LEE KOK FOONG-17WBR08176RiskRisk is defined as the potential of uncertainty to happened, that might cause gaining or losing something of value. Risk is unpredictable, and uncontrollable outcome that might occur under certain circumstances. There are two types of risk, which is systematic risk and unsystematic.
Systematic risk is known as market risk, or un-diversifiable, the uncertainty inherent to entire market segment. There is no action we can take to avoid the uncertainty from happening, such as inflation rate, interest risk, recession, and so on. Unsystematic risk, which is specific risk, diversifiable risk, is another type of uncertainty that can be reduced through diversification. Unlike systematic risk, unsystematic risk can be avoided or prevent by taking precaution. The example of unsystematic risk is business risk, financing risk, and more. Each company will face both systematic and unsystematic risk, as for Genting Berhad, there are several risks that they concerned about: Systematic RiskMarket riskAs I mentioned previously, market risk is an undiversifiable risk that is challenging and faced by every company, included Genting Berhad. The market risk is the potential of experiencing losses due to certain factors that affected the entire performance of the financial market.
Market risk will occur due to the volatility of the overall financial market, the volatility risk is uncontrollable by company itself. For corporation like Genting Berhad, their share price is subjected to market risk, which will fluctuate from time to time. All of the companies which had gone through IPO process, their company’s share price will be listed in Bursa Malaysia, and the prices changes is due to the supply and demand on the stock market. Corporation can do least to change the investor’s preferences, hence, it is a risk which is unpredictable and unavoidable for all.
Interest Rate RiskGenting Berhad encounter interest rate risk because most of the Group’s borrowing and their debt securities is categorized as available for sale financial assets. The Groups issue borrowing at variable interest rate, which put the Group to cash flow interest rate. The amount of borrowing is huge, the vary in interest rate may brings a huge impact to their financial position. The Genting Berhad manage to swap their cashflow interest rate risk by using floating-to-fixed interest rate swaps. With the interest rate swaps, it will have economic effect of converting all the borrowings from floating rates to fixed rates.
In the other words, Genting is getting rid of the interest rate risk that might harm their financial statements. Unsystematic RiskCredit riskCredit, also known as default risk, is the uncertainty that may arise from borrower who failed to make required payments. The higher the credit risk, the higher the cost of borrowing, the objective is to reduce the likelihood the borrower will default on its requirement payments, hence the cost of borrowing increase to compensate the risk associated.
Genting Berhad is exposure to credit risk due to the sales made is mainly in terms of credit. The more number of trade receivable a corporation have, the greater the credit risk faced by the corporation. In order to keep credit risk of Genting under control, Genting Singapore PLC has established a Credit committee and processes the make evaluation on the creditworthiness of their counterparties based on their profile and background. It is to lower down the likelihood a party may failed to meet the obligation on repayments. Through monitoring their trade receivables, the credit risk of Genting Berhad are minimized. Liquidity RiskBig corporation like Genting Group, also subjected to liquidity risk.
Liquidity risk simply means that the ability of a firms to meet their short-term financial demands. The uncertainty occurs when a firm is unable to convert physical assets into cash that to meet immediate cash needs. The Group did a good job in managing their liquidity of cashflow. They regularly reviewed the Group’s cashflow to make sure that they are able to meet its obligations. The Group constantly views their balance sheet to maintain their cash and cash equivalents appropriate at healthy level for operating environment and expected cashflow that required by itself.
Meanwhile, the surplus of cashflow is held by the operating entities which above the balance required for working capital managements, is control by the Group Treasury. The Group treasury invests the surplus of cashflow in interest bearing investment, which provides themselves a certain level of healthy cashflow that might be needed when time has come. Source of FinancingCorporation may utilize several sources to finance their company, such as long-term financing, medium-term financing, short-term financing, owned capital, borrowed capital, internal and external sources.
Genting did not make borrowing in financial year 2015, but in 2016, it has made short-term borrowings with an amount up to RM2219.6 million. With my own opinion, there are two recommendation that I would like to suggest on the source of financing the Genting Group could use: Retained ProfitThe biggest advantage of retained profit is it does not depend on outside parties to provide source of financing. Instead, Group could utilize the retained profit and finance its corporation with internal sourcing of capital. It eliminates the risk that associated with other parties, which might include interest rate if you are borrowing from financial institutions, or dilution of ownership through issuing new shares, or even bankruptcy risk that might arises.
Retained profit does not required the firm to be tight up with the obligation or commitments that might put your corporation in hardship. Besides, it enhances your financial ratio and financial strength which is favorable to investors. The lower debt-to-equity ratio provides an insight that your company is sustainable and profitability with sufficient cashflow to cover operating cost and encouraging growth of company. It is considered as an internal source, which the source of capital is basically generated internally from your business activities, such as reduction on working capital, or the sale of assets. Bill DiscountingAnother suggestion for Genting Berhad is bill discounting.
If a buyer buys goods from the seller, and sales is made in terms of credit, the credit period may vary from one to 4 months. Within the timeframe, the default risk is associated with these creditors as the sales is merely made on letter of credit. It also caused the buyer subjected to liquidity risk as well. Bill discounting is a fee which takes by banks from a seller, in exchange to release the funds before the predetermined credit period.
The fund that the seller retrieved is normally 80% of original funds. The difference between the ready money paid by bank, and the face value of the bill is called the discount. However, bill discounting method is much more attractive as the seller gets to retrieve ready cash, which maintaining the liquidity of a firm. The bill discounting provides a company with instant cash that might be to invests in new projects ahead, rather than wait for trade receivables to repay its debts. A good corporation must have a sound financial statement and maintain its firm’s cash equivalents to maintain liquidity to meet short-term obligations, such as operating cost, initial capital for the launch of new projects, term-loan repayments and so on. Thus, bill discounting method is another souce of financing recommended for Genting Group.
ConclusionThere are many other sources of financing that Genting Group might implement to meet their firm’s obligation and requirements. For big corporation like Genting Berhad, its vital for them to get their internal financing stable and sustainable. Short-term cashflow must be sufficient and adequate fulfil firm’s demands. Even though Genting has take several precautions to prevents its risk, but there’s never enough.
Instead, Genting should pay more attention to maintain the growth of firm and a sound financial statements.