chapter 3- debt (1)- loans

Question 1

what type of borrow is a government?

Answer 1

sovereign

Question 2

where do commercial banks borrow from each other?

Answer 2

interbank market

Question 3

what is a syndicated loan?

Answer 3

when a borrower wants to borrow more than one bank is prepared to lend
involves a group of banks lending to the same borrower on the same terms

Question 4

what is contained in a loan agreement?

Answer 4

it contains covenants which are promises the borrower makes to the bank

Question 5

what is wholesale banking?

Answer 5

when a bank lends to a business or government

in return, the borrower has to service the debt (interest)

Question 6

why do companies use debt?

Answer 6

tax- deductible

the interest a company pays on its loans reduces the amount it profits, and in turn, the amount of tax paid

Question 7

what isn’t tax- deductible?

Answer 7

dividends

Question 8

what does private banking focus on?

Answer 8

investing the money of high net worth individuals

Question 9

what are the two types of lending?

Answer 9

bilateral- lender and borrower

syndicated- multiple lenders

Question 10

why may a bank not want to extend the amount it allows someone to borrow?

Answer 10

due to the credit risk

Question 11

how is the rate of interest expressed?

Answer 11

in basis points (one hundredths of a per cent) over a bench mark rate (called bank base rare if set by the central bank)

Question 12

what is the interbank market?

Answer 12

• where banks lend to each other

- tend to be short term and allow a bank to earn a return on money that is temporarily surplus to its requirements

Question 13

when do bank crisis’ usually happen?

Answer 13

when banks stop lending to each other due to loss of confidence over each others solvency (ability to repay) so they stop lending to each other, and in turn, to companies and governments

Question 14

on what basis do banks lend on?

Answer 14

cost-plus basis

they take their own cost of funds and add a profit element

Question 15

what is the normal response of a bank to borrower defaults

Answer 15

it needs security and so many clauses in loan documentation will allow the bank to accelerate the loan and seize any security for the loan

Question 16

what is revolving credit facility?

Answer 16

where a company can reborrow whatever it has repaid, by utilising repaid amounts

Question 17

what is a term loan?

Answer 17

a loan of a fixed amount for a fixed period

Question 18

what is a letter of credit facility?

Answer 18

used in less sophisticated markets where the bank issues a letter of credit that the company can borrow against

Question 19

what is an on-demand repayment?

Answer 19

the bank can demand immediate repayment of the loan for no reason

Question 20

what are 3 types of fees that banks get when lending money?

Answer 20

arrangement fees- for agreeing to lend
drawdown fees- for actually making the money available
early repayment fees- if the borrower wants to repay all or part of the loan early

Question 21

what are the steps involved in arranging a syndicated loan?

Answer 21

• borrower will award a bank a mandate
• the bank will act as an arranger and bring together a syndicate of banks to which it will pass on however much of the loan it doesn’t want to keep
• in large syndications, this may be known as book running
• once the loan has been made, there is the ongoing job of collecting interest and repayments from the borrower and distribution of this money to the syndicate, whilst monitoring the borrower’s financial covenants and administering waivers and amendments to the loan documentation
  this role is called acting as the agent bank

Question 22

what is a sharing clause and where is it found?

Answer 22

in a syndicated loan
if a bank receives a payment from the borrower, then it will share that payment between syndicate members
this is to prevent the borrower from favouring one lender

Question 23

what is a negative pledge?

Answer 23

prevents a borrower from charging its assets to any other creditor in preference to the lending bank and so ensues the bank retains its priority over later lenders

Question 24

what is pari passu?

Answer 24

this prevents the borrower from giving preference or better terms to any other lenders it may use or approach

Question 25

what are restrictions on disposals?

Answer 25

borrower cannot reduce the size of its business by getting rid of assets

Question 26

what do financial ratios do?

Answer 26

monitor a companies financial health
minimum net worth
minimum working capital 
interest cover 
debt to debt equity ratio

Question 27

what are some different types of default?

Answer 27

payment default- non payment of interest or principle when due
material adverse change- serious deterioration in the borrower’s financial position
cross default- a default under any other loan agreement is a default under this one

Question 28

what are the 3 different roles in the event of insolvency?

Answer 28

1. reciever
2. administrator
3. liquidator

Question 29

what words dictate who ranks ahead of whom in the creditor loop

Answer 29

priority
preference
preferred creditor

Question 30

what is a sovereign borrower?

Answer 30

governments e.g.

where 50 plus banks are involved

Question 31

when was the there a sovereign debt rescheduling crisis and how long did it take to work through?

Answer 31

1880’s

a decade

Question 32

what is acquisition finance?

Answer 32

a loan made to borrowers so they can take over company’s in M&A deals
thus
it is called event driven lending, rather than general corporate lending

Question 33

what is asset finance?

Answer 33

• its a way of funding the acquisition of an asset by getting a bank to buy the asset and lease it to the company
• otherwise, they would have landed the money to borrow it
• the lease will be for the asset’s useful economic life, in which the lessee makes quarterly rental payments until the bank has recovered the cost of the asset
• also has an interest charge

Question 34

what is asset finance usually used for?

Answer 34

• aircraft, ships, oil rigs
• attractive as can result to being cheaper than simply borrowing the money and buying the asset
• the deal is a lower credit risk to the bank which it reflects in a lower implicit interest rate
• banks also get tax allowances for buying the asset
• often called tax driven/ based financings as the overall cost to the lessee is smaller

Question 35

when banks buy assets (asset finance), why do they get tax allowances?

Answer 35

because many countries provide tax advantages to encourage companies to invest in plant and machinery to remain competitive

Question 36

what will asset finance leases usually contain?

Answer 36

covenants to ensure the lessee pays the rental, maintains and repairs the asset, insures it and try’s not to sell it, not to misuse it and not to jeopardise the availability of the tax breaks

Question 37

what is peppercorn rent?

Answer 37

• when the lessee has come to the end of the primary term (they have paid off the entirety of the asset), the bank will extend for a secondary term to allow them to continue using the asset (peppercorn)
• if not, the asset is sold and the bank lets the lessee have any proceedings of the sale by way of rebate of rental

Question 38

what is an example of an operating lease?

Answer 38

• borrowing a car on holiday

- the company doesn’t expect you to insure or maintain the car, they do this for you

Question 39

what is project finance and what do they do?

Answer 39

• can take years to reach fruition
• bring together lenders from developed economies to help construct infrastructure projects in emerging economies
• they’re often limited recourse or non- limited recourse- they don’t look to the borrower for repayment

Question 40

what does an offtake contract do?

Answer 40

it is the key to organising how the borrowing will be repaid
with offtake contracts, the gment agrees to buy the project’s output (such as electricity) to distribute to its citizens

Question 41

what basis are most projects built on?

Answer 41

turn- key basis
there will be a long stop date- project should be completed date
drop-dead date- when the project must come on-stream to meet the debt service and repayment projections

Question 42

what is a completion bond?

Answer 42

• a bond which gives the bank step in rights over the project to ensure it is finished
• its a form of guarantee provided by a marlin insurer (an insurance company which specialises in one line of business)

Question 43

what is a political risk?

Answer 43

• that the government likes the look of the project so much it nationalises it
• this is neutralised by political risk insurance, which is provided by ECO’s ( export credit agencies)

Question 44

what is an example of a multilateral lending agency and what does their involvement in major projects encourage?

Answer 44

world bank

encourages commercial banks to participate

Question 45

what is trade finance?

Answer 45

it is a way for manufactures to export their goods knowing they will be paid by the importer who may be on the other side of the world and someone they’ve never met but correspond with

Question 46

what Is a bill of exchange when discussing trade finance?

Answer 46

is a promiser to pay under which a company agrees to pay the seller a given sum of money at some point in the future- usually 3 months ahead

Question 47

what is a forfait market?

Answer 47

• it is the international market for letters of credit and is a form of factoring (banks buying debt owed to companies at a discount and recovering the full amount on maturity- allowing the companies to get the bull of the cash owed to them at an earlier date, thus helping their cash flow)