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BLP > 2.6 Companies: Debt Finance > Flashcards

2.6 Companies: Debt Finance Flashcards

1
Q

Two ways companies borrow money

A

Through loans or debt securities

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2
Q

What does RoC issue once charge registered

A

Certificate of reg

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3
Q

Why is floating less secure than fixed (4 reasons)

A

Ranks below fixed usually in priority, part of prescribed part, can be avoided in insolvency and administrators can pay costs out of it

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4
Q

Funding costs of equity finance

A

Dividends IF declared, which are not tax deductible

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5
Q

What happens if security not registered at CH within 21 days

A

Void

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6
Q

What is the equation for gearing

A

Non-current liability divided by total equity, times by 100

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7
Q

Any person dealing in GF can deem Ds to be unrestricted - provision

A

40(1)

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8
Q

What is a floating charge

A

Borrower can dispose until crystallisation, when it becomes fixed

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9
Q

Why does Borrower not need to check D’s have appropriate authority to borrow

A

Bank protected by s.40

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10
Q

Example of on-demand loan

A

Overdraft

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11
Q

Example of committed loan

A

Term loan

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12
Q

How does debt finance affect finances of the company

A

Regular interest makes it hard to build up reserves + agreement may contain financial performance targets

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13
Q

What happens to priority if several F/F over same asset

A

1st created + reg has priority, unless Deed of Priority agreed

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14
Q

What is the effect of debt finance on power balance

A

No impact - bank cannot affect decision-making, although it CAN control through e.g. undertakings

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15
Q

What is the ratio for a highly geared company

A

High debt:equity

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16
Q

How does equity finance affect finances of the company

A

No NEED to distribute profits (so can reserve in BS), but bad performance affects share capital value

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17
Q

What kind of shares are debt/equity hybrid

A

Preference shares

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18
Q

Examples of floating charge asset

A

Inventory, debts owed to C and cash

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19
Q

What is a debt security

A

Bond

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20
Q

When does investor get investment back for equity finance

A

On winding up, sale, or buy back by company

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21
Q

Two kinds of loans

A

On-demand or committed

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22
Q

Effect on BS of debt finance

A

Increase NCL

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23
Q

Two kinds of charge

A

Fixed and floating

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24
Q

What is a debenture

A

Doc creating security

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25
Q

Priority of Ms on winding up

A

Ms are last, and some may have preference shares

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26
Q

Provision on presumed to be unrestricted objects

A

31(1)

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27
Q

What happens if mistakes are made on application to register company charge

A

Can try again, but Lender loses priority over any security granted in interim

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28
Q

What does bank do before parties instruct lawyers

A

Sends draft term sheet to borrower

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29
Q

Funding costs of debt finance

A

Interest for Lender is not dependent on profit, but IS tax deductible

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30
Q

Priority of creditors on winding up

A

Paid before Ms + can take security + contractually agree priority/subordination w/ other Lenders

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31
Q

Why does Borrower check if restriction in AoA against borrowing

A

Ms could get injunction and/or Ds may be personally liable

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32
Q

Does person dealing in GF under 40 need to enquire as to Ds restriction?

A

No

33
Q

40(1) says what

A

Any person dealing in GF can deem Ds to be unrestricted

34
Q

What is the effect on future ability to raise money if equity finance

A

Decrease in gearing = more attractive to banks, but earnings/share decrease, so less attractive to equity investment

35
Q

Is the term sheet legally binding?

A

No, equal to heads of terms

36
Q

What is the ratio for a low geared company

A

Low debt:equity

37
Q

What inspection rules apply to company charges (+ provision)

A

Must allow inspection by creditor/M for free + any other person for fee (859Q)

38
Q

From what date does reg of charges apply

A

6th April 2013

39
Q

How might the raising of equity finance be restricted

A

May need SR to allot, and PrivC cannot offer to the public

40
Q

Effect on future ability to raise money if debt finance

A

Increase in gearing = riskier, and may be no security left for future loans

41
Q

Why does Borrower check Ds have appropriate authority to borrow

A

Ms could get injunction and/or D may be personally liable

42
Q

Four kinds of security

A

Lien, pledge, mortgage and charge

43
Q

Three kinds of guarantees

A

Downstream, upstream and cross-stream

44
Q

Degree of reg + procedure for debt finance

A

No specific provisions to follow (bar reg at CH)

45
Q

What restrictions apply to issuing debt securities (PCR ISSUE)

A

Privy cannot offer to the public + prospectus requirements under s.85 FSMA

46
Q

Provision on failure to register charge at CH = void against A/L/C and debt payable on demand

A

859H

47
Q

What can Borrower do on maturity on the loan if he can’t/doesn’t want to pay it back

A

Refinance

48
Q

Provision on validity of Cs act cannot be questioned by lack of capacity under AoA

A

39

49
Q

What does the loan agreement contain

A

Main commercial terms, e.g. undertakings, reps and conditions precedent

50
Q

Which kind of company enhances shareholder return - highly or low geared

A

High - low geared means shareholder earnings diluted

51
Q

General section provision in CA on registering security at CH

A

859

52
Q

Why does Borrower not NEED to check if restriction in AoA

A

Bank protected by s.39

53
Q

Why is the security doc separate from loan agreement

A

Privacy - security doc publicly filed at CH

54
Q

Degree of regulation + procedure for equity finance

A

Various steps (CADNB), and can be opposed by Ms

55
Q

Two effects of failure to register charge at CH

A

Void against A/L/C, and debt payable on demand

56
Q

Two ways creditors can protect their investment on winding up

A

Take security + contractually agree priority/subordination w/ other Lenders

57
Q

How do Ms, unsecured creditors and preferential creditors rank among themselves

A

Equal, subject to preferential share rights

58
Q

How might raising of debt finance be restricted

A

AoA, and undertakings in other loans (to e.g. not take on any other loans)

59
Q

Examples of fixed charge asset

A

Property, machinery, share capital in subs and goodwill

60
Q

31(1) ?

A

Presumed to have unrestricted objects

61
Q

Who register company charge at CH?

A

Anyone interested, but usually Lender’s S

62
Q

What is a fixed charge

A

Creditor control disposal, but Borrower can use in ordinary course of business

63
Q

What shows Ds have sufficient authority to borrow

A

Board Minutes

64
Q

What is the effect of equity finance on power balance

A

Dilutes economic and/or voting power

65
Q

Degree of scrutiny for equity finance

A

Key decisions go through Ms, who can sway if significant voting power; Ms can also bring action for mismanagement

66
Q

39

A

validity of Cs act cannot be questioned by lack of capacity under AoA

67
Q

Time to register any security underpinning money borrowed w/ CH

A

Within 21 days, starting day after charge created

68
Q

What is the effect on BS of equity financing

A

Increase in total equity

69
Q

How does Creditor control its Borrowr

A

Through e.g. undertakings

70
Q

Where would you look to see if restriction in AoA on borrowing

A

Objects - if no objects clause (for CA ‘06 onwards), presumed unrestricted

71
Q

Scrutiny for debt finance

A

Monitoring through e.g. reps and undertakings; security reduces ability to deal w/ assets freely

72
Q

Docs to deliver to CH to register charge

A

MR01 + certified copy + fee

73
Q

Priority hierarchy

A

fixed, preferential creditors, crystallised floating + prescribed part, unsecured and Ms

74
Q

What can borrower do if he triggers an event of default

A

Ask for waiver or renegotiate terms

75
Q

What regulation applies to financing advice

A

Shares and bonds are ‘specified investments’ under FSMA, and advising is specified activity under RAO Part 2 if concerns merits.

76
Q

What may be the two effects of an event of default

A

Acceleration or enforcing security

77
Q

When does investor get investment back for debt finance

A

as agreed, or on sale of the debt

78
Q

Main finance docs are…

A

Term sheet, loan agreement and security doc

79
Q

What records must be kept of company charge + provision

A

Record of every charge + varying instruments, at reg office or other location, informing CH (859P)

BLP (18 decks)

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