What Is a Refinancing Risk?

Refinancing risk refers to the uncertainty in the refinancing of an enterprise due to changes in the variety of financial instruments and financing methods in the financial market, or difficulties in refinancing due to the irrational financing structure of the enterprise itself.

Refinancing risk

Right!

Refinancing risk is due to

In a certain period of time, the financing capacity of enterprises is always limited. It is impossible for an enterprise to obtain debt funds indefinitely. When the debt amount of a company reaches a certain level, creditors will refuse to borrow funds from the company because the risk of the company is too large. If a company incorporates a large amount of debt funds in a short period of time in order to complete an M & A activity, it means that the difficulty of refinancing the company has greatly increased. This often has two consequences:

1. The enterprise cannot obtain debt funds because it has fully used the debt financing line;

2. Although enterprises can obtain debt funds again, due to the expansion of corporate debt and the increase of corporate risks, companies will have to bear higher debt financing costs than before (this is the so-called debt scale effect).

The most effective way to prevent financial risks and refinancing risks is to determine a reasonable capital structure. From the above analysis, it can be concluded that the size of the financial risk and refinancing risk of debt financing is mainly determined by the size of the company's debt. As long as the company can effectively control the scale of debt, these two risks can be well prevented; but at the same time, because debt financing will also bring benefits to the company, companies cannot avoid debt funds at all in order to avoid risks. These two issues are related to the "how much debt and how much cost to obtain debt" for the enterprise. The capital structure of an enterprise is to solve these two problems. As we all know, the enterprise is the carrier of resources in the market economy. The resources of an enterprise include debt and equity. Although both are owned by the enterprise, because their own characteristics are different, they will naturally have different impacts on the enterprise, so it is important to determine a reasonable ratio between the two. A reasonable capital structure can accelerate the capital accumulation of an enterprise, make the enterprise grow rapidly, and place the enterprise in a favorable position in the fierce market competition; otherwise, it will make the development of the enterprise difficult, and even be eliminated by the market. So, what exactly is the difference between debt and equity?

(1) The cost of obtaining debt funds is low and the speed of obtaining them is fast. This is because: first, the law has fewer restrictions on companies that can obtain debt funds, and the procedures for companies to obtain debt funds are simpler, the costs are naturally less, and the time is shorter; second, for creditors, The risk is less than equity funds, so the risk premium required by creditors will naturally be lower than that of equity owners. For enterprises, this means that the cost of debt financing is relatively low. Finally, the interest on the debt funds that the company has to pay each year can be paid before tax, so the company can reduce its tax income, thereby reducing taxes; and the company pays to shareholders Dividends cannot be paid before taxes. This means that the cost of paying interest on debt is further reduced than the cost of paying dividends.

(2) Enterprises can obtain financial leverage effects. When the profitability of the company is strong, the company can also obtain financial leverage by obtaining debt. The so-called financial leverage effect means that under the condition of a certain capital structure of an enterprise, the debt financing cost paid by the enterprise from the EBIT profit is relatively fixed. When the EBIT profit changes, each yuan's EBIT profit The burden of fixed financing costs will increase or decrease accordingly. In other words, when the profit rate of an enterprise is greater than the fixed cost of financing, the interest rate, then the profit of the enterprise will be amplified. For example: A company needs to acquire B company. In the process, it needs 100,000 yuan. It is estimated that after A company merges with B company, the annual profit rate of the company can reach 10%, and the interest rate of the debt is 6%. Assuming that A uses 100 % Of equity funds and 60% of equity funds were acquired and compared, and the results were compared. It can be seen that as long as the profit rate of the enterprise is higher than the interest rate of the debt, the enterprise can enjoy the benefits brought by the financial leverage.

(3) Although debt financing has many advantages such as convenient financing procedures, fast financing speed, low financing costs, and enterprises can enjoy financial leverage, it can not ignore its own fatal shortcomings. For companies integrated into debt, debt funds have greater risks than equity funds. As long as the enterprise obtains debt funds, it will face pressure to repay the principal and interest on schedule. If the company fails to repay the principal and interest of the debt on time, its financial risk will evolve into a financial crisis. The more debt a company has, the more likely it is to have a financial crisis. With a little carelessness, companies can go bankrupt. Therefore, it is impossible for an enterprise to expand the scale of debt indefinitely. In addition, with the continuous expansion of the company's debt scale and the increase of corporate risk, creditors will demand higher risk premiums, and the direct result will lead to an increase in the financing costs that the company will bear. Rising costs will naturally partially offset the effects of financial leverage. When the enterprise's debt reaches a certain scale and the debt cost level of the enterprise is exactly equal to the profit level of the enterprise, the financial leverage of the enterprise is completely lost. If the debt scale is increased, the enterprise will suffer financial leverage loss. At this time, the capital structure of the enterprise has reached the optimal capital structure.

Assumption, suppose that Enterprise A decides to further expand the debt scale and complete the merger and acquisition with 40% equity funds instead of the previous 60% equity funds. Due to the increase in debt scale, the cost of corporate debt also increased from 6% to 10% At this time, compare the results. This proves that when the debt level of an enterprise is equal to the profit level, the capital structure of the enterprise is the most reasonable capital structure, and the enterprise can enjoy the benefits brought by the largest debt financing, and can maximize the financial risks and refinancing Risks remain within the control of the enterprise. Enterprises should follow a reasonable capital structure in mergers and acquisitions, and arrange the ratio between liabilities and owner's equity according to the most reasonable capital structure. It is not possible to blindly expand the scale of liabilities for the completion of mergers and acquisitions, resulting in excessive financial pressure on the enterprise, but it is worth the loss.