essentials of treasury management - working capital class final outline

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Outline created covering selective chapters to be seen on a Final Exam

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Chapter 5 Money Markets

I. Global Money Marketsa. Money Market Participantsi. Issuers of money market instruments1. Government entities2. Securities dealers3. Commercial banks4. Other corporations (including non-profits) that need to raise fundsii. Broker-dealer1. Trades securities for its own account or on behalf of its customersa. Acts as Broker when trades orders on BEHALF of customersb. Acts as Dealer when trading for own account2. Holding securitiesa. Can hold them in their own name, customers name, or street namei. Street name securities are held in the brokers name on behalf of the brokers customerii. Doesnt affect rights of the actual owneriii. Eliminates the need to re-register/re-issue securities in the name of the actual owneriv. Done to simplify trading registration takes several days in a manual environment and securities trade daily3. Compensationa. Charge fees/commissions for their services4. Role in money marketsa. Places the majority of new issues in the primary marketb. Provides the secondary market with the necessary liquidity for outstanding issues5. Dealer Rolea. Act as counter party in transactionb. Enter into REPO agreementsi. Used to finance a dealers securities inventoriesiii. Central Securities Depositories CSDs1. Companies that hold securities:a. That are certificated or non-certificated or dematerializedb. Enables book-entry transfer of securities2. Facilitate money market transactions in other ways tooa. Trade matchingb. Clearing and settlement3. Examplesa. Depository and Trust Company DTCb. Euroclear in Belgiumc. Singapore Exchange SGX4. Nearly all SHORT-TERM securities are issued in NON-CERTIFICATED or book-entry formiv. International Central Securities Depositories ICSDs1. Are CSDs that settle trades in international securities in addition to domestica. Ex: Clearstream, Euroclear, and SIX securities Servicesb. Investment Risk Considerationsi. Introduction1. Money markets have a primary need to minimize risk to principal while maintaining liquidity2. Accompanied by lower returns on yields and low-risk levels3. Appropriate for conservative, short-term portfoliosii. Credit/Default Risk1. The risk that payments to investors on a security will not be made under the original terms2. Higher risk = higher yields3. Credit ratings are assigned based on the issues default risk and seniority a. Additional consideration given to collateral, backup lines of credit, bond issuance, or any credit enhancementb. If a bank provides a letter of credit L/C, the obligation assumes the credit rating of the bank4. Impact of unrated short-term investmentsa. Must be evaluated for credit risk an involved processb. If it must be resold new owner would most likely need to perform a credit risk evaluationc. This process makes it more difficult to find a buyer or it could delay the sale at minimumd. Holding these investments in an organizations short-term portfolio would require FOOTNOTES about the securities in any audited financial statementsiii. Liquidity Risk1. Risk that a security cannot be sold quickly without experiencing an unacceptable loss can also affect YIELD and PRICE on a security2. Primary determinants of a securitys liquiditya. Marketability b. Maturity3. Even with active secondary markets holding investments over longer period of time increases the exposure to price/interest rate riskiv. Price/Interest Rate Risk1. Risk arising when interest rates change for securities that are identical/similar to portfolio securities2. Longer maturity = greater price riska. Since market values are more responsive to changes in market interest rates3. Reason for existencea. A fixed-rate security may have to be sold prior to maturity in a market where interest rates are rising causing a loss of principal on the salw4. Re-investment riska. Occurs when the proceeds from an investment that - has been sold, has matured, or has been redeemed prior to maturity must be reinvested after market interest rates have declined5. Interest rate risk management through use of swapsv. Foreign Exchange (FX) risk1. Arises when securities denominated in foreign currencies are held in an investment portfolioa. Risk of change in the rate of exchange2. Present whether the investment is sold prior to maturity or redeemed at maturity3. How to limita. Only permit investments in foreign securities in 2 scenariosi. When the investment is issued in an economically and politically stable countryii. When the security is suitable as part of an overall currency hedging strategyc. Types of Money Market Instruments and Investmentsi. Commercial Paper CP1. Allow companies to raise funds in the short-term money market2. Refers to tradable promissory notes issued by companies as opposed to banks3. Normally an unsecured obligation4. Maturity rangea. Overnight 270 days for publically traded CPb. Overnight 397 days for private placement CPc. Most CP matures in less than 45 days5. Returnsa. Doesnt pay interest is sold at discount and holder receives face value at maturity6. Advantagesa. Investment-grade CP highly liquidb. Broad range of maturities precise investment7. Disadvantagesa. Not secured against any particular asset b. Though it may be issued with a backup line of credit or standby letter of credit that will pay off the CP in the event of defaultii. Asset-Backed Commercial Paper ABCP1. Most features of above CP and is secured against specific assets a. Usually secured against short-term traded receivables 2. Issued through a sponsoring financial institution known as conduit3. Single-seller backed by assets from a single institution4. Multi-seller backed by assets from multiple institutions5. Advantagea. Primary offers more security than CPb. Credit enhancement from sponsoring bank ensures timely repayment at maturity6. Disadvantagea. Complex structure makes it harder to appraise the overall risk may require 3rd party monitoringb. Complex structure + smaller ABCP market = higher liquidity riski. Investors receive higher rate of return for higher riskiii. Bank Obligations1. Banks raise funds with the followinga. Time depositsi. Savings accountsii. CDs & Negotiable CDsb. REPOsc. Bankers Acceptances2. Eurodollar depositsa. May be issued as negotiable Eurodollar CDs or non-negotiable Eurodollar time deposits both are interest bearingb. Non-US and foreign branches of US banks raise funds in global money markets through EURODOLLAR depositsc. Many multinational businesses invest in these issues because they provide the ability to invest in USD-based securities that historically have had a higher rate of interest than comparable US bank securitiesi. Due to fewer regulations and lack of US reserve requirements3. Yankee CDsa. USD-denominated CDs sold by US branches of non-US banksb. Typically sold through the NY branches of foreign banks carry minimum investment of $100,000c. Historically has a higher rate of interest than comparable US bank securities i. Regulatory differences and lack of R.R4. Banker Acceptance BAa. Arises out of commercial tradeb. Represents a time draft that is issued by a purchaser of goods to pay a supplier & that has been accepted by the bank on which the draft is drawnc. Holder can wait until maturity to receive payment in full or sell it at discount to receive money immediately iv. Government Paper 1. State & local government agencies/entities raise money in the short-term money market by issuing a range of short term papera. Treasury bills or government-issued promissory notes2. Marketa. Liquid and highly active3. Issuancea. Issued on a discount basisb. Variety of maturitiesc. Low returns because of the generally low default risk sovereign risk4. Examplesa. UK gilts, US Treasuries, German Bunds, Japanese Government Bonds JGBs, and Brazilian government bonds5. T-Billsa. Issued with original maturity at less than a year on a discount basisi. Maturities of 4, 13, 26, or 52 weeksb. Newly issued Treasury Offerings are sold through a multiple-price, sealed-bid auctionc. Competitive T-Bill purchasei. Bids are accepted starting with the highest price lowest yield offered, down to the lowest price necessary to sell the entire issued. Non-Competitive T-Bill purchasei. Bidder guaranteed to receive the desired amount of bills at the average price from the competitive-bid processe. Eligible bank, broker-dealers, and other private & government entities tender bids for specific amounts of the offered securitiesv. Floating-Rate Notes FRNs1. Companies and banks issue FRNs to raise funds in the short-term market2. Maturities typically one year or longer3. Pay a regular coupon as well as PROMISE or a return of their face-value at maturitya. Actual return = coupon interest rate + capital gain/loss from FRN transaction since theyre traded on secondary markets at discount4. Interest rate resets periodically based on LIBOR or the Euro interbank offered rate Euribora. As a result FRNs are sold at a QUOTED SPREAD over the stated reference rateb. The spread remains constant while the reference rate can vary5. Perpetual FRNsa. Issued with no maturity date investor can only recapture their capital by selling them on the secondary market6. Advantagesa. Variable rates make them appealing in an uncertain interest rate environment and when investors dont want to lock into a fixed rateb. Offer relatively attractive yieldsc. Regular resetting of the coupon = less capital volatility than fixed-interest rate securitiesd. Issued with credit enhancements to improve marketabilityi. May be secured by collateral pledged by borrowerse. Has a published credit rating7. Disadvantagesa. Capital value can fluctuate in the time between interest rate resets that bring the securitys yield in line with the rest of the marketb. Bid-offer spread of an FRN tends to be wider = regular trading can erode any yield advantage relatively quicklyc. Like CDs, tend to be issued with large denominationsvi. Repurchase Agreements (REPOS)1. Typical REPOa. Bank/securities dealer sells government securities it owns to an investor then agrees to repurchase them at a later date at slightly higher priceb. From the investors perspective that buys the securities with the promise to sell them back = reverse repo2. Classification: overnight, term (2+ days), and open (no maturity)3. Advantagesa. Ample opportunity to tailor its maturity and interest to each partys requirements b. Taking legal possession of the underlying security also gives the investor a high degree of comfort since REPOS can be sol if the selling counterparty defaults on the agreement settlement risk4. Disadvantagea. Can be set up with standard contracts but the investor needs to perform analysis/due diligence to determine a fair price among other things and creditworthiness of the exchanged securityvii. Other Types of Money Market Investments1. Money Market Funds MMFsa. Pools of money market instruments in which investors have an ownership interestb. Generally have an Net Asset Value NAV of one unit of currency of the offering such as dollars, euros, sterling, etc.i. As long as NAV does not break the buck or fall below $1, the investors initial investment is SECUREc. Regarded as a cash equivalentd. Configurationi. Report a NAV of $1/shareii. May not hold securities whose maturity exceeds 397 daysiii. Must maintain a dollar-weighted average portfolio maturity of 60 dayse. Regulationsi. Regulated by the SECii. Restricts investments in MMFs by quality, maturity, and diversityiii. 2010 imposes liquidity requirementsf. Advantagesi. Provides an organization with a professionally managed, marketable securities portfolio at a low costii. Charge management fees/service costs based on investors balance, level of activity, and services providediii. Administratively easy frees up treasury resources for other tasksiv. Offer daily liquidityv. Pays dividends (usually monthly) based on funds average yield for the dividendvi. In changing interest rate conditions ex. Falling - MMF managers may extend the maturities of new securities purchases in the funds underlying portfolio to LOCK in yields1. = greater return of longer-term instrumentsg. Economies of scale of large MMFsi. Obtain very competitive trading termsii. Helps to ensure yields are not eroded by active management of the underlying portfolioiii. Most MMFs offer same-day settlement just as liquid as overnight depositsiv. Credit rated by all leading agencies risk profiles easy to appraise2. Short-Duration Mutual Fundsa. Invest in securities with maturites EXCEEDING maturities in most money market instrumentsb. In most cases longer-maturity funds offer not only higher average returns, but also a higher risk of fluctuations in their underlying valuec. Average maturity 1 to 3 yearsd. Place most holdings in specific types of instruments ex. Govt issues3. Investment Sweep Accountsa. Accounts that contain any excess end-of-the-day funds from a depository institutionb. Offer investments in REPOS, other MMIs, managed accounts, and mutual fundsc. Lower returns minimal risk and minimal time and effort

II. Short-Term Money Markets in the U.S (III.)a. Processing an Clearing of Short-Term Investments in the U.Si. Commercial Book-Entry System CBES1. A multi-tiered, automated system for purchasing, holding, and transferring marketable Treasury securities2. Exists as a delivery system provides simultaneous transfer of securities against settlement of funds3. Top Tiera. At the top is the NBES National Book-Entry System operated by FEDb. Operated in its capacity as the fiscal agent of the US Treasury4. Middle Tiera. Depository Institutions hold book-entry accounts for their customers: brokers, dealers, institutional investors, and trusts5. Lower Tiera. Each broker, dealer, and financial institution maintains book-entry accounts for individual customers, corporations, entities, etc.6. Indirect Holding holding of securities on the book-entry system of the firm that purchases securities on behalf of investors7. Succeeded in replacing paper securities with e-records prevents theft, loss, and counterfeitingii. Depository Trust & Clearing Corporation DTCC1. Works through its subsidiaries to provide clearing, settlement, and info services2. Formed in 1999 though combo of DTC depository Trust Company, and NSCC National Securities Clearing Corporation3. Acts as a legal depository (holding place) for most stock & bond certificatesa. Brings significant efficiency to market clearing process4. As an industry-owned corporation operates at an at-cost basis5. At cost basis charges transaction fees and returns excess revenues to its membersb. US Money Market Participantsi. US issuers1. US Treasury2. Federal Agencies & GSEs3. Securities Dealers4. Commercial banks & Municipalities5. Other corporations that raise funds borrowing in Money Marketii. Fed1. Responsible for managing the initial sale and subsequent settlement of most book-entry Treasury security sales/purchases2. Implements US monetary policy through FOMC3. FOMC implements its monetary policy through purchase/sale of Treasury securities in secondary markets often with REPOS4. Fed buys, sells, and redeems treasury securities in its role as fiscal agent c. US Federal Agency and Government-Sponsored Enterprise GSE Securitiesi. Carries either an explicit or implicit guarantee by the US governmentii. Created as one of 2 types:1. Asset-backed debta. Often require greater due diligence to fully investigate security issue and all assets used as part of collateralb. Often require Sophisticated analytical skills2. Direct debtiii. GNMA Ginnie Mae Government National Mortgage Association1. Provides liquidity for gov-sponsored mortgage programs though its MBSs plan2. MBS plan indiv. Mortgages insured/guaranteed by certain gov-agencies are pooled and interests in them are sold either as MBSs or REMICs real estate mortgage investment conduits3. Prepayment & Extension riska. Prepayment risk arises because as interest rates fall, mortgage refinancing increase resulting in higher prepayment rateb. Extension rate is opposite as interest rates rise, refinancing decrease results in lower prepayment rate = effectively extending maturity iv. US Department of Veterans Affairs VA1. Also guarantees REMICs issued through its Vendee Mortgage Trust Securitization program2. Guarantees timely payment of principal and interest to the REMIC investorv. GSEs 1. Private companies that act as financial intermediaries to provide funds for loans made in housing, education, and agriculture sectors2. Do not carry credit backing of US gov though there is strong implication that the gov would intervene in a crisis to help pay investors because of the importance of GSEs to public welfare3. GSE securities are issued by Fannie Mae FNMA Federal National Mortgage Association and Federal Farm Credit Banks Funding Corporation, Freddie Mac FHLMC Federal Home Loan Banks Office of Financed. Municipal Notes, Variable-Rate Demand Obligations (VRDOs), and Tax-Exempt Commercial Paper CPi. Maturities of 3 months to 1 year are typical for Municipal Notesii. Maturities range up to 270 days for CPiii. VRDOs are issued as long-term bonds that carry a short-term liquidity feature a put1. Put option allows investor to sell the instrument back to issuer at par2. Allows for liquidation either weekly or monthly3. Supported by a credit facility, such as bank L/C4. Often tax-exempt, but taxable instruments do existiv.

Chapter 6 Capital Markets

I. Debt Market (III)a. Medium and Long-Term Borrowingi. Term loan1. Fixed maturity, usually greater than 1 year2. Can be repaid in installments or in single payment3. Are amortizing periodic payments represent both interest and principal4. Usually negotiated with a financial institution or other lender not bought in secondary market5. Typically secured by asset being financed maturity is related to assets useful lifeii. Medium- or Intermediate-Term Notes1. Terms in the 2 to 10 year range2. Pay interest in periodic intervals (semi-annually) 3. Very similar to long-term bonds, but with short maturities4. Marketable and liquid may be traded activelyiii. Long-Term Bonds1. Introduction and Detailsa. 10 30 year maturitiesb. Issued like stock bought and sold in secondary marketsc. Not secured against any specific assetd. Most are coupon bonds make regular interest payments at a fixed ratee. Principal is repaid in full to bondholder at maturityf. Bond indenture contract between issuer and holderi. Describes bond issueii. Lists collateral (when applicable)iii. Makes representations and warrantiesiv. Specifies covenantsv. States the terms by which company will provide funds for redemptionvi. Sets schedule of interest payments dates and amountsvii. Scheduled maturity and nay early redemptions/call provisions2. Mortgage Bondsa. Used to finance specific assetsb. Assets pledged as security against the issuec. Substantial financial covenants/ indenture agreements3. Unsecured Bonds Debenturesa. Represent general claims against the issuing organizations assets and/or cash flowsb. May include sovereign, corporate, and municipal bondsc. Companies without easily securitized assets must use debentures4. Convertible Bondsa. Can be converted into common/preferred stock by the holder and sometimes even the issuerb. Provide holder with potential for capital growthc. Lower interest rates5. Sovereign Bondsa. Typically denominated in currency of issuing governmentb. Transactional, political/sovereign risk with potential for FX risk if issued in a currency other than the home currency6. Sub-Sovereign Bonds Municipala. Bonds usually in the form of general obligation/revenue bondsi. General obligation paid from the proceeds of general tax revii. Revenue bonds linked directly to, and repaid from, revenues from specific public projects or services7. EuroBondsa. An international bond denominated in a currency other than that of the country in which its issuedb. Give issuers the flexibility to choose the currency and country in which to offer their bond according to countrys regulation constraints, their FX needs, and their preferred currencyc. Provides a multinational organization with ability to create Natural Hedge8. Zero-Coupon Bondsa. Issued at substantial discount and paid face value at maturityb. 2 advantages for corporate user:i. No cash outflow until maturityii. Issuing company receives annual tax deduction until maturityc. Disadvantagesi. Not callable or refundableii. Taxed on interest earnings each year even with no actual payment until maturity9. High-Yield Bondsa. A.k.a junk bonds or below-investment grade bondsb. Issued by less creditworthy entities10. Other Bondsa. Income pay interest only if a company has profitsb. Collateral trust bonds backed by securities of other companies that are owned by issuing firmc. Equipment trust cert secured by movable equipmentd. Index interest rates tied to an economic index used most often when a high level of inflation is present/possiblee. Economic development bonds typically issued by developing countries for express purpose of fostering development of infrastructure & relatedf. Tax increment financing TIF used primarily for local financing where a muni may use all/portion of new property taxes within a district to assist in projects financingg. Tender option bonds allow holder to redeem bond either once in its life or on specified dates usually at par valueh. Foreign bonds sold in a country by a foreign borrower - denominated in domestic currency of issuing countryi. Multicurrency bonds usually issued as:i. Currency option bonds allowing investors to choose among several predetermined currenciesii. Currency cocktail bonds denominated in a standard basket of several currenciesiv. Other Forms of Debt Capital 1. Floating- (Adjustable-) Rate Debta. Interest payments reset periodically based on movement in a rep. interest rate index such as LIbOR or US T-Billb. Stated as spread from basic index rate (e.g LIBOR + 3%)c. Attractive to investors during periods of RISING interest ratesd. Borrowers prefer this because they can take advantage in DROP in interest rates2. Project Financing a. Applies to large projects, often in energy also used for private infrastructure b. Lenders are paid from projects cash flows generally without recourse to projects individual sponsors/owners3. Securitizationa. Primary corporate applications accounts receivables and inventoryb. Increases liquidity and thus lowers cost of capital to borrowersc. 4. Off-Balance Sheet Financinga. Ex: joint ventures, R&D partnerships, sales of receivables factoring, and operating leasesb. Often used by orgs with high debt levels or with very restrictive covenants on use of additional debtc. Operating leases = most commonv. Debt Contract Provisions1. Debt (Bonds and Term loans) Indentures and Covenantsa. Indenture legal document outlining the rights and obligations of the borrower and lenderb. Covenants may be negative or affirmativei. Negative actions company CANNOT takeii. Affirmative actions company MUST takec. Covenants ma also include change-of-control and most-favored-nation clauses that provide buyer/lender relief in certain casesd. Purpose is to protect BH from actions by management that would heighten risk to lenders or increase value for EH at their expense2. Representations and Warranties (pg 154)a. Existing conditions at time when loan agreement is executed3. Events Defaulta. May occur if borrower violates any condition under a debt agreementb. Cure period time when an event by default may be corrected before lender pursues default remediesc. Remedies normally includes acceleration of all principal and interest on debt when a default occursd. Waivers of default may be given a lenders discretion 4. Material Adverse Change Clause MACa. Lets a lender refuse funding or declare a borrower to be in default even if all agreements are in full compliance if lender believes a material adverse change has occurred in borrowers conditionb. Used to renegotiate terms and NOT to cancel usually5. Call and Put Provisionsa. Give issuing entity right to call in the bond/issue prior to maturity (call)b. A call premium is generally paidc. Valuable b/c allows company to redeem issue if interest rates fall or excess cash becomes availabled. Put allows holder to force issuer to repurchase debt at specified datesi. Debt will be redeemed at par creates a floor price for debt6. Sinking Fundsa. This provision requires companies to call/repurchase on the open market a portion of the outstanding bond issues each eari. This essentially amortizes the bonds issue over its lifeb. Other types requires a company to make payments into a trust account amassing a lump sum for retirement of the bonds at maturityi. Increases safety of bonds and lowers required rate7. Refinancinga. Often done following periods of high interest rates8. Defeasance of Debta. Removes debt from balance sheet without retiring the issueb. Borrower places sufficient funds in escrow (usually gov securities) to pay for interest and principalc. Since control of debt and escrow funds is relinquished, it can be removed from balance sheet 9. Promissory Notea. The legal portion of debt contractb. An unconditional promise to pay a specified amount plus interest at a defined rate either on demand or on a certain datec. Master note used to simplify the paperwork connected with loans with multiple advanced features such as lines of credit and revolvers10. Collateral a. Asset used as security for loan or bond issue11. Liensa. Legal claim on assets used as collateralb. Other Factors in Using Debt as a Source of Capitali. Credit Enhancements1. Used to improve overall credit rating reassurance borrower will honor obligation2. Can be in form of L/C or backup line of creditii. Guarantees1. Full guarantee party full guarantees any borrowing2. Specific-project guarantees only loans relating to specific projects3. Guarantee of payment or collection guarantee party agrees to make payment on loan or collect payment from subsdiary, only if it formally defaults4. Comfort letter not legally enforceable letter from another party stating actions it will or will not take on behalf of the borrower5. Performance 6. personaliii. Bond/Credit Ratings1. Reflects default probability 2. Considerationsa. Rating criteria qualitative and quantitativeb. Importance of ratings to investors and managementc. Changes in ratingsiv. Maturity Matching1. Matches the life of a debt issue to life of any assets being financed2. Primary risk maturity mismatched with longer-term assets funded with short-term sourcesa. Short term debt must be rolled over = exposure to changing interest ratesv. Effects of Interest Rate Levels and Forecasts1. Impacts use and cost of debt2. Flight to Quality preference of safe or quality investments in declining market conditions. Yield spread between high and low risk investments increases vi. Availability of Collateral1. Companies with large asset bases that can be used as collateral typically borrower at lower rates

Chapter 11 Short-Term Investing and Borrowing

I. Pricing and Yields on Short-term investments (III.)a. Factors influencing Investment Pricingi. Yield Curve1. Plot of yields of various maturities on the same investment class 2. Normal yield curve short term rates are often lower than longer term rates3. Liquidity preference theory investors demand a yield premium in compensation for lower liquidity associated with longer maturity4. Inverted yield curve - investors shift preference for long-term securities or borrowers shift preference to short-term borrowinga. This demand increases prices = lower interest rate (investors)b. This demand increases interest rates (borrowers)5. Inverted curve = sign of recession in near future low inflation expectationsii. Tax Status1. Affects yield exempt securities provide lower yield2. b. Yield Calculations for Short-term Investmentsi. Yield Calculation Principles and Examples1. Yield of any short-term investment is function of:a. Cash flows received from investmentb. Amount paid for investmentc. Maturity or holding period2. Year basis number of days in yeara. Money market yield = 360-day yearb. Bond equivalent yield = 365-day year3. Yield Calculationsa. b. 4. Discounting Calculations (T-bills, CP, and BAs = money market)a. b. c. ii. T-Bill Quotes and Yield Calculations1. Ask quote discount at which DEALER will SELL T-bill (360-day year)2. Bid Quote discount at which DEALER will BUY T-bill (360-day year)3. Ask yield yield to an INVESTOR purchasing T-bill @ ask discount (365-day year)4. Use equations in above section

II. Managing short-term financing (IV.)a. Introductioni. Maturity of less than 1 yearii. Used to finance CAs such as A/R and Inventoryb. Short-Term Funding Alternativesi. Trade Credit1. Primary source of short-term financing used by many businesses2. Buyer receives goods but payment isnt made until a later dateii. Internal Borrowing1. Best source of low-cost funds2. Multiple units of an organization separate subsidiaries may borrow and lend amongst themselves intra-company lending3. Affected by many laws and regulationa. Length of time that intra-company loans are outstanding affect whether payment of principal is treated as return of capital or return of dividend for tax purposesiii. Selling of Receivables1. Receivables may be factored sale/transfer of title to a factor third party2. Securitization is another method to sell A/Ra. Company issues debt securities backed by a pool of A/Rb. A/R suitable for securitization have predictable CFs (adequate to retire the issue) and historical record of LOW lossesiv. Commercial Bank Credit1. Chief source of working capital for most companiesa. Offered on a secured or unsecured basisb. Security provided by collateral or guarantees used to obtain favorable rates2. Loan Syndications and Participations (pg 341)a. In L.Ss, multiple FIs share the funding of a single credit facilitateb. The syndicate or group of lenders is led by an agent/intermediary to negotiate credit terms and documentation, make advances and collect payments on the loan, and disseminate infoc. In a Participation a FI purchases an interest in another lenders credit facilityi. Purchaser = participantii. Seller = lead institutiond. Purpose of these arrangements is to allow banks to offer larger loans then they could on their own: due to capital requirements3. Lines of Credita. Overviewi. Lender gives borrower access to funds up to a max amount over a period of timeb. Covenants and Conditionsi. Cleanup requires a period f 30 60 consecutive days with no outstanding borrowing (ensures that it is used for short-term)ii. Covenants focus on maintaining certain liquidity or coverage ratios, or max debt ratiosiii. MAC clause iv. Good internal reporting and cash forecasting are essentialc. Types of Linesi. Secured borrower must pledge collateralii. Uncommitted line lender offers to make funds available in the future without obligation as to a specific amount1. A.k.a discretionary line of creditiii. Committed line formal loan agreement with terms and conditionsiv. Guidance line/operating risk exposure limit1. Used to accommodate credit exposure created from operating activities (Ach operations, returned deposits, FX exposure, etc.)d. Compensating Balances (pg 342)i. Balances maintained in companys deposit accounts at the bank for purpose of increasing overall revenue of bank on accte. Pricingi. Cost components:1. All-in rate of interest2. Commitment fees, can be on used/unused balances3. Compensating balancesii. All-in rate consists of base rate (LIBOR, US prime, Fed funds rate) plus or minus a spreadiii. Total interest paid = all-in rate * loan balance outstandingf. Revolving Credit Agreementsi. Revolving credits formal, contractual commitments with loan agreements & covenantsii. Usually a commitment fee on unused portion along with fee for use of borrowing iii. Usually used for short-term but commitment term ranges from 2 to 5 years iv. Contain all characteristics of committed linesv. Additionally, feature short-term, fixed-rate funding options that offer fixed-rate loans for specified period with penalties imposed for prepaymentv. Single Payment Notes1. Granted for short period and with purpose2. Both interest and principal paid at maturityvi. REPOS1. Let companies tap into liquidity of their investment portfolio without disposing of their investments in money market instruments d2. Equivalent transaction = single payment note secured by marketable securitiesvii. CP issuance1. 3(a)(3) programa. Issuer can issue up to 270 days in minimum amounts of $100,000b. Proceeds may only be used for working capital purposes2. 4(2) programa. Can issue up to 397 days in minimum amounts of $250,000b. No restriction on how proceeds are used3. Specificsa. Sold at discount b. Discount rate is calculated on 360-day yearc. Costs include dealer fees, backup credit facility fee, rating agency charges, and any credit enhancement costs4. Desirablea. Only when ongoing funding needs are large because of the effort and high fixed costsviii. Asset-Based Borrowing1. Typically secured by A/R or inventory supports temp financing needsc. Pricing and Costs of Principal Short-Term Financing Sourcesi. Annual Cost for CP Issuance1. Total costs to issue CP: interest rate implied in discount, dealer fee, fee for credit enhancement2. 3. 4. 5. ii. Annual Cost for A Line of Credit1. Interest and a commitment fee on an annual basis2. Overall interest rate: total interest paid on lines used portion and amount paid for commitment fee relative to the average used portion of line over borrowing perioda. b. c. 3. Compensating Balance effectsa. b. Amount that must be borrowed on the line to have a certain $ amount when considering compensating balancesi. ii. the larger amount borrowed increases the total interest and fees paid (interest paid and unused portion fee equations)

III. Debt Financing (V.)a. Costs of Borrowingi. Primary cost = interestii. Other costs = credit enhancements, credit agencies, legal fees, commitment and facility fees, broker fees, dealers/investment banks for underwriting, registration and regulatory feesiii. Indirect costs = costs of negotiating and maintaining covenantsb. Basic Components of Interest Ratesi. ; where 1. IP = inflation prem, DP = Default prem, LP = liquidity prem, MP = maturity premii. Combo of real risk-free rate & short-term rate of inflation usually = rate on T-Billc. Base Ratesi. Usually includes adjustments for inflation and maturity premiumsii. Spread will factor in adjustments for default and liquidity premiumsiii. Influenced by economic conditions and yield curvesiv. Fed funds rate = interest US banks charge to borrow reserve balances from each otherv. Prime rate usually 3 percentage points above fed funds rated. Short-Term versus Long-Term Borrowingi. Historically, short-term < long-term rates (normal yield curve)ii. Short-term borrowing carries 2 risks not seen in long-term borrowing1. Fluctuation in market interest rates2. Availability of fundsiii. Long-term borrowing on a fixed-rate basis stabilizes interest costs provides a narrow range for fluctuation in interest costs on a variable rate, long term loan with interest rate collariv. Operational Advantages of short-term financing1. Ease of access2. Flexibility 3. Ability to finance credit needs efficiently4. Less restrictive covenantsv. Operational Disadvantages of Short-term Financing1. Continuing need to renegotiate or ROLL OVER the financinga. Lender may not agree because of changing financial variables2. Asset based lending one approach of continued short-term debt that carries lower risk3. Downsides of secured lending:a. Assets used as security must be monitoredb. Key ratios related to assets must be maintainedc. Lending is limited to some percentage of asset valuese. Loan Agreements and Covenantsi. For bonds covenants typically determined from negotiations with the rating agency as part of the rating processii. Some restrictions from covenants:1. Ability to sell certain assets2. Right of an organization to issue bonds3. Use of second or junior mortgages4. Key ratios that limit flexibility in financial decision making5. Payment of dividendsf. Credit Rating Agencies (CRAs)i. Classes of Ratings1. issuer credit ratingsa. an opinion on the obligors (issuers) overall capacity to meet financial obligations includes counterparty, corporate credit, & sovereign credit ratings2. issue-specific credit ratingsa. consider the attributes of the issuer, as well as specific terms of the issue, quality of the collateral, and creditworthiness of the guarantorsii. The Rating Process1. Quantitative Analysisa. Financial analysisb. Based on financial reports2. Qualitative Analysisa. Quality of management b. Analyze firms competitiveness within its industryc. Expected growth of the industryd. Vulnerability of industry to business cycles, tech change, regulatory changes and labor relations3. Government issue ratinga. Based on analysis of the economy, debt levels, finances (tax rev and expenses), financial statements and administration strategiesb. Other factors are primary source of repayment from general taxes or specific revenues and collateral for the debtiii. Review of Ratings1. Reviewed once a year by rating agencies2. Review based on financial reports, new business info, or review meetings with managementiv. Credit Rating Scales1. Page 358 chart

Chapter 12 Long-Term Capital Investments

I. Managing Capital Market Investmentsa. Objectives of Capital Market Investments i. Issues to Consider:1. Risk preferences2. Return objectives3. Liquidity needs4. Time horizons or future needs for funds5. Tax issues6. Legal or regulatory factors (esp for pension fund inv)ii. Analysis of Risk Tolerance1. Once risk tolerance is determined type of return required by investor must be considered2. Return objective may be stated in terms of:a. An absolute return annualized return of 12.5%b. A relative return exceeds return on 10-year Treasuriesc. A general goal current income, total return, etciii. Capital Preservation1. Want to maintain purchasing power of investments while minimizing risk to loss2. Suitable short-term MANAGEMENT strategy, but may not be suitable for capital investmentsa. Assumption that the company can ride out short term downturns that would detriment a short-term portfolioiv. Return Objective1. Some mix between current income and capital appreciation2. May be impacted by the intended use of those returns (think pension fund)b. The Asset Allocation Decisioni. Capital investment mix1. Fixed-income securities provide their returns in the form of a relatively predictable stream of income2. Equities have a higher potential for long-term gain and higher risk of loss3. Equity investments provide returns as a mix if both income and capital appreciation/depreciationii. Structure of portfolio1. Objectivesa. The longer the desired maturity the greater risk tolerance greater use of equity2. Consider taxes (capital gains and income)c. Long-Term Fixed-Income Debt Portfolio Managementi. Duration** (pg 368)1. gives estimate of volatility of investmenta. longer duration = more price volatility = sensitive to interest rates and vice versa2. Duration measures # of years to recover true cost of a bond3. 4. Factors affecting bond duration:a. Time to maturity longer maturity = longer durationb. Coupon rate higher coupon = lower durationii. Interest Rate Risk1. Longer duration = more interest rate risk **(page 370 chart)iii. Diversification1. Reduces overall riskiv. Fixed-Debt to Floating-Debt Ratio1. Ratio corresponds with firms views on long-term interest ratesa. Increase in LT rates = lower FD/FLD because theyd most likely invest in more floating-rate investments2. Use float-rate investments when they believe they have means to support additional interest rate exposure3. Disadvantage of managing portfolio solely on this ratioa. Fail to consider maturities of securitiesv. Foreign-Currency-Denominated Investments1. FX risk must now be considered in addition to default and interest riskvi. Using Derivatives in Long-Term Fixed Income Portfolio1. To manage interest rate risk use swaps, futures, and options2. Credit risk credit default swapsa. CDS seller of CDS will pay buyer in event of loan default or other credit event (bankruptcy) on the part of a particular issuer.3. Currency risk FX futures, forwards, options, an d swapsvii. Asset/Liability Management1. This issue comes up when an investment portfolio uses borrowed funds as part of its overall strategy2. Mostly issue is expressed in terms of maturity mismatch3. Using ST funding for LT assets is only profitable if yield curve is upward slopingviii. Securities Lending1. The owner of specific securities lends them to another party with collateral for a negotiated fee2. Primary purpose is to allow borrower to hedge or short-sell (anticipate drop in value)3. Also used to cover failed transactions when seller of securities is unable to deliver them on settlement dated. Equity Stock Portfolio Managementi. Defining and measuring Investment Risk1. Risk possibility of discrepancy between ACTUAL results and EXPECTED results with an estimation of the differencea. Use stdev to estimate individual asset variancesb. Use covariance to estimate how 2 or more assets change relative to one anotherii. Diversificationiii. Capital Asset Pricing Model CAPM1. iv. Determining Portfolio Risk and Return

Chapter 15 Operational and Enterprise Risk Management

I. Enterprise Risk Management ERM (III)a. Market Risk** (chart page 445)i. Equity price riskii. Interest Rate Riskiii. FX Riskiv. Commodity Price Riskb. Credit Riski. How change/downgrade in credit quality affects value of a securityc. Operational Riski. Potential losses stemming from inadequate systems, management failure, faulty control, fraud and human errord. Liquidity Riski. Funding liquidity risk1. Ability to raise necessary cash to meet its obligations as they come due2. Linked to ability to raise capital (ST and LT)ii. Asset liquidity risk1. Ability to sell an asset quickly AT or close to its true valuee. Legal and regulatory Compliance Riskf. Event Riski. Risk associated with unexpected events unplanned corporate reorganization or natural disasterg. Business Riski. Classic risks in operating a business uncertainty of demand for products/services, cost of producingii. Associated with day-to-day management of a companyh. Strategic Riski. Risk of major investments for which there is a significant uncertainty about successi. Reputation Riski. Risk that customers, suppliers, investors, regulators, etc. may decide that a company has a bad reputation and decide not to do business with itII. Operational Risk Management (IV)a. Internal Operational Risksi. Employee risk1. Defalcation risk risk of intentional employee frauda. Fidelity risk the specific case of theft of money, securities or property2. **Also includes purposeful violation of policies to improve performance ratings, compensation, or as cover-up3. Most internal risk can be addressed by - strong internal controlsa. Segregation of dutiesb. Maker-checker controlsc. Periodic self-auditsd. Management oversighte. insuranceii. Process Risk1. Lack of proper controls or failure of employees to follow procedures2. Financial reporting errors3. Lack of timely reconciliation of bank accounts4. Highly complex processes people dont understand them, how to use them or their limitations5. When an organization may not be able to meet terms of contracts with customers and suppliers6. Errors in clearing and settlement for financial transactionsiii. Technology Risk1. Security breaches (external) or security violations (internal)2. Choosing a tech platform over another obsolescence, failure of system and support with risk that vendor may go out of business3. Difficulty to monitor, and audit complex spreadsheet modelsb. External Operational Risksi. Financial Institution Risks1. Potential failure of your FI and the impact on your company loss of balances, diminished borrowing capacity, disrupted services)2. Operational failures by FI performing daily transactions processing3. Communication failures between FI and companyii. Counter-Party Risk1. Risk that the other party in a contract or financial transaction will not performiii. Legal and Regulatory Compliance Risk1. Potential lawsuits or other legal actions instigated by customers, trade partners, or gov agencies and regulators2. Sovereign risk risk of interference of foreign gov in settlement of a foreign transaction3. Political risk economic impact faced by businesses due to political change/decisionsiv. Supplier Risk1. A specific type of counter-party riskv. External Theft/Fraud Risk1. Primary source payment process2. Reduce by replacing paper-based payments with electronicvi. Physical and Electronic Security Riskvii. Natural Disasters Riskviii. Terrorism Riskc. Fundamental Factors for Operational Risk Management Strategyi. Importance of Organizational Culture1. Employees observing improper behavior by management or actions not in shareholders best interest must be able to report these activities without being penalized2. Best approach culture promoting individual responsibility and is supportive of educated risk takingii. Importance of Technology 1. Critical in formation of strategies related to operational management2. Necessary to help gather, analyze, and then monitor operational controls and procedures3. Reduces manual errors and limits access by non-authorized personneliii. Importance of Guidelines for Board of Directors (page 453)1. Important in reducing overall operating risk

Chapter 17 Treasury Policies and Procedures

I. Policy Development Example: Short-Term Investment Policy (IV)a. The Importance of Having and Investment Policyi. Establishes a clear understanding of firms investment philosophy and OBJECTIVESii. Can set clear parameters for its investments1. Better manage liquidity, monitor compliance, minimize riskiii. Becomes more crucial in decentralized and geographically widespread companiesb. Setting Investment Objectivesi. Safety 1. Credit quality indicates probability of default measures safety of the principal2. Investment research used to evaluate credit risk3. Volatility important measure of both liquidity and safetya. Related to maturity in bond investments (long maturity = high volatilityb. Related to stocks, beta is usedii. Liquidity 1. Seasonality may help define a firms liquidity needs2. Not primary obligation in long-term portfolios where maturity can be matched closely with need for fundsiii. Risk/Return Trade-Off1. Risk tolerance is key determinantc. Developing a List of Permitted Investmentsi. Comes after establishing investment objectivesii. Sometimes based on minimum credit ratings (CP w/ min rating of A-1/P-1)iii. Global companies approved list may further specify acceptable issuer countries, and in some cases, specific industries within countriesd. Investment Requirementsi. Diversification approaches1. Allocating investments by asset class2. Hold a % of foreign securities minimize impact of movement in currency3. Limit investments from specific issuers and/or instruments limits concentration riskii. Investment or Exposure Horizon1. Investment horizon time firm expects or is willing to hold an investment2. Exposure horizon function of firms risk philosophy and total interest rate exposure already present in other areas of the organizationiii. Other Limitations on Investments1. Clearly state firms attitude toward maintaining simultaneous debt and investment positions2. Specify any limits on holding of less-than-liquid assets3. List financing and/or credit requirements for FIs and other companies in which investments are made4. Define credit requirements and guidelines if foreign investments are allowed5. Ensure that collateralization and guarantee guidelines are specified clearlye. Other Issues in Developing an Investment Policy IP (page 517)i. Valuation of Investments ** 1. IP should state process used for investment valuation and management of impaired investmentsii. Exception Management1. Include provisions to accommodate exceptions ex. Investment opportunities that fall outside of the approved list -> procedure for obtaining exception approval2. Should include guidelines how to handle downgraded investments falling below policy guidelines3. Identify individual or group whose approval is required for exceptions4. Detail actions and procedures deal with exceptions found during compliance testingiii. Use of External Money Managers**1. Should be subject to provisions of the corporate investment policy2. Clearly describe their roles and responsibilities critical if theyre involved in the investment processiv. Performance Measurement and Reporting1. Performance Measurement a. Evaluate against established benchmarks b. Benchmarks consistent with company goals and based on permitted investments2. Reportinga. Designed to accomplish specific goals with different levelsb. Any breaches of investment limits and how they were remedied should be reportedc. Weekly/monthly performance reportsd. Contain explanations of any fluctuations in average rates or investment balances include projections for next period3. Calculating Returnsa. Most popular methods: total return, current yield, and YTMb. When comparing returns essential that they are all calculated the same wayv. Policy Compliance1. Need for regular policy compliance review and evaluation identify parties responsible for thisvi. Internal and External Controls1. Custodial Service Providers2. Limitation of Liabilityvii. External Restrictions

Chapter 20 Financial Decisions and Management

I. Cost of Capital and Firm Value (IV)a. Capital Components and Costsi. Source of permanent capital long-term debt (bonds) and equity capital (common stock and retained earnings)1. Their relevant cost their marginal cost rate of return demanded by market if funds were raised today2. Use after-tax costsb. Cost of Debti. Relevant cost of debt = after-tax costii. For a bond pre-tax rate of cost = YTM1. YTM rate of return earned over a bonds remaining life based on its market price at the date the measure is takenc. Cost of Common Equityi. Funds raised through RE, and/or issue new common stockii. Markets required rate of return applies to RE and common stockiii. If the board chooses to reinvest all/some of earnings in the business, SH expected a rate of return on this investmentiv. CAPM used to estimated markets required rate of return (RROR)1. Re = rrf + (rm rrf) d. WACCi. Determines a companys cost of capitale. Firm Valuei. EVA discussion firm must earn ROR on assets > cost of capital in order to create SH value1. Return on assets > WACC to create value2. ii. EVA = EBIT(1 Tax rate) (WACC)(Long-term Debt + Equity)

II. Lease Financing and Management (V)a. Introductioni. Acquisition process by which a company acquires a particular building or asset basing decision on regular capital budgeting proceduresii. Financing asset must be financed through borrowing or leasing leasing has same effect on capital structure as borrowing 1. CF from leasing are compared to CF from borrowing fundsb. Why Companies Leasei. Key reason tax benefit for both lessor and lessee 1. Can be used as off-balance-sheet financingii. LT leasing direct substitute for debt in capital structure esp if you have poor creditiii. Appealing if assets have high potential for tech obsolescence (computers)iv. Appealing to start-ups or if you are beginning sales in a new area high level of uncertainty about future demand1. cancellation provisions of lease = protectionv. may choose to lease assets for operations outside of usual expertisec. Types of Leases** (chart on page 618)i. Differences among lease types:1. Length2. Party responsible for maintenance and upkeep3. Value of asset at end of lease4. Relevant tax treatment5. Who retains asset at end of lease and under what termsii. Sale-and-Leaseback Arrangements1. Asset owned by company is sold to another party (lessor) asset is immediately leased back to its original owner (lessee)2. Aids companies that need a cash infusion3. Used by companies that cannot take full advantage of tax benefits from depreciation excessive operating lossesiii. Operating or Service Leases1. Lessor may maintain asset and retain ownership at end of lease2. Often done on an off-balance-sheet basis lease payments only show up on income statement as an expense3. Usually run for periods shorter than life of equipment4. There is residual value of the asset at end of lease termiv. Capital or Financial Leases1. Essentially an alternative to borrowing funds and purchasing the asset2. 4 conditions:a. Length of lease at least 75% of useful life of assetb. Transfer of ownership to lessee at end of termc. Bargain purchase option during or at end of leases lifei. Bargain price sufficiently less than fair market valued. PV of discounted lease payments at beginning of lease > 90% of assets fair market value3. An operating lease = a lease that meets none of these conditions4. Double-net lease lessor receives payment after expenses are paid a. Expenses maintenance, operating & insuranceb. Triple-net lease in real estate further includes taxes, insurance, and utilitiesd. Estimated Residual Valuei. Assets with potentially high residual value have lower lease paymentse. Tax Considerations for Leasesi. In US full amount of annual operating lease payment = tax-deductable expense1. Provided IRS agrees that the contract is genuinely an operating lease2. Reason for IRS restrictions prevent a more rapid write-off of assets than is allowed by IRSs depreciation rulesii. Lease classification: Capital or Operating Lease1. Depends on whether lease transfers risks and rewards of ownership to the lesseeiii. Most tax legislation aims to prevent deductions for interest expense when tax avoidance is a main reason for undertaking the leasef. Lease vs. Borrow-and-Buy Decisioni. Compare costs of leasing vs. costs of borrowing to buy the asset1. Examine NPV of CFsii. Calculated example: lease vs. borrow and buy (page 621-622)

III. Equity Financing and Management (VI)a. IPOs and Decision to List Stock in USi. IPOii. Advantages of Going Public1. For investors provides liquidity 2. Allows value to be determined by market establishes companys stock priceiii. Disadvantages of Going Public1. Regulatory disclosurea. Competitors gain access to greater amount of infob. Compensation/net worth of owners is determined more easily by outside partiesc. Financial reporting attestation & internal control requirementsd. Registration and disclosure are expensive for an IPO2. Managerial flexibilitya. Less flexibility for managersb. Conflict between SHs and management (with regard to salaries and perks)3. Controla. Owners/managers surrender some control when going public even if majority ownership is maintainedb. Minorities get better representation/control with cumulative voting4. Other factorsa. If there is small market for the stock/company market price may not reflect true valueb. Going public with debt securities = need to get it rated to sell publiclyi. Expensive as shitiv. Decision to List Stock1. Advantagesa. Stock marketability increases traded more widely and more invetors can access itb. Increased public exposure higher salesc. Reduces perceived market risk may lower WACC, thereby increasing overall market value2. Disadvantagesa. Reporting and governance requirements can go well beyond government regulationb. Higher costs charged by exchangesv. Delisting of Stock1. Involuntary delisting company has fallen out of compliance with exchange requirements2. Voluntary delisting a. Added disclosure requirements and expenses of auditing and reporting have caused many smaller companies to delistvi. Choice of Exchanges1. If you wish to raise capital globally list on worlds money centersa. NY, Toronto, Tokyo, Frankfurt, Paris, HK, etc2. US companies may be listed and traded on exchanges outside USa. Same for foreign companies in USvii. Type of Stock (to issue)1. Dual-classa. 2 types of stock issued: Class A and Class B stockb. One class is sold to the general public has limited voting rights but with preferential dividendsc. Second class is reserved for original owners and executives greater voting power to maintain majority controlb. Shareholder Rightsi. Control of company1. Have right to elect a companys directors who in turn select officers to manage the businessii. Cumulative votingiii. Proxy1. Right to vote can be assigned to another individual through a proxyiv. Staggered election of directorsv. Preemptive right1. Existing SHs shall have the first right to purchase shares of any NEW stock issue on a pro rata basis and based on proportion of shares ownedc. Mergers and Acquisitionsi. Types of transactions1. Merging 2 companiesa. 2 firms about the same size merge to form a single new company2. Acquisition of a companya. One company buys a majority of voting shares of anotherb. Good takeover candidate cash rich business, low D/E, significant growth potentialc. Friendly acquisition extensive due diligence into financials of target3. Hostile takeovera. Acquiring firm will make tender offer directly to SHs, bypassing managementb. Acquiring firm may only know publicly available info greater risk because of limited due diligencec. Tender offer represents cash offer for common shares held by stockholdersi. Generally more expensive than negotiated M&As due to resistance of target management d. Second approach engage in proxy fight prior to targets annual SHs meetinge. A third approach creeping tender offer quietly purchasing sufficient stock in the open market to enable a change in management4. LBOa. When an entity finances the acquisition of company primarily through borrowing typically collateralized by assets of company being acquiredb. Debt carried on balance sheet of acquired companyc. Repayments made from operating CFs of acquired companyd. Can also be used if a firm wants to go privatee. Most cases SHs of target firm receive more than current price of stockf. More risk than an acquisition paid for through issuance of equityi. High level of debt and need to generate on-going CFs to make paymentsii. Financing the Transaction1. Common structuresa. All cash transactionb. Stock transaction c. Mixed stock/cash transactiond. Leveraged cash transaction, financed through debt issuee. Debt transactionf. Mixed cash/debt transaction g. Preferred stock transaction2. cash sources to pay for acquired firma. cash from acquiring firmb. excess cash from target c. cash from sale of targets assetsd. issuance of investment-grade bondse. issuance of below investment grade bonds with amortization schedule supported by a forecast of operating CFsd. At the Market ATM Programsi. An alternative to traditional underwritten offering of a fixed # of shares at a fixed price all at onceii. ATM allow for issuance of a specific amount of equity over time sold into existing secondary market at current market price on an AS-NEEDED BASISiii. Dribble plans called this because stock is issued in small increments as to avoid impacting the market price