Debt finance

Question 1

Why is it difficult to raise equity finance for private companies?

Answer 1

Cant offer shares to public

Question 2

What are the types of debt finance?

Answer 2

Loan facilities
Debt securities

Question 3

What is a loan facility?

Answer 3

Agreement between borrower and lender which gives borrower right to borrow money on agreed terms.

Question 4

What can a loan facility include?

Answer 4

• Overdraft
• Term loan

Question 5

Why are overdrafts unsuitable?

Answer 5

Bank can demand repayment at any time

Question 6

What are term loans?

Answer 6

loan for fixed period of time repayable on certain date

Question 7

What is a revolving credit facility?

Answer 7

loan for period of time but can repeatedly borrow and repay up to agreed maximum

Question 8

What is a debt security?

Answer 8

Company issues a security acknowledging investor’s rights from finance provided

Question 9

What form does a debt security take?

Answer 9

Piece of paper

Question 10

Can a debt security be transferred?

Answer 10

Yes can be sold

Question 11

What is an example of a debt security?

Answer 11

A bond

Question 12

What are the types of hybrid debt finance?

Answer 12

• convertible bonds
• preference shares

Question 13

What are convertible bonds?

Answer 13

Can be converted into shares with agreement to give up right to receive interest and repayment

Question 14

What are preference shares?

Answer 14

no voting rights and definite amount of dividends paid before other shareholders

Question 15

What are the debt finance documents?

Answer 15

Term sheet
loan agreement
security document

Question 16

Is a term sheet legally binding?

Answer 16

No

Question 17

What is the common meaning of debenture?

Answer 17

Security document which is sent to companies house for registration

Question 18

What are forms of securities?

Answer 18

• Pledge
• Lien
• Mortgage
• Charge

Question 19

How is a mortgage different to a charge?

Answer 19

Mortgage - retain possession but ownership transferred to creditor
charge - retain possession but equitable proprietary interest created in favour of creditor

Question 20

What is a fixed charge?

Answer 20

Creditor can control what provider can do with asset (disposing and charging of it)

Question 21

What is a floating charge?

Answer 21

Floats over class of circulating/fluctuating assets

Question 22

What is crystallisation?

Answer 22

floating charge stops floating and fixes to assets owned at time

Question 23

What kind of security is taken over property?

Answer 23

Charge by way of legal mortgage

Question 24

What kind of security is taken over vehicles?

Answer 24

Fixed

Question 25

What kind of security is taken over stock?

Answer 25

Floating

Question 26

What kind of security is taken over cash in the bank/book debts?

Answer 26

Floating (depending on type of bank account)

Question 27

What kind of security is taken over IP/goodwill?

Answer 27

Fixed

Question 28

What kind of security is taken over plant and machinery?

Answer 28

Fixed

Question 29

Are guarantees a security?

Answer 29

No

Question 30

What is a guarantee?

Answer 30

Agreement that guarantor will pay borrower’s debts if borrower fails

Question 31

What are the requirements to register a charge at companies house?

Answer 31

Delivered within 21 days (starting day after of creation of charge):
- statement of particulars
- certified copy of charge
- relevant fee

Question 32

What is issued when a charge is registered?

Answer 32

certificate of registration

Question 33

Who can register a charge?

Answer 33

Company creating charge or lender

Question 34

What are the consequences of failing to register a charge?

Answer 34

• Charge is void against liquidator, administrator and any creditor
• Debt is immediately payable

Question 35

What are the recordkeeping requirements for charges?

Answer 35

• 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

Question 36

What are the consequenes for not following the recordkeeping requirements for charges?

Answer 36

Offence, liable to a fine

Question 37

What is the order of priority on winding up?

Answer 37

1. Creditors with fixed charges
2. Preferential creditors
3. Creditors with floating charges
4. Unsecured creditors
5. Shareholders

Question 38

What happens on winding up where more than one creditor has a fixed charge against the same asset?

Answer 38

First created charge has priority

Question 39

Can the order of priority be varied?

Answer 39

Yes

Question 40

What are the changes on the balance sheet when issuing shares at the nominal value?

Answer 40

• Increase in share capital (bottom half)
• Increase in cash (top half)

Question 41

What is premium?

Answer 41

Amount paid over nominal value of shares

Question 42

How is the price of a share calculated?

Answer 42

value of company ÷ number of shares in issue

Question 43

What is the effect on the balance sheet of issuing shares at more than their nominal value?

Answer 43

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

Question 44

How is earnings per share calculated?

Answer 44

Profit after tax ÷ average number of ordinary shares in issue while profit generated

Question 45

What are the changes on the balance sheet for debt finance

Answer 45

Top half:
* Liabilities increased by amount of loan
* Current assets increased by loan funds

Question 46

How is gearing calculated?

Answer 46

Long term debt ÷ equity x 100%.