Appendix DBeyond Debt and Equity
As described in Chapter 19, CFOs and CROs must help their firm choose the right mix of financing on the equity-to-debt continuum, beginning with shareholders' invested funds and continuing on through hybrid, subordinated, senior and collateralized funding, ultimately reaching client-based funding alternatives such as bank deposits or insurance reserves.
Each of these alternatives offers advantages and disadvantages, illustrated by the following important questions.
- To what extent does the alternative qualify as a substitute for shareholder capital under regulatory and rating agency solvency regimes? Related to this, to what extent are external limitations put on the use of different funding alternatives?
- What is the all-in after-tax cost of funding for the different alternatives, including interest and tax considerations, structuring and credit-enhancement expenses and, especially for securitized financing alternatives, additional effects in the form of reducing risk capital requirements and the ability to increase volumes by relaxing other leverage restrictions.
- Finally, how sustainable is the source of funding under different scenarios, for example a crisis in confidence or “run on the bank,” a shock to inter-bank funding liquidity due to a flight to quality or other systemically relevant event? Liquidity and funding risk considerations are examined in greater detail in Chapter 18.
The remainder of this appendix provides a brief overview of ...