debt finance flashcards (chapter 4,5,12)

Question 1

How does a company borrow money under the model articles ?

Answer 1

Directors have authority under MA 3 - they can borrow via board resolution (unless company does not follow model articles. check for restrictions)

Question 2

explain the key features of an overdraft

Answer 2

it is a contract between a bank and the company, allowing a company to overdraw on their account

it is a temporary loan for everyday expenses

it is an uncommitted facility (payable on demand without need for notice to be given)

company pays a fee for the overdraft facility and interest on the amount overdrawn.

Question 3

explain the key features of a term loan

Answer 3

it is a fixed amount of money given for a fixed period - repayable on a certain date

Interest is payable on the amount borrowed at regular intervals

• typically used in acquisitions
• can be bilateral or syndicated
  -lender unable to recall loan until the end of the term unless borrower breaches agreement
  -amount borrowed either one lump sum or during the term
  -terms of the loan contained in the facility/loan agreement.

Question 4

explain the key features of a revolving credit facility

Answer 4

• maximum amount made available to the company for specified period
• company can borrow up to the maximum amount/repay the amount at the end of the interest period
  -company can re-borrow amounts it has repaid as long as it never goes beyond the maximum
  -bank receives interest on the amount borrowed + commitment fee for having the maximum amount available at all times
  -can be bilateral or syndicated

Question 5

explain the key features of a debt security

Answer 5

-Debt securities are financial instruments issued by a company to raise money
- company sells debt security to investor, company receives cash , investor receives promise to repay with interest.
- a good example is a bond

Question 6

how does a company grant security under MA

Answer 6

directors can decide to grant security

there are no restrictions in the Model Articles

no requirement for shareholder resolutions

if not dealing with MA (CHECK)

Question 7

what is a mortgage ?

Answer 7

except for land (technically a charge by way of legal mortgage) a mortgage involves the transfer of legal title to the lender

lender has right to immediate possession of asset if borrower defaults on loan

Once loan is repaid, the legal title is transferred back to the borrower , or, in the case of land, the charge is lifted and the mortgage is discharged.

Question 8

what is a fixed charge?

Answer 8

equitable proprietary interest over the asset held by the lender

Grants lender control over the asset. Borrower can’t sell the asset without the lender’s consent and must keep the asset in good condition

lender has right of first claim

commonly taken over plant and machinery.

Question 9

what is a floating charge?

Answer 9

-Secures a group of assets that constantly changes such as stock.

the company retains the freedom to deal wit the assets in the ordinary course of business until the charge crystallises (company defaults or becomes insolvent)

Question 10

when does a fixed charge risk being a floating charge

Answer 10

‘control’. if the lender doesn’t have such control then the fixed charge , even if in one document will be in fact a floating charge . this is important as a floating charge ranks behind a fixed charge on insolvency.

Question 11

what are the rules of priority between fixed and floating charges over the same asset

Answer 11

fixed over floating always (unless negative pledge)

fixed over fixed if first fixed is created earlier

floating over floating if first floating is created earlier

Question 12

what are the rules on the registration of security ?

Answer 12

failure to register in 21 days of the security being granted results in the loan being immediately repayable and the security being VOID against the administrator, liquidator and credit. in insolvency , the holder of the void charge = unsecured creditor

Question 13

how do you register the charge ?

Answer 13

file at companies house:
- the debenture
- form MR01
-fee

if a charge Is taken over land, it must also be registered at the Land registry (mortgage)

debenture and MR01 form kept at the company’s registered office for inspection.

Question 14

what are the advantages of a term loan ?

Answer 14

gives greater certainty than an overdraft
borrower has greater control because the bank can only request repayment under terms of the contract

Question 15

what are the advantages of an overdraft for a business?

Answer 15

• flexible source of finance
• few formalities needed to arrange it

Question 16

what are the disadvantages of a term loan

Answer 16

time and expense In negotiating all legal documentation for such a loan
once re-paid , money cannot be re-borrowed by the business

Question 17

what are the disadvantages of an overdraft

Answer 17

repayment demanded at any time by the bank
expensive as it is unsecured and banks charge high interest rates in return for offering such flexibility to the owner

Question 18

advantages of a revolving credit facility ?

Answer 18

flexible
possible to reduce the total amount of interest payable by reducing borrowings

Question 19

disadvantages of revolving credit facility

Answer 19

• time and expense in negotiating and agreeing all legal documentation
• high fees + interest rate charged

Question 20

list the clauses found in term loans and revolving credit facilities

Answer 20

Payment of money to the borrower

Repayment and pre-payment

Interest rates

Express covenants

Implied covenants

events of default

Question 21

what covenants are typically included in a facility agreement?

Answer 21

• that dividends and other distributions to shareholders do not exceed a specified percentage of the net profits
• that current assets exceed current liabilities by a specified amount of money
• not To dispose of assets without lenders consent
• to not create any further security over the whole or any part of the undertaking without the consent (negative pledge clause_
• provision of info eg annual accounts

Question 22

why might a lender be more reasonable when negotiating a facility agreement?

Answer 22

there is a risk that the bank would be found liable as a shadow director of the borrowing company

Question 23

define the term ‘debenture’

Answer 23

loan agreement in writing between borrower and lender that is filed at companies house . can only be entered into by companies and LLPs, not sole traders or partnerships

Question 24

what is a secured debt

Answer 24

a lender with security may claim the assets of a business if the business fails to meet obligations under facility agreement.

Question 25

Security