Financing Options
Posted: Sun Jul 18, 2010 10:59 pm
I don’t know whether this is possible to do under the existing engine but I think it would add a lot of depth to the game if the financing options could be expanded. Right now your only options to finance your enterprise is issuing stocks or borrowing on what appears to be essentially a business line of credit. It would be great if the options included preferred stock and bonds.
Preferred stock could be modeled as debt that pays a fixed rate from the company’s dividend pool. If the dividend are not enough to cover the payment it accrues so that you have to generate enough cash flow to pay all of the unpaid preferred stock before you investors (or you) see that dividend.
Bonds should be issued at a fixed rate while the business line should be a more expensive floating rate borrowing option making it a more dangerous tool in an environment of rising interest rates. Bonds could be priced according to a firms credit risk (could be based on something as simple as DSCR and LTV), the seniority of the issuance, and the demand for bonds by the market. If a company’s fortunes declined its credit rating would be downgraded making its existing bonds worth less and new ones more expensive. Also, unlike a business line there should be a lockout period on the bonds so that you cannot just pay them back whenever you feel like it which might make a player think twice before taking on debt. This would give players an incentive to better manage their cash flow and make it riskier to make a big bet if they are levered – if that new car manufacturing facility that you just built with the proceeds from your bond issuance doesn’t perform as expected you now have more to lose than just your investment.
If possible it would be great to be able to trade these bonds in a secondary market with prices adjusting based upon the prevailing interest rate and credit risk. First, it would give players something else to do with their cash. Of course if the player goes on a bond buying binge prices will rise and yields drop making it more attractive for their competitors to issue debt. In addition, it could also open up the strategy of buying up a company’s debt and potentially take control during a bankruptcy or just collect pennies on the dollar. Finally, it would make the player think more strategically when trying to buy up a competitor. You may be able to buy up all their equity without problem but you may not be able to afford taking on all that extra debt your competitor is carrying on their books – at least without a downgrade to your own credit rating!
My last thought is that it should be possible for the player to declare a special dividend from any company he/she controls so that you can relieve your companies of any large cash balances if you don’t have any good use for all the cash. After all, if a company doesn’t have an opportunity to invest its cash at a rate that exceeds its cost of capital it should be distributing the cash back to its shareholders so they can find an alternative investment that will. As a real world example Microsoft paid out a $3/share special dividend in 2004.
Preferred stock could be modeled as debt that pays a fixed rate from the company’s dividend pool. If the dividend are not enough to cover the payment it accrues so that you have to generate enough cash flow to pay all of the unpaid preferred stock before you investors (or you) see that dividend.
Bonds should be issued at a fixed rate while the business line should be a more expensive floating rate borrowing option making it a more dangerous tool in an environment of rising interest rates. Bonds could be priced according to a firms credit risk (could be based on something as simple as DSCR and LTV), the seniority of the issuance, and the demand for bonds by the market. If a company’s fortunes declined its credit rating would be downgraded making its existing bonds worth less and new ones more expensive. Also, unlike a business line there should be a lockout period on the bonds so that you cannot just pay them back whenever you feel like it which might make a player think twice before taking on debt. This would give players an incentive to better manage their cash flow and make it riskier to make a big bet if they are levered – if that new car manufacturing facility that you just built with the proceeds from your bond issuance doesn’t perform as expected you now have more to lose than just your investment.
If possible it would be great to be able to trade these bonds in a secondary market with prices adjusting based upon the prevailing interest rate and credit risk. First, it would give players something else to do with their cash. Of course if the player goes on a bond buying binge prices will rise and yields drop making it more attractive for their competitors to issue debt. In addition, it could also open up the strategy of buying up a company’s debt and potentially take control during a bankruptcy or just collect pennies on the dollar. Finally, it would make the player think more strategically when trying to buy up a competitor. You may be able to buy up all their equity without problem but you may not be able to afford taking on all that extra debt your competitor is carrying on their books – at least without a downgrade to your own credit rating!
My last thought is that it should be possible for the player to declare a special dividend from any company he/she controls so that you can relieve your companies of any large cash balances if you don’t have any good use for all the cash. After all, if a company doesn’t have an opportunity to invest its cash at a rate that exceeds its cost of capital it should be distributing the cash back to its shareholders so they can find an alternative investment that will. As a real world example Microsoft paid out a $3/share special dividend in 2004.
