Debt finance Flashcards
Why is it difficult to raise equity finance for private companies?
Cant offer shares to public
What are the types of debt finance?
Loan facilities
Debt securities
What is a loan facility?
Agreement between borrower and lender which gives borrower right to borrow money on agreed terms.
What can a loan facility include?
- Overdraft
- Term loan
Why are overdrafts unsuitable?
Bank can demand repayment at any time
What are term loans?
loan for fixed period of time repayable on certain date
What is a revolving credit facility?
loan for period of time but can repeatedly borrow and repay up to agreed maximum
What is a debt security?
Company issues a security acknowledging investor’s rights from finance provided
What form does a debt security take?
Piece of paper
Can a debt security be transferred?
Yes can be sold
What is an example of a debt security?
A bond
What are the types of hybrid debt finance?
- convertible bonds
- preference shares
What are convertible bonds?
Can be converted into shares with agreement to give up right to receive interest and repayment
What are preference shares?
no voting rights and definite amount of dividends paid before other shareholders
What are the debt finance documents?
Term sheet
loan agreement
security document
Is a term sheet legally binding?
No
What is the common meaning of debenture?
Security document which is sent to companies house for registration
What are forms of securities?
- Pledge
- Lien
- Mortgage
- Charge
How is a mortgage different to a charge?
Mortgage - retain possession but ownership transferred to creditor
charge - retain possession but equitable proprietary interest created in favour of creditor
What is a fixed charge?
Creditor can control what provider can do with asset (disposing and charging of it)
What is a floating charge?
Floats over class of circulating/fluctuating assets
What is crystallisation?
floating charge stops floating and fixes to assets owned at time
What kind of security is taken over property?
Charge by way of legal mortgage
What kind of security is taken over vehicles?
Fixed
What kind of security is taken over stock?
Floating
What kind of security is taken over cash in the bank/book debts?
Floating (depending on type of bank account)
What kind of security is taken over IP/goodwill?
Fixed
What kind of security is taken over plant and machinery?
Fixed
Are guarantees a security?
No
What is a guarantee?
Agreement that guarantor will pay borrower’s debts if borrower fails
What are the requirements to register a charge at companies house?
Delivered within 21 days (starting day after of creation of charge):
- statement of particulars
- certified copy of charge
- relevant fee
What is issued when a charge is registered?
certificate of registration
Who can register a charge?
Company creating charge or lender
What are the consequences of failing to register a charge?
- Charge is void against liquidator, administrator and any creditor
- Debt is immediately payable
What are the recordkeeping requirements for charges?
- any instruments amending available for inspection
- kept at registered office or other place permitted
- inform companies house where kept
- free for inspection by creditors or members, or precribed fee for others
What are the consequenes for not following the recordkeeping requirements for charges?
Offence, liable to a fine
What is the order of priority on winding up?
- Creditors with fixed charges
- Preferential creditors
- Creditors with floating charges
- Unsecured creditors
- Shareholders
What happens on winding up where more than one creditor has a fixed charge against the same asset?
First created charge has priority
Can the order of priority be varied?
Yes
What are the changes on the balance sheet when issuing shares at the nominal value?
- Increase in share capital (bottom half)
- Increase in cash (top half)
What is premium?
Amount paid over nominal value of shares
How is the price of a share calculated?
value of company ÷ number of shares in issue
What is the effect on the balance sheet of issuing shares at more than their nominal value?
Top half:
* Cash received from SHs shown by increase in assets
Bottom half:
* Nominal value of new shares shown by increase
* Premium is shown in newly created share premium account
How is earnings per share calculated?
Profit after tax ÷ average number of ordinary shares in issue while profit generated
What are the changes on the balance sheet for debt finance
Top half:
* Liabilities increased by amount of loan
* Current assets increased by loan funds
How is gearing calculated?
Long term debt ÷ equity x 100%.
