage”, “degree of operating leverage”, “firm’s age” and “size of the firm (log(assets))”. The above variables determining the capital structure of a firm have been taken into consideration after a thorough literature review. It is observed from the study that “financial leverage”, “debt service capacity (interest)” and “size of the firm (log assets)” are significant factors influencing the profitability of the firms of the Indian iron and steel industry. In this study, a further attempt has been made to...

Intellectual Capital Valuation and Debt Service: Combining EBITDA with Operating Cash Flows

Purpose: This paper aims to detect how intangibles can create scalable, synergistic and externally perceived value, softening debt constraints that traditionally affect IC.Design/Methodology/Approach: A comprehensive IC valuation approach is theoretically linked to measurable accounting sources, looking for its scalable impact on economic margins and financial flows. Corporate finance implications are then analyzed, softening information asymmetries and so enhancing debt capacity.Findings: IC has a low and mis-perceived collateral value, so discouraging debt, but is also -- paradoxically -- a fundamental component of cash generating value, so representing a key factor for debt servicing, especially if properly combined with scalable and value adding strategies. EBITDA, marginally increased by synergistic intangibles, plays a key role as a bridge between accrual and cash flow accounting, and so between market and income value; operating cash flows and consequent debt service capacity, also derive from pivotal EBITDA.Research Limitations/Implications: The impact of IC scalability, through operating leverage, on valuation and debt capacity is just drafted, with somewhat unsophisticated assumptions. Capricious interaction of IC assets is still a mystery and so is their inside and externally perceived impact on value, demanding further research and empirical testing.Practical Implications: Better identification and measurement of IC. Proper detection and accounting measurement of the interdependence between operating and financial leverage eases value assessment and debt placement, softening information asymmetries.Originality/Value: An innovative evaluation framework, with an interdisciplinary accounting, economic and financial approach, is proposed in this paper, with practical insights for IC value maximization.

Foreign Direct Investment as an Instrument for promoting Economic Development in Bangladesh

A healthy financial sector is very much crucial for economic growth, especially for economies like Bangladesh. Because, growth in Bangladesh must come largely from exports and its enterprises must, therefore, be internationally competitive. But unfortunately, Bangladesh has a financial system in which borrowers fail to repay loans, foreclosure is almost unheard of, and the government has to bail out banks. However, the Foreign Direct Investment (FDI), the most powerful weapon for accelerating economic development in Bangladesh. To attain an economic growth rate in the seven to eight percent range, investment has to be increased significantly, Because of declining levels of official development assistance in recent years and inadequate domestic savings, FDI presents opportunities for overcoming domestic resource constraints. The Board of investment (BOI) was created as market mechanism where investors can cut through red-tape associated with foreign trade and business start-ups. FDI basically helps to fill-up the capital gap and shortage of a country. Foreign Direct Investment is one of the vital forces to boost up the economy. In this study paper I would like to draw a current scenario of Foreign Direct Investment in Bangladesh. In this regard I present the most updated data, avoid the uncompleted data and use the best judgment at the time of presenting the data to better knowing the current trend about the Foreign Direct Investment in Bangladesh. The benefits of FDI in terms of physical capital formation, transfer of technology, and know-how are sufficient to justify sustaining these flows. Capital controls are not the answer to a rising flow of FDI. Foreign Direct Investment (FDI) will help the country in further developing infrastructures, creating more employment, developing capacity, enhancing skills of the labour force of the host country through transferring technological knowledge and managerial capability. To ensure that resulting payments liabilities remain within the country’s debt-servicing capacity, it is essential to develop an effective non-intrusive reporting and monitoring system the main ingredients of which are presented in the study. JEL Classification Code: G11, O24

The Nexus Between External Debt And Economic Growth In Nigeria (1981 – 2009).

The study seeks to determine the impact of external debt on Nigeria using annual data from 1981- 2009. In our empirical analysis, we run ordinary least square test to verify the statistical significance of the variables used and Johansen cointegration to determine the order of integration among the variables. Empirical investigations revealed that the coefficient of external debt is statistically significant at 5% while other variables such as prime lending rate. Growth rate of GDP are not statistically significant. Our cointegration result s revealed the existence of two cointegrating equations at 5% level of significance among Gross domestic product, external debt, PLR, GRGDP and GREXDS. The results show the existence of long-run relationship among the variables. I. Introduction External debt management refers to the establishment of the condition of issue and redemption of foreign loans. It involves the proceeds of administering the external public debt that is, providing for the payment of interest and arranging the refinancing of maturity bonds/debt. It involves a conscious and carefully planned schedule of the acquisition and retirement of loans contracted either for development purpose or to support the balance of payments. It makes use of estimates of foreign earnings, sources of exchange finance, sources of exchange finance, the project returns from the investment and the repayment schedule. It also includes an assessment of the country's capacity to service existing debts and a judgment on the desirability of contracting loans (CBN; 1996). Nigeria's economic histories in the pre and post independence era are important in order to understand the magnitude of her economic problems and the measures in the recent past to combat the external debt crisis and achieve sustainable economy recovery and growth. The nation's inability to meet all its debt service payments constitutes one of the serious obstacles to the inflow of external resources into the economy. The accumulation of debt service arrears, which is being compounded with penalty interest, has not permitted reduction in the debt stock, despite the fact that government has been servicing it external debt with US $2.0 billion annually between 1991 and 1997. The reasons for this are varied. In some cases, debt problems have mainly stemmed from the efficient use and control of borrowed funds by debtor countries. In most countries, returns on investment had not even debt servicing cost. While in others an adequate policy framework for debt management has led to accumulation of external debts that have proved excessive for the countries debt servicing capacity. Many debtors have faced much higher than anticipated growth in debt payment relative to their growth in their exports of gods and services.