Chapter 6 - Debt Finance

Question 1

Lender’s Risk

(STRAP)

Answer 1

• Security - assets/covenants
• Timeframe
• Repayment profile
• Amount
• Purpose

Question 2

Fixed/Floating charge

Answer 2

• Fixed charge - specific assets
• Floating charge - business assets in general
  
  • on default charge fix to assets at time

Question 3

4 types of covenant

Answer 3

• Financial - gearing, interest cover
• Dividend restrictions
• Management, control, ownership e.g. board structure, staff
• Reporting/disclosure - regular accounts/reports, contracts won/lost

Question 4

Positive/Negative covenant

Answer 4

• Positive - must do e.g. maintain ratio
• Negative - can’t do e.g. take on extra debt

Question 5

Interest rate swap advantages

Answer 5

• Reduce finance cost
• Change debt profile - fixed/variable
• Low transaction costs
• Flexible - any size, can be reversed
• Companies with different credit ratings

Question 6

Interest rate swap disadvantages

Answer 6

• Counterparty risk - other side will default
  
  • insurance may be possible
• Difficult to find swap partner - may need to pay a bank