What is the capital market defined as? Put simply it’s a market for buying and selling of long term debt or equity securities. As you know, as a business you have four main methods of raising financing for your business.
These are: share capital, retained earnings, bank facilities and capital market transactions.
In our experience, most issuers prefer to use debt capital markets rather than equity capital markets. Capital markets involve numerous players. On the investing side you have institutional clients which are primarily mutual funds, insurance companies and pension plans and they are able to offer rate of returns on their products that they provide to [customers] via the investment of these securities, which are issued primarily from governments and companies alike.
What that says or implies is that the capital market is an essential part of any economy and part of the financial services in any country.
Suppliers of capital, meaning the pension plans, insurance companies, mutual funds and banks tend to want the maximum possible return at the lowest possible risk.
Issuers on the other hand, the people who issue the debt, tend to want to raise capital at the lowest possible cost with the least amount of requirements.
So therefore the functioning of the capital markets really is how do you bring together the requirements of the investing suppliers of capital and the people who require capital.
Typically a capital market issue should cost more than a bank type debt and it’s simply because there is more legal documentation involved and there are more annual ancillary fees.
So typically we advise that an issuer should look at the capital market once the costs are not prohibitive, and maybe where the advantages of the capital market issue from a supply of capital, sharing of risks among investors, actually may outweigh the cost of doing it by a cheaper route, in the case of bank financing.
Refinancing, where issuers would like to refinance maybe some mortgage or bank debt via capital market issue, that tends to be the least riskiest and could probably be the best candidate for a capital market issue because the company is not going to be increasing their level of leverage, and the cost savings attributable to the capital market are would actually bode well for the company from a finance cost perspective.
Construction type projects, which we have seen really make up the majority of projects in Barbados, would probably be the riskiest of projects because outside of the reliability of cash flows there are many areas in terms of construction risks, delays, cost overruns, all of that adds to the riskiness of the projects.
Of course the beauty of capital markets is that there are ways in which you can structure around those things. It really depends on the availability of the sponsors of the projects, their ability to inject capital where needed.
One of the attractive attributes of the capital markets is the ability to do long term financing, riskier projects and allows the financing to be shared among various financing institutions, not just in the form of banks, but rather pension plans, insurance companies and mutual funds who are looking for long term securities to match their liability profile.
• Tariq Alli is First Citizens Investment Services (Barbados) Ltd’s head, capital markets.
