chapter 3- debt (1)- loans Flashcards
what type of borrow is a government?
sovereign
where do commercial banks borrow from each other?
interbank market
what is a syndicated loan?
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
what is contained in a loan agreement?
it contains covenants which are promises the borrower makes to the bank
what is wholesale banking?
when a bank lends to a business or government
in return, the borrower has to service the debt (interest)
why do companies use debt?
tax- deductible
the interest a company pays on its loans reduces the amount it profits, and in turn, the amount of tax paid
what isn’t tax- deductible?
dividends
what does private banking focus on?
investing the money of high net worth individuals
what are the two types of lending?
bilateral- lender and borrower
syndicated- multiple lenders
why may a bank not want to extend the amount it allows someone to borrow?
due to the credit risk
how is the rate of interest expressed?
in basis points (one hundredths of a per cent) over a bench mark rate (called bank base rare if set by the central bank)
what is the interbank market?
- 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
when do bank crisis’ usually happen?
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
on what basis do banks lend on?
cost-plus basis
they take their own cost of funds and add a profit element
what is the normal response of a bank to borrower defaults
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
what is revolving credit facility?
where a company can reborrow whatever it has repaid, by utilising repaid amounts
what is a term loan?
a loan of a fixed amount for a fixed period
what is a letter of credit facility?
used in less sophisticated markets where the bank issues a letter of credit that the company can borrow against
what is an on-demand repayment?
the bank can demand immediate repayment of the loan for no reason
what are 3 types of fees that banks get when lending money?
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
what are the steps involved in arranging a syndicated loan?
- 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
what is a sharing clause and where is it found?
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
what is a negative pledge?
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
what is pari passu?
this prevents the borrower from giving preference or better terms to any other lenders it may use or approach
what are restrictions on disposals?
borrower cannot reduce the size of its business by getting rid of assets
what do financial ratios do?
monitor a companies financial health minimum net worth minimum working capital interest cover debt to debt equity ratio
what are some different types of default?
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
what are the 3 different roles in the event of insolvency?
- reciever
- administrator
- liquidator
what words dictate who ranks ahead of whom in the creditor loop
priority
preference
preferred creditor
what is a sovereign borrower?
governments e.g.
where 50 plus banks are involved
when was the there a sovereign debt rescheduling crisis and how long did it take to work through?
1880’s
a decade
what is acquisition finance?
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
what is asset finance?
- 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
what is asset finance usually used for?
- 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
when banks buy assets (asset finance), why do they get tax allowances?
because many countries provide tax advantages to encourage companies to invest in plant and machinery to remain competitive
what will asset finance leases usually contain?
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
what is peppercorn rent?
- 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
what is an example of an operating lease?
- borrowing a car on holiday
- the company doesn’t expect you to insure or maintain the car, they do this for you
what is project finance and what do they do?
- 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
what does an offtake contract do?
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
what basis are most projects built on?
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
what is a completion bond?
- 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)
what is a political risk?
- 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)
what is an example of a multilateral lending agency and what does their involvement in major projects encourage?
world bank
encourages commercial banks to participate
what is trade finance?
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
what Is a bill of exchange when discussing trade finance?
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
what is a forfait market?
- 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)
