|
Review and analyze the long term financing mix rational of 3i Group
In this essay will be categorized into 4 parts: first part I will refer to the long term debt finance in the past decade. Second part is about 3i Group Long term equity finance.
; Thirdly, I will analyze about 3i’s capital structure, gearing and liquidity in fiscal year 2009
; Finally, based on discussion and analysis above, a conclusion will be provided.
3i Group PLC (LSE: III) is a leading private equity firm. It is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.
3i Group is one of biggest European private investment company, which has 60 years of investment history, the investment management of assets reached $1.4 billion each year, investment amount is about 20 million dollars, which is 50% for buy-outs, from the group enterprise or private company bought stock; 35% for growth of investment, another 15% is investment risk.
Long term debt finance:
According to the 3i Group’s annual report, from fiscal year 2002 to fiscal year 2006, the amount of long term debt was from 1,282 million to 2,163 million, however the interest paid level was low, which was around 40 million. From 2006 to 2009, it borrowed long term debt what was less than before, which was only 400 million comparing with past year figures. But the interest paid increased to high level, which was more than 10 times of interest rate in past year.
This information reflected that the capital structure had changed during 2006 to 2007, which the company chose to pay back interest rather than put their profit to free cash flow. It can be clearly found that in 2006 the long term debt is 2163 million, because during 2006, 3i Group invested a lot of projects such as 30 million in Electrawinds, 72 million Euros in Azelis, successfully completed lead investment in ACR’s US$620 million with Khazanah, etc. While, in 2007, the long term debt is only 661 thousands, because 3i Group sold Vetco Gray for US$1.9 billion; 3i, HgCapital and Neuhaus Partners sell DocMorris to Celesio; Scandlines sale successfully finalized, which means 3i group try to change the capital structure.
The activity of the company has influenced the debt activity, as the previous example I mentioned, in 2006 3i group spent a lot of capital on the investment, while in 2007 they sold and had fund return.
Even more importantly, from 2002 to 2006, when 3i Group have a lots of long term borrowing, it seems hard for them to borrow money from bank, so they issued some bonds, most of them have 5 years maturity, especially in 2002, they have issue the bonds with 10 percents coupon rate and 100 pounds face value, the required return rate of market was 12 percent at that year. Thus, the valuation of this bond in 2002 is
year CF PV of CF
2002 £ 10.00 £ 8.93
2003 £ 10.00 £ 7.97
2004 £ 10.00 £ 7.12
2005 £ 10.00 £ 6.36 #p#分页标题#e#
2006 £110.00 £62.42
Sum in 2002
£92.79
So the market value is £92.79, which is less than market return. However, 3i group overcome the high level debt, because of 3i’s strong reputation in Euro market, but in 2004 the required return rate has changed from 12% to 11%. And the remaining years of maturity is three years. Thus, the market value is calculated as following table:
year CF PV of CF
2004 10 £ 9.01
2005 10 £ 8.12
2006 110 £ 80.43
Sum in 2004
£ 97.56
Comparing these results, as the required return rate of market decreased http://www.ukassignment.org/liuxuezuoyedaixie/daixiehelanzuoye/ and coupon rate is remaining same level, the market value of the bond is increased which means when remaining year of maturity decline, require rate of return seems to become lower, because of the company will pay back the bonds soon.
In the value of long term debt finance, with the approach of maturity and other new bonds issued, without changing the coupon rate, the market value of the bonds might change a little. In 2007, when the long term debt changed again and paid back the issue earlier, the new bond issued in 2007 have a lower in coupon rate. As the result of, 3i Group do not need so much capital issued by bonds. Consequently, the coupon rate was not only relative with the market condition but also strong link with the performance of the company.
|
