Debt Finance Flashcards
What are preference shares?
Shares with a fixed rate of dividend which have a prior claim on profits available for distribution
What are the features of preference shares?
Shares have a fixed percentage dividend payable before ordinary dividends
The dividend is only payable if there are sufficient distributable profits
Preference dividends are not deductible for corporate tax purposes
Advantages of preference shares?
No dilution of control as no voting rights
Preference dividends do not have to be paid in any specific year
Disadvantages of preference shares?
Are not tax deductible
Company needs to pay a higher return to compensate for the additional risk compared to debt
What is a bond/loan note
A negotiable security evidencing a debt governed by a contract which specifie
How may bonds be secured?
A fixed charge over a specified asset
A floating charge over a class of asset which changes
What do holders of unsecured bonds have?
The same rights as unsecured trade creditors
What may bonds be?
Irredeemable or redeemable
What are deep discount loan notes?
Loan notes issued at a large discount to nominal value and redeemable at nominal value on maturity
What do investors in deep discount loan notes receive?
A large capital gain on redemption, but are paid a low coupon during the term of the loan
What are zero-coupon loan notes?
Loan notes issued at a discount to nominal value and which pay no coupon
What are the following advantages of zero-coupon loan notes?
Issuing company pays no interest, only cash payout is at loan note’s maturity
Return to investors is wholly in the form of a capital gai
Interest expense deductible?
It is tax deductible and therefore reduces corporation tax payments
What are convertibles?
Loan notes or preference shares which can be converted into a pre-determined number of ordinary shares
What are the features of convertible loan notes and preference shares?
Pay a fixed coupon or dividend until converted
May be converted into ordinary shares
What advantages to convertibles show?
They are a relatively low-risk investment
They can offer a lower coupon/dividend rate than would have to be paid on a non-convertible loan
What are warrants?
The investor’s right, but not the obligation, to purchase new shares at a future date at a fixed price
Are warrants sometimes attached to loan notes?
Yes, to make loan notes more attractive
What advantages do warrants offer? (coupon rate)
The coupon rate on the loan note will be lower than for comparable straight debt
What advantages do warrants offer? (issuing equity)
Way of issuing equity (albeit with a delay) without the usual negative signal associated with an equity issue
