Debt finance Flashcards
(18 cards)
What is a loan facility?
A loan facility is an agreement between a borrower and a lender which gives the borrower the right to borrow money on the terms set out in the agreement.
What are the three types of loan facility?
-Overdraft
-Term loan
-Revolving credit facility
What is a debt security?
In return for finance provided by an investor, the company issues a security acknowledging the investor’s rights. The security is a piece of paper acknowledging the debt, which can be kept or sold onto another investor.
A classic example is a bond.
What are the key debt finance documents?
Term sheet: statement of key terms of the transaction
Loan agreement: sets out main commercial terms of the loan
Security document: if a loan is secured, a separate security document will be negotiated and entered into
What are the two meanings of debenture?
Under s738 CA 2006, “debenture” covers any form of debt security issued by a company, including debenture stock, bonds and any other securities of a company, whether or not constituting a charge on the assets of the company.
A debenture is a type of security document and the most commonly used in secured loan transactions. The debenture sets out the details of the security and is sent to Companies House for registration purposes.
What is a security and what is the the main benefit of taking a security?
Security means temporary ownership, possession or other proprietary interest in an asset to ensure that a debt owed is repaid.
The main benefit of taking security is to protect the creditor in the event that the borrower enters into a formal insolvency procedure.
What is a charge?
A charge simply involves the creation of an equitable proprietary interest in an asset in favour of the creditor.
What is a fixed charge?
A fixed charge is a type of security that a creditor takes over a specific asset or assets to secure a debt. If the borrower defaults on the loan, the creditor can seize the asset to pay back the loan.
The assets cannot be sold/changed without consent of the creditor.
If a fixed charge becomes enforceable, what can the creditor do?
If the charge becomes enforceable, the creditor will have the ability to appoint a receiver of that asset or to exercise a power of sale of the asset.
What is a floating charge?
A floating charge is a security interest that a creditor holds over a company’s assets as a whole, or a class of assets, in exchange for a debt. The term “floating” refers to the fact that the charge can change over time as the business’s assets change.
What happens when a floating charge crystallises?
When a floating charge crystallises, it ceases to float over all of the assets in a class and instead fixes onto the assets in the class charged at the time of the crystallisation, preventing the borrower from dealing with those assets.
Why are fixed charges often preferred to floating charges?
Fixed charges rank above a floating charge in the statutory order of priority if a company is wound up.
Floating charges can also be avoided under S245 Insolvency Act 1986, whereas fixed charges cannot.
With floating charges, the security provider has freedom to dispose of the assets in the ordinary course of business, therefore the creditor will not be sure of the value of the secured assets. Fixed charges fix onto a certain class of assets which cannot be disposed of without the creditor’s consent.
What is the time limit for the registration of any charge created by a company with Companies House?
21 days beginning with the day after the day on which the charge is created.
What is the effect of the failure to register a charge within the prescribed time limit?
-the charge is void against a liquidator, administrator and any creditor of the company; and
-the debt becomes immediately payable
What is gearing?
The ratio of debt to equity. It is an important indicator of the financial health of a company.
The higher the ratio of debt to equity, the more highly a company is geared.
What is the formula for calculating a company’s gearing?
Long term debt (non-current liabilities) divided by the total equity multiplied by 100%.
What are the advantages of debt finance?
-Borrowing money can help companies to make bigger investments
-Increasing gearing through debt finance does not dilute shareholders interests like equity finance does
-High level of loan capital compared to equity improves the earnings per share of the shareholders
What are the disadvantages of debt finance?
-Highly geared companies are seen as more of a credit risk
-Less equity to protect creditors therefore higher risk
-Need to make more profits before interest to meet demands for interest payments on loans
