BLP Week 8 - Debt Finance

Question 1

What are the two main types of debt finance?

Answer 1

Loan facilities and debt securities.

Question 2

What is a loan facility?

Answer 2

An agreement between a borrower and lender allowing borrowing on set terms.

Question 3

What is a debt security?

Answer 3

A financial instrument (like a bond) acknowledging borrowed funds, which can be traded.

Question 4

What happens at the maturity date of a debt security?

Answer 4

The issuer repays the value of the security to its holder.

Question 5

How do lenders protect themselves in debt finance?

Answer 5

By taking security over the borrower’s assets.

Question 6

What is an overdraft?

Answer 6

An on-demand facility repayable at any time; interest is paid on the overdrawn amount.

Question 7

What is a term loan?

Answer 7

A loan for a fixed period, with fixed repayment terms (either lump sum or installments).

Question 8

What is a revolving credit facility?

Answer 8

A reusable line of credit that allows borrowing and repayment up to a limit over a set time.

Question 9

What is a convertible bond?

Answer 9

Starts out as a bond investor earns interest and expects the company to repay the full amount later (like loan). But bondholder also has the option to convert the bond into shares of the company instead of getting repaid in cash.

Answer 10

.

Question 11

What is a term sheet?

Answer 11

A non-binding summary of key agreed terms.

Question 12

What is a loan agreement?

Answer 12

A detailed document setting out commercial loan terms, obligations, and conditions.

Question 13

What is a security document?

Answer 13

A document establishing the lender’s security rights over assets.

Question 14

?

Answer 14

.

Question 15

What are representations and warranties?

Answer 15

Statements of fact made by the borrower on signing and repeated during the loan term.

Question 16

What are undertakings in a loan agreement?

Answer 16

Promises by the borrower to (not) do certain things.

Question 17

What is an event of default?

Answer 17

A breach allowing the lender to call in the loan early.

Question 18

What is security in debt finance?

Answer 18

A proprietary interest in assets ensuring loan repayment.

Question 19

Why is security important for lenders?

Answer 19

Protects the lender if the borrower can’t repay the loan.
It may provide priority over other creditors if the borrower defaults or goes bankrupt.

Question 20

What is a pledge?

Answer 20

Security provider gives possession of the asset to the crefitor until the debt is paid back.

Question 21

What is a lien?

Answer 21

The lender retains possession of the asset until payment - arises by operation of law (e.g., mechanic’s lien).

Question 22

What is a mortgage (in debt finance)?

Answer 22

Ownership is transferred to the lender, possession stays with the borrower.

Question 23

What is a charge?

Answer 23

The lender gets an equitable proprietary interest and enforcement rights over the asset.

Question 24

What is a fixed charge?

Answer 24

Attached to specific assets; borrower cannot dispose of them without consent.

Question 25

What assets typically have fixed charges?

Answer 25

Machinery, vehicles, etc.

Question 26

What is a floating charge?

Answer 26

Covers fluctuating assets like inventory; allows disposal until crystallisation.

Question 27

What is crystallisation in floating charges?

Answer 27

* When a floating charge **stops floating and fixes** to the assets in the relevant class. * The **creditor acquires control** of the assets/can sell them. * **Arises by operation of law or triggered by certain contractually agreed events** eg breach significant terms of loan.

Question 28

What are disadvantages of floating charges from creditor's perspective?

Answer 28

Lower priority, asset value can vary, and they can be overridden in insolvency.

Question 29

What is a guarantee in debt finance?

Answer 29

A third party promises to repay the loan if the borrower defaults.

Question 30

Where are charges registered?

Answer 30

At Companies House (UK).

Question 31

What happens if a charge isn’t registered in 21 days*? ## Footnote *Registered within 21 days beginning **with the day after** the day on which the charge is created.

Answer 31

It becomes void against administrators and creditors, and debt becomes immediately due.

Question 32

What is included in the MR01 form for registration?

Answer 32

Company, creation date, persons entitled, asset descriptions, certified copy, fee.

Question 33

Who registers the charge?

Answer 33

Usually the lender’s solicitor, but it can be anyone interested in the charge.

Question 34

What must companies keep regarding charges?

Answer 34

Certified copies of all charges and amendments, available for inspection.

Question 35

What is the priority order in a winding up?

Answer 35

Fixed charge holders, preferential creditors, floating charge holders, unsecured creditors, shareholders.

Question 36

What is the 'prescribed part fund'?

Answer 36

A portion of floating charge proceeds reserved for unsecured creditors (post-15 Sep 2003).

Question 37

Who has priority among multiple fixed or floating charge holders?

Answer 37

The first charge created (if properly registered), unless altered by agreement.