Chapter 6 - Debt Finance Flashcards
What is the difference between Money Markets and Capital Markets
Money Markets tend to be for short term and mainly used by interbank lending
Capital markets are for longer term such as bonds and equity. These can be traded.
Note: Bonds usually have a redeemable date and are seens as ‘creditors’ whereas equity is a shareholder
What is subordinated debt?
Debt that ranks below existing unsecured debt.
This can still be issued if they have strick debt covenants
What are feature sof Convertible Debt
- Cannot be detached from debt (unlike warrant)
- Potetnial for Cap Gains over and above debt value
- Can be covereted (if Share price is great than debt) or held to maturity
Explain Sale and Lease Back
- Assets sold to investor and leaseback for rent
- Rent is tax deductable
- Business may be subject to Capital Gains tax if value is higher than book value as agreed with tax office
What are Business Angels
Unlike venture capitailists BA provide finance to small business
Explain Operating Leases
- Income and expense in P&L
- No trf of risks and rewards
- Can be cancelled
- Used for rapidly changing technology
NOTE:
Biz view borrowing from a bank restrictive and expensive as opposed to selling bonds on the market
What are the characteristics of Cross-Currency Swaps
- Swap of original principal in different currencies which are swaped back at end of term at original spot rate
- Can be fix for fix, float for flaot or fix for float
What are commercial papers features
- Long Term finance - traded on Capital Markets
- Unsecured
- Within 9 month maturity (usually 1 week to 3 months)
- Can be traded before maturity
Explain RCF
Revolving Credit facilities
- Use or withdraw money from predetrmined limit
- Pay back + interest
- Can pay back in full at any time
- Flexible debt financing
What are Eurobond features
- Denominated in any currency
- Eurocurrency bonds can be listed on the domestic currency SE by not traded
- Self Regulation off shore market
- In contrast, domestic bonds can be both listed and traded on local SE and usually are named bond holders
What is a Debt with Warrants attached
A Warrant is an option to buy a share at a future date for a specified price.
Capital gains may be possible if share price increases.
They are often attached to binds as a sweetner to purchasing bonds
Purchaser can sell the warrnt at anytime before exercise date
What are the 2 types of security
- Fixed - Against particular asset(s). Lender goes to front of queue
- Floating - Against general asssets. Lender is in higher position than if it was not secured this way
What are principles around Bond Market
- Can be expensive but once in costs reduce
- need to build up a repuation for credit quality
- They have STD terms and conditions and these play a key role in reaching wider investors
- Long term market
Explain Finance Leases
- Risks and Rewards are transfered
- Usually for UEL
- After which can be sold and
- Split between both entities
- Carry on using at Peppercorn rent
- Lessor does not provide maintenance
- Lessor charges enough to cover cost of asset + profit
- Apply substance over form so:
- Asset in SOFP
- Costs are under liability
