Debt - Capital Stack Flashcards
What is a secured loan?
A secured loan is a loan where the borrower pledges an asset (property) as collateral for the loan.
In secured loans, borrowers pledge property against the loan therefore in the case the borrower deagults, the creditor can take possesion of the pledge asset and may sell it to regain some or all of the amoun loanded.
What happens in a secured loan default when the collateral is not enought to repay debt?
If the sale of the collateral does not raise enough money to pay off the debt, the creditor can obtain a deficiency judgment agaisnt the borrower for the remaining amount
What is a deficiency judgment in a secured loan?
A Deficiency Judment i are court orders that make you personally liable for unpaid debt.
Deficiency judments are typically associated with home foreclosures when the home selling price is not enought to cover the outstanding debt.
Example: You default on a loan and the lender repossesses your property, the value of the property may not pay off the loan. For example, you might owe $200,000 on your home, but it only sells for $180,000. You’re $20,000 short.
Because the lender wants all of the money back, they may take further legal action against you. Legal action to collect the remaining amount is called a deficiency judgment.
What is recourse loan/debt?
Recourse loans are loans that allows lenders to come after you in case of a default. Under a recourse loan the lender can come after you even after they taken the collateral.
On mortages, state laws often dictate whether a loan is recourse or not. California for example is known as a non-recourse loan state therefore lenders can sue you and collect anything above the collateral.
Refinances, second mortgages, and “cash out” transactions tend to create
recourse loans
Purchase loans for your primary residence are most likely
non-recourse loans in non-recourse states.
What is a security interest?
A security interest is the interest that a lender has in a prperty that is being usef for collateral. If a loan has a security interest is a secured loan because it has colletalra which can be used to pay off the loan in the case of deafult.
What is a personal guarantee for a loan?
A personal guarantee requires the borrower to promise to pay back the lender even if the business cannot repay.
What is non-recourse debt?
Non-recourse loans are secured loans that are secured by a pledge of collateral but for which the borrower is not personally liable.
In a non-recourse loan, if the borrower defaults, the lender can only seize the collateral and if the collateral sells for less than the debt owed, the lender cannot seek any deficiency judgments to cover the balance.
Typically, non-recourse debt is seized to 50% - 60% of the value to ensure the lender is overcollateralized
You can think that the incentives under a a non-recourse loan sit between a full recourse secured loan and a totally unsecured loan.
Non-recourse debt is carriend on the debtor company balance sheet as a liability and the collateral is carried as an asset.
What is the most common form of secured debt in real state?
A lien. A lien is a security interest granted over a property to secure payment of a debt or some other obligation
The owner of the property that grants the lien is referred as the lienee and the person who has the benefit of the lien is the lienor or lien holder.
Liens can be “consensual” or “nonconsensual”. What does this mean?
Consensual means that the lien is voluntary and imposed by a contract between the credit and the debtor as its the case for Mortages.
Non consesual liens are involuntary and they arise by statute or common law. Those laws give creditors the right to impose a lien on a real proeprty by the existence of a relationship between the creditor and the debtor.
Non-consensual liens include: tax liens (imposed to secure tax payments), HOA liens (for unpaid fees), mechanic liens (for unpaid work done on the property), attorneys liens (against fees incurred to secure payments)
What is a term loan?
A term loan is the simplest form of corp debt.
Under a term loan the borrower agrees to borrow from the lender and the lender agrees to lend a principal sum for a fixed period of time to be repaid a certain date.
Terms loans can have 3 different repayment methods:
Fixed amortization
Sculpted amortization
Bullet amortization
What is a syndicated loan?
A syndicated loan is a loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan. A syndicated loan is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers. Loan syndication is a risk management tool that allows the lead banks underwriting the debt to reduce their risk and free up lending capacity.
What happens to security interest of a lender when a borrower declares Chapter 11?
In Chapter 11 bankruptcy, the company declares itself bankrupt while retaining control of its assets but falls under the jurisdiction of the court. This chapter prohibits lenders from seizing collateral and offers the company the opportunity to reorganize and propose a repayment plan (referred to as debtor-in-possession).
Chapter 11’s primary aim is to safeguard essential assets from being sold off hastily. If a liquidator or bankruptcy trustee were to sell the business, it might be done in parts rather than as a going concern. This approach can result in significantly lower returns for unsecured creditors and, inevitably, the loss of employment for all staff members.
In English law, there are four main ways to legally promise something as security for a debt or obligation:
Pledge: In a pledge, the borrower transfers the title of a pledged asset to the lender, but the borrower will still maintains ownership and use of the asset. Should the borrower default, the lender has legal recourse to take ownership of the asset pledged. The borrower retains all dividends or other earnings from the asset during the time it is pledged. Some loans contain a negative pledge clause or covenant that limits the borrower from using the pledged asset to secure other loans.
Contractual Lien: In Liens, the lender has the right to retain the property belonging to the debtor until the loan is paid back. The lien is a right that arises under commom law statues instead of a contract unlike a pledge or mortgage. It is imposed by the law of common courts and it was identified not as a remedy but as a right instead. It is valid only till the demands are met and the lien-holder only has possessory rights on the property (A lien holder can’t sell the property). Lien is applicable on movable and immovable property.
Equitable Charge: This doesn’t involve giving the item to the creditor. Instead, it’s more about a legal agreement that says the creditor has a right to certain property if the debt isn’t paid.
Mortgage: This is like an equitable charge, but here, you’re actually transferring the ownership of the property (like a house) to the creditor until the debt is paid. However, you still get to use the property during this time.
So, the main difference is about whether you physically give the item to the creditor or just agree that they have a right to it, and whether or not ownership is transferred.
