REFINANCING MATRIX : APPLICABILITY OF SECURITIES BASED REFINANCING FOR SES COMPANIES

Abstract

This dissertation examines how the property sector could exploit opportunities to improve corporate profits through capital structure refinancing. The refinancing of capital structure is executed through the use of innovative and suitable securities or financial products available in the capital markets. These products is predominantly used to refinance either or both the debt and the equity components of the capital structure of local property companies. This relationship between capital structure refinancing and securities innovations available in the capital market is investigated based on the relevant time series data. They are derived from 1984 to 1996 for data pertaining to local property companies and from 1987 to 1996 for data pertaining to local securities market. A detailed regression analysis from 1992 to 1995 pertaining to 20 publicly listed property companies is conducted to determine the correlation between capital structure refinancing and securities innovations. Refinancing activities in the selected property companies are suitably proxied by their weighted average cost of capital. The measure of the growth in percentage terms of innovative financial products against the overall market determines the extent of innovations in the market. The bivariate regression analysis conducted to determine the correlativity suggests a positive correlation between cost of capital and securities innovations, particularly in the area of debt financing innovations. The findings suggest strongly that the design of the capital structure and subsequently corporate profits can be enhanced by the use of innovative refinancing. The applicability of the studies is put into context with a financial perspective of the local construction industry. It argues the case for financial innovations based on the fact that finance related costs constitute a large part of the operating costs and it will increase significantly with the regionalization of the industry. How financial innovations are used to cover perceived interest rate risks as well as perceived foreign exchange risks are shown through examples in either onbalance- sheet or off-balance-sheet capital refinancing activity. The entrepreneur is in business with the objective of maximizing his risk-return profile. Therefore financial risks will reside largely with the entrepreneur no matter how well organized or managed the company may be or no matter how well he allocates his project risks contractually to various parties involved. To this effect, a refinancing matrix is proposed as a strategic tool to manage capital structure risks or portfolio risks from real estate project or projects under construction locally or overseas. It is hoped that this matrix will be used to organize the application of present and future financial innovations as they develop and evolve in the capital market.