9: Woodside Petroleum Limited is about to raise additional short-term funding to meet its funding needs over the next three-month planning period. It is considering issuing commercial bills or promissory notes. (a) What is a promissory note? Identify and briefly explain the roles of the parties to a P-note issue. (b) What are the main differences between P-notes and commercial bills of exchange?
A promissory note, which typically has a maturity of 90 days, is described as ‘an unconditional promise in writing made by one person to another, signed by the maker engaging to pay, on demand at a fixed or determinable future time, a sum certain in money to the order of a specified person or to the bearer’ (Viney & Phillips 2012, 308). The structure of the promissory note is that of a discount security, sold by the issuer for less than the face value in exchange for the face value at maturity (Viney & Phillips 2012, 308). The discount amount, which is the difference between the face value and the issue price, is the cost of borrowing to the issuer and the gain for the buyer of the P note. The roles of the parties to a P-note issue are dealers and lead managers. Most P-note issue is done by major commercial banks, investment banks and merchant banks. The lead manager would arrange for a dealer panel of market participants. The roles of the dealers are to distribute the notes in the market and to have good success with investors and to also oversee a secondary market for the notes (Viney & Phillips 2012, 309). The P-notes are similar to the commercial bills of exchange with some differences. The P-note is a promise to pay while the bill is an order to pay. While the P-notes do not require the sellers to endorse the note, the commercial bills of exchange require the endorsement of the sellers. The P-notes enjoy the option of selling the notes in the money market without paying a future debt. However, as the P-notes do not require seller endorsement and are a form of unsecured instruments, this form of short term fund is only available to companies with excellent credit reputation. As Woodside Petroleum Limited is a strong and well-reputed company, it should not have any problems raising P-notes as short-term funding.
10: Santos Limited issues 90-day P-notes(commercial paper) as part of a three-year underwritten facility established with an investment bank syndicate. The commercial paper has a face value of $ 7 million and is discounted at a yield of 8.33 per cent per annum. (a) Why might Santos seek the services of an investment bank syndicate? (b) Explain the role of the underwriters to the issue.
(c) Why has Santos established a three-year facility if the P-notes are issued with only a 90-day maturity?
Santos seeks the services of an investment bank syndicate possibly because it does not have a strong reputation in the market to attract sufficient investors. Since the P-note is a promise to pay rather than an order to pay, only large corporations with an excellent reputation are able to attract sufficient investment for its P-notes. The role of an investment bank syndicate is to help with the distribution of the paper and they also guarantee up to an agreed amount of paper that is not taken up by the investors. Due to the agreement to purchase a limited amount of unsold paper, the investment syndicate is motivated to actively promote the paper. The reason for Santos establishing a three year facility is the flexibility that the rollover facility will allow it to extend the loan beyond a short-term tenure. Additionally, raising the P-notes is an expensive exercise, it is prudent for Santos to avail itself to a rollover facility for a possible line of credit.
15: On further reflection, the business manager in Question 14 decides to implement a different strategy and factor the firm's accounts receivable. The manager approaches a factor company and is advised that the factoring agreement will include with-resourse and...
References: (Borgia etl, 2010)
(HOME FINANCE ADVERTISING FEATURE, 2008)
(Home Loan Calculator, 2012)
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