Guide to Analysing Companies

E
EXTRINSIC VALUE
133
02 Essential Finance 10/11/06 2:22 PM Page 133

---

Ff
Facility
A banking service (such as an overdraft facility) that is made
available to customers for their use as and when they please. A
facility letter is a letter from a bank confirming in writing the
details of a specific loan that has been made available.
Factoring
The business of collecting someone else’s debts on their behalf.
A company sells its receivables (that is, its unpaid invoices) to a
factor (often the subsidiary of a bank) at a discount. The
factor then sets out to collect the money owed. Its profit
comes when it has collected more than the discounted price that
it pays for the debts. A company that sells its debts to a factor
gets a helpful boost to its cash flow, does not have to worry
about bad debts and should be able to spend less on its in-
house accounts function. Factoring may also include any or all
of the following:
 maintaining the company’s sales ledger;
 managing the company’s credit control, that is, making
sure that it does not give customers excessively long
periods to repay;
 the actual collection of unpaid debt;
 insurance cover against bad debt.
Factoring is divided into disclosed and undisclosed. Disclosed
factoring, in which the factor lets the debtors know that that it is
collecting payments on behalf of the client, is increasingly
common. Undisclosed factoring (also known as confidential
invoice discounting) allows the client to conceal the fact that it
has employed a factor.
Fallen angel
A company with bonds outstanding in the market that is
134
02 Essential Finance 10/11/06 2:22 PM Page 134

---

downgraded from investment grade to speculative grade.
This usually happens because a rating agency decides that
the quality of the company’s credit (that is, its ability to repay
its debts) has deteriorated. Being reduced from investment
grade to junk status increases a company’s cost of borrowing
and therefore the effective rate of interest paid on any
bonds held by investors. The prospects of fallen angels are
harder to assess than those of companies judged from the outset
to be speculative. This is because analysts do not know
whether to believe the forecasts of sales and profits produced
by companies whose credit rating has been downgraded.
(See also junk bond.)
Fannie Mae
The name used by the Federal National Mortgage Association, a
company created in 1938 by Congress to support the sec-
ondary market in mortgages. Like freddie mac (the
Federal Home Loan Mortgage Corporation), it buys mortgages
from banks and other providers, repackages them as securi-
ties and sells them in the market. Fannie Mae’s aim is to main-
tain the pool of money available to mortgage providers, thus
ensuring that those who want them can find competitively
priced home loans. As a result, it has sometimes owned as much
as 10% of all US mortgages. Although Fannie Mae started life as
a government agency, it was split in two during the 1960s. One
half became ginnie mae (the Government National Mortgage
Association), a federal agency; the other was acquired by its
own shareholders and became what is now known as Fannie
Mae. Fannie Mae is still the largest buyer of US mortgages and
one of its most active borrowers in the debt market.