SOURCES OF LONG-TERM FUNDS

The sources of long-term funds are reflected in the items appearing on the right side of the balance
sheets under the classification

Long-term Liabilities and Stockholder equity. Thus are the following:

 Long-term mortgage of plant and other real estate items owned by the company
 Long-term chattel mortgage of property and equipment and other movable assets owned by the
business.
 Issuance of long-term commercial paper.
 Issuance of corporate bonds.
 Issuance of shares of capital stock, common and preferred.

Long-term debt is known as DEPT CAPITAL AND STOCKHOLDERS EQUITY, as equity capital. The mix of
debt capital and equity capital is called CAPITAL STRUCTURE.

In obtaining long-term loans, the lender usually lends up to 80% of the fair market value of property
offered as collateral by the borrower and the standard requirements are:

a. Torres title for real estate

b. Purchase invoice/certificate of ownership for movable property
c. Tax declaration for real property
d. Insurance coverage for building and movable property; and
e. Audited financial statement.

The interest rate may be fixed of subject to changes based on fluctuations in prevailing interest rates.

Corporate Bond- These are certificates of indebtedness with par (face) value and clearly defined terms.
The term include maturity date, interest payment dates and possible convertibility to common stock.

Corporate Stock- This term refers to ownership in a corporation. It is divided into share and ownership of
these shares is evidence by stock certificates.

Credit Rating- For debt securities (such as commercial papers and bonds) to be generally accepted by
investors, a high credit rating is a pre-requisite. As a matter of practice, the SEC and the Bangkok Central
ng Philippines (BSP) require credit ratings of issuers of both short-term and long-term commercial
papers.

Credit Rating- is an opinion on the financial soundness of an enterprise and its capability to repay its
debts and the corresponding interest. It is a tool for risk assessment and as such, it provides investors
with a simple and objective indicator of default risk to supplement their own credit evaluation.

Analytical Process in Credit Evaluation- Credit rating are arrive at based on an analytical process that
considers quantitative and qualitative factors. Quantitative analysis focuses on cash flows, profitability,
liquidity, financial flexibility, capital adequacy, asset quality and asset/liability management. Quantitative
analysis delves on industry risk, market position, operating environment, management, and ownership
structure. For financing institutions, it includes credit appraisal system.

Importance of credit rating in the capital market- A credit rating benefits the three parties to debt
security issues. For buyers of debt securities (investors / creditors) the benefit are the follows.

 Reduced uncertainty- this encourages capital market growth and improves market
efficiency and liquidity.
 Wider investment horizons- this helps investors analyze potential debt investments
across different industries and countries.
The foregoing benefits to investors/creditors increase the marketability of debt securities and
consequently reduces funding cost and provide access to a wider pool of capital. The underwriter also
benefits there from because he can gauge debt security pricing across issues.

Credit Rating in the Philippines

In the Philippines, issuers of debt securities avail of the services of the Philippine rating services
corporation (PhilRatings). The symbols it has been using for corporate issuers, short-term issuances and
for corporations are in Appendix.