CIMA F3 Syllabus B. Sources of long term funds - Target debt profile - Notes ^{7 / 15}

A company's debt profile is its mix of different types or debt finance.

Management will be responsible for structuring the debt profile to reduce the risks of debt finance, such as refinancing risk, currency risk and interest rate risk.

Refinancing risk

This is the risk that a company cannot repay or refinance existing debts. 

This risk is reduced if its maturity profile (ie the timing of maturity of debts) is spread so that the debts mature at different times. 

This enables the company to put in place a schedule or refinancing and ensure there is adequate cash available to pay off debts when they mature.

Currency risk

A company can face higher costs if it borrows in a currency for which exchange rates move adversely against the company's domestic currency. 

Management should seek to match the currency of the loan with the currency or the underlying operations / assets that generate revenue to pay interest / repay the loans. 

Currency risk can also be mitigated through the use of derivatives such as currency futures, options or swaps.

Interest rate risk

This is the risk of interest payments increasing due to fluctuating interest rates. 

A company that has fixed interest debt may end up paying more than it needs to if interest rates fall. 

However the company runs the risk of adverse increases in interest rates if it chooses floating rate debt. 

The risk of this can be mitigated through the use of derivatives such as interest rate futures, options or swaps.