Debt Finance Flashcards
(47 cards)
What should you check in assessing a companies ability to borrow?
- when the company was incorporated
- company’s articles
What is a loan facility?
An agreement between a borrower and a lender which gives the borrower the right to borrow money on the terms set out in the agreement
What is an overdraft?
On-demand facility - bank can call in debt at anytime and demand immediate repayment
What is a term loan? What are its key features?
Loan of money for fixed period of time, repayable on a certain date.
Lender cannot demand early repayment unless borrower breaches agreement
What is a bullet repayment?
A term loan that is repayable in a single lump sum at the end of the agreement
What is amortising repayment?
A term loan that is repayable in instalments
What is a revolving credit facility?
- Loan for specified period of time
- Borrower can repeatedly borrow and repay loans up to agreed maximum overall amount
What is a debt security?
Company issues a security acknowledging investor’s rights in return for finance provided by an investor
That security can then be sold on by investor
Class example is a bond
How are private companies restricted in their issue of bonds?
Can only issue to targeted investors and not the public indiscriminately
What are convertible bonds? What happens if they are converted?
Bonds which can be converted into shares in the issuing company.
If bondholder chooses to convert they receive shares but lose right to receive interest and repayment of principal amount invested
What is a term sheet in debt financing?
- Statement of key terms of transaction agreed by lender and borrower.
- Equivalent to heads of terms.
- Not intended to be legally binding
What is a loan agreement?
- Document that sets out the main commercial terms of the loan agreement such as interest, interest dates, date principal loan will be repaid, fees etc
- Intended to be legally binding
What are the two meanings of debenture?
- s 738 - debenture means any form of debt security issued by a company, include debenture stock, bonds, and other securities of a company whether or not constituting a charge on company assets
- type of security document and one of the most commonly used in secured loan transactions. Separate document from loan agreement setting out details of security. Debenture sent for registration purposes at Companies House
What are representations in loan agreements?
Statements of fact as to legal and commercial matters made on signing of the loan agreement and repeated periodically during the life of the loan
What are undertakings in loan agreements?
Undertakings are promises to do (or not to do something or to procure that something is done or not done
What is Event of Default clause?
Clause that gives bank power to call in its money early if borrower shows signs of becoming an enhanced credit risk
What is a pledge?
Security provider gives possession of the asset to the creditor until the debt is paid back eg pawning a watch
What is a lien?
Creditor retains possession of asset until debt is paid back eg mechanic’s lien
What is a mortgage?
Security provider retains possession of the asset but transfers ownerships to the creditor
Security provider will then have ownership transferred back to them when the debt is repaid - right of equity of redemption
What is a charge?
Security provider retains possession but subject to equitable proprietary interest in the asset in favour of the creditor
Lender will also take certain contractual rights over the assets such as right to sell or receiver/administrator to take possession if debt not paid back
What is a fixed charge?
A fixed charge is normally taken over assets such as machinery and vehicles.
Creditor can control what the security provider can do with the fixed charge assets but borrower can still use it.
Security provider undertakes not to dispose of or create further charges over the charged assets without the creditor’s consent
What happens when a fixed charge becomes enforceable?
Creditor will have the ability to appoint a receiver of that asset or to exercise a power of sale of the asset
What is a floating charge?
A floating charge floats over the whole of a class of circulating/fluctuating assets.
Whatever assets in that class happen to be owned by the security provider of any given time are subject to the floating charge and the security provider is free to dispose of the assets as it wishes until crystallisation
What happens on crystallisation of a floating charge?
Floating charge stops floating and fixes to the assets in the relevant class which are owned by the security provider at the time of crystallisation
Creditor thus acquires control over the assets as if they had a fixed charge over them.
