2.6 Companies: Debt Finance Flashcards
Two ways companies borrow money
Through loans or debt securities
What does RoC issue once charge registered
Certificate of reg
Why is floating less secure than fixed (4 reasons)
Ranks below fixed usually in priority, part of prescribed part, can be avoided in insolvency and administrators can pay costs out of it
Funding costs of equity finance
Dividends IF declared, which are not tax deductible
What happens if security not registered at CH within 21 days
Void
What is the equation for gearing
Non-current liability divided by total equity, times by 100
Any person dealing in GF can deem Ds to be unrestricted - provision
40(1)
What is a floating charge
Borrower can dispose until crystallisation, when it becomes fixed
Why does Borrower not need to check D’s have appropriate authority to borrow
Bank protected by s.40
Example of on-demand loan
Overdraft
Example of committed loan
Term loan
How does debt finance affect finances of the company
Regular interest makes it hard to build up reserves + agreement may contain financial performance targets
What happens to priority if several F/F over same asset
1st created + reg has priority, unless Deed of Priority agreed
What is the effect of debt finance on power balance
No impact - bank cannot affect decision-making, although it CAN control through e.g. undertakings
What is the ratio for a highly geared company
High debt:equity
How does equity finance affect finances of the company
No NEED to distribute profits (so can reserve in BS), but bad performance affects share capital value
What kind of shares are debt/equity hybrid
Preference shares
Examples of floating charge asset
Inventory, debts owed to C and cash
What is a debt security
Bond
When does investor get investment back for equity finance
On winding up, sale, or buy back by company
Two kinds of loans
On-demand or committed
Effect on BS of debt finance
Increase NCL
Two kinds of charge
Fixed and floating
What is a debenture
Doc creating security
Priority of Ms on winding up
Ms are last, and some may have preference shares
Provision on presumed to be unrestricted objects
31(1)
What happens if mistakes are made on application to register company charge
Can try again, but Lender loses priority over any security granted in interim
What does bank do before parties instruct lawyers
Sends draft term sheet to borrower
Funding costs of debt finance
Interest for Lender is not dependent on profit, but IS tax deductible
Priority of creditors on winding up
Paid before Ms + can take security + contractually agree priority/subordination w/ other Lenders
Why does Borrower check if restriction in AoA against borrowing
Ms could get injunction and/or Ds may be personally liable
Does person dealing in GF under 40 need to enquire as to Ds restriction?
No
40(1) says what
Any person dealing in GF can deem Ds to be unrestricted
What is the effect on future ability to raise money if equity finance
Decrease in gearing = more attractive to banks, but earnings/share decrease, so less attractive to equity investment
Is the term sheet legally binding?
No, equal to heads of terms
What is the ratio for a low geared company
Low debt:equity
What inspection rules apply to company charges (+ provision)
Must allow inspection by creditor/M for free + any other person for fee (859Q)
From what date does reg of charges apply
6th April 2013
How might the raising of equity finance be restricted
May need SR to allot, and PrivC cannot offer to the public
Effect on future ability to raise money if debt finance
Increase in gearing = riskier, and may be no security left for future loans
Why does Borrower check Ds have appropriate authority to borrow
Ms could get injunction and/or D may be personally liable
Four kinds of security
Lien, pledge, mortgage and charge
Three kinds of guarantees
Downstream, upstream and cross-stream
Degree of reg + procedure for debt finance
No specific provisions to follow (bar reg at CH)
What restrictions apply to issuing debt securities (PCR ISSUE)
Privy cannot offer to the public + prospectus requirements under s.85 FSMA
Provision on failure to register charge at CH = void against A/L/C and debt payable on demand
859H
What can Borrower do on maturity on the loan if he can’t/doesn’t want to pay it back
Refinance
Provision on validity of Cs act cannot be questioned by lack of capacity under AoA
39
What does the loan agreement contain
Main commercial terms, e.g. undertakings, reps and conditions precedent
Which kind of company enhances shareholder return - highly or low geared
High - low geared means shareholder earnings diluted
General section provision in CA on registering security at CH
859
Why does Borrower not NEED to check if restriction in AoA
Bank protected by s.39
Why is the security doc separate from loan agreement
Privacy - security doc publicly filed at CH
Degree of regulation + procedure for equity finance
Various steps (CADNB), and can be opposed by Ms
Two effects of failure to register charge at CH
Void against A/L/C, and debt payable on demand
Two ways creditors can protect their investment on winding up
Take security + contractually agree priority/subordination w/ other Lenders
How do Ms, unsecured creditors and preferential creditors rank among themselves
Equal, subject to preferential share rights
How might raising of debt finance be restricted
AoA, and undertakings in other loans (to e.g. not take on any other loans)
Examples of fixed charge asset
Property, machinery, share capital in subs and goodwill
31(1) ?
Presumed to have unrestricted objects
Who register company charge at CH?
Anyone interested, but usually Lender’s S
What is a fixed charge
Creditor control disposal, but Borrower can use in ordinary course of business
What shows Ds have sufficient authority to borrow
Board Minutes
What is the effect of equity finance on power balance
Dilutes economic and/or voting power
Degree of scrutiny for equity finance
Key decisions go through Ms, who can sway if significant voting power; Ms can also bring action for mismanagement
39
validity of Cs act cannot be questioned by lack of capacity under AoA
Time to register any security underpinning money borrowed w/ CH
Within 21 days, starting day after charge created
What is the effect on BS of equity financing
Increase in total equity
How does Creditor control its Borrowr
Through e.g. undertakings
Where would you look to see if restriction in AoA on borrowing
Objects - if no objects clause (for CA ‘06 onwards), presumed unrestricted
Scrutiny for debt finance
Monitoring through e.g. reps and undertakings; security reduces ability to deal w/ assets freely
Docs to deliver to CH to register charge
MR01 + certified copy + fee
Priority hierarchy
fixed, preferential creditors, crystallised floating + prescribed part, unsecured and Ms
What can borrower do if he triggers an event of default
Ask for waiver or renegotiate terms
What regulation applies to financing advice
Shares and bonds are ‘specified investments’ under FSMA, and advising is specified activity under RAO Part 2 if concerns merits.
What may be the two effects of an event of default
Acceleration or enforcing security
When does investor get investment back for debt finance
as agreed, or on sale of the debt
Main finance docs are…
Term sheet, loan agreement and security doc
What records must be kept of company charge + provision
Record of every charge + varying instruments, at reg office or other location, informing CH (859P)
