BLP: Debt Finance Flashcards
(34 cards)
What is debt finance?
Raising money by borrowing, typically through loan facilities (e.g., overdrafts, term loans) or issuing debt securities (e.g., bonds) to lenders
Name two main categories of debt finance.
Loan facilities (overdrafts, term loans) and debt securities (bonds, debentures)
What is an overdraft facility?
An on-demand bank facility allowing a company to draw up to an agreed limit but callable at any time; interest is charged on the overdrawn amount
How does a term loan differ from an overdraft?
A term loan is borrowed for a fixed period and repaid on a specified date (either as a single bullet payment or in installments), whereas an overdraft is repayable on demand
What is a bond (debt security)?
A tradable instrument issued by a company promising the holder repayment of principal at maturity plus periodic interest payments
What is a convertible bond?
A bond that the holder can convert into the issuer’s shares, exchanging debt for equity according to specified terms
Why might a private company prefer debt finance to equity finance?
Private companies cannot broadly offer shares to the public (s 755 CA 2006); debt allows raising funds without share issuance and dilution
What is a term sheet in a debt finance transaction?
A non-binding summary of key commercial terms (loan amount, interest rate, fees, covenants, events of default) agreed by lender and borrower
What document formalizes the detailed terms of a loan?
The loan agreement, which sets out interest rates, repayment schedule, fees, representations, undertakings, and events of default
What is a debenture in the context of debt finance?
(1) Any debt security (bonds, debenture stock) under s 738 CA 2006; (2) The document creating security (charge) over the borrower’s assets
In a loan agreement, what are ‘representations and warranties’?
Statements of fact about legal and commercial matters made by the borrower on signing and repeated during the loan term; breach may trigger an event of default
What are ‘undertakings’ in a loan agreement?
Covenants or promises by the borrower to do or refrain from doing specified actions (e.g., maintain insurance, not incur further debt) to protect the lender
What constitutes an ‘event of default’?
A specified breach (e.g., non-payment, covenant breach, insolvency) that permits the lender to accelerate repayment or enforce security
Why is security taken by a lender, and what forms can it take?
To protect repayment if the borrower defaults. Common forms include pledges, liens, mortgages, fixed charges, floating charges, and guarantees
What is a pledge?
A form of security where the borrower transfers possession of an asset to the lender until the debt is repaid
What is a lien?
A security interest arising by operation of law, allowing the creditor to retain possession of an asset until payment of a related debt (e.g., mechanic’s lien)
How does a mortgage differ from a charge?
A mortgage transfers legal ownership (subject to the borrower’s equity of redemption) to the lender, whereas a charge creates an equitable interest without transfer of legal title
What distinguishes a fixed charge from a floating charge?
A fixed charge attaches to specific assets, restricting disposal without lender consent. A floating charge hovers over a changing pool of assets (e.g., stock) until crystallisation
When does a floating charge crystallise?
On specified events (e.g., borrower default, insolvency, certain covenants breached) or by operation of law, at which point it fixes on the assets then in the charged class
What is the priority order among creditors when a company is wound up?
1) Fixed charge holders (first call on proceeds from charged assets); 2) Preferential creditors (wages up to £800, certain pensions, taxes); 3) Floating charge holders (subject to prescribed part fund); 4) Unsecured creditors; 5) Shareholders
What is the ‘prescribed part’ in relation to floating charges created on or after 15 September 2003?
A statutory carve-out from floating charge proceeds set aside for unsecured creditors before paying floating charge holders
What is a guarantee, and how does it differ from a charge?
A guarantee is a promise by a third party to pay the borrower’s debt if the borrower fails; it does not create rights in collateral but creates a contractual obligation
Who must register a charge at Companies House, and within what timeframe?
The company or any interested party (usually the lender) must file a statement of particulars (Form MR01) and a certified copy of the charge within 21 days after creation (s 859A CA 2006)
What happens if a charge is not registered within 21 days?
The charge is void against a liquidator, administrator, and any creditor, and the debt becomes immediately payable (s 859H CA 2006)
