Ch 7.2: Credit Document Analysis Flashcards
Name the key debt documents
Credit agreement or indenture
Term sheet
Offering circular/Offering memorandum/Prospectus
Collateral agreement
Other security documents
What is the indenture (the credit agreement document)?
The indenture governs the rights and obligations of the debtor and the creditor w.r.t. to the specific debt instrument. It is a form of a contract.
Loans are generally governed by a credit agreement, bonds are generally governed by an indenture.
What is the term sheet?
The term sheet is the summary of the main terms and conditions of the debt instrument.
Reviewing the term sheet provides a quick overview of the key features of the transaction.
What is the content of the offering circular (prospectus)?
The OC contains
- a cover page,
- a brief description of the issuer,
- a description of potential credit risks to the investors,
- selected financial information,
- a description of the debt securities,
- a description of the use of proceeds,
- a section defining how the actual transfer of money will take place between the various parties,
- a notice about tax issues.
What is a collateral agreement?
In case of a secured debt instrument, a large body of documents will be included to demonstrate the physical existence of the security and to govern the rights and obligations of the parties to the agreement.
The collateral agreement describes the assets being offered as security and states the nature of the agreement between the borrower and the creditors.
It is supplemented by documents showing how the actual collateral taken was perfected and granted to the benefit of creditors.
What are the key sections on the indenture?
Definitions section
The facilities: What is the money going to be used for?
Utilization When is the money going to be available and how?
Repayment, Prepayment and Cancellation: Can the debt instrument be prepaid?
Costs of utilization: What is the cost to the borrower?
Additional Payment Obligation: Are there other costs that creditors should be compensated for?
Guarantee: Does another entity guarantee the debt obligations?
Representations: Who is the borrower? What is the financial shape of the borrower?
Undertakings: What are the covenants, triggers, subordination?
Events of default: What constitutes an event of default?
Administration: How are the housekeeping matters to be taken care of?
Governing law and enforcement: If things turn sour, what legal system governs the agreement?
What are the 10 critical questions to gain a greater understanding of a bond offering?
- Who is the issuer?
- Where is the issuer incorporated?
- What is the relationship with the parent company?
- What are the debt amount issued and in which currency?
- What are the price and the coupon?
- What is the maturity?
- What are the interest payment dates?
- What is the rank of debt obligations?
- What is the governing law?
- What is the intended use of the proceeds?
What are the 7 key credit information questions?
- Is the firm in good standing?
- Are there any restrictions on the activities of the firm?
- Are there any credit cliffs or triggers?
- Are there any financial covenants? If so, what are they, and what is their credit impact?
- Are there any nonfinancial covenants? If so, what are they, and what is their credit impact?
- What constitutes a default?
- What remedies exist in an event of default?
What is a change of control provision?
A change of control provision gives the bondholders the option of requiring the firm to repurchase the bonds if there is change in the control of the company, e.g. the company is bought by another company.
What are credit cliffs and triggers?
Credit cliffs and triggers give bondholders the option to force the corporate to redeem particular debt insturments if the status of the firm should change or if its performance deteriorates substantially.
What is the debt-service coverage ratio (DSCR)?
The debt-service coverage ratio measures the cash flow available to pay current debt obligations.
DSCR = Net operating income / Total debt service
where
NOI = Revenue - Costs TDS = Current debt obligations (obligations due within 1 year)
