Debt finance Flashcards
What are Loan Facilities?
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 is an Overdraft?
An on-demand facility where the bank can call for all of the money owed immediately.
Type of loan facility
What is a Term Loan?
A loan with a fixed period of time where the lender cannot demand early repayment.
Type of loan facility
What is a Revolving Credit Facility?
A facility where the lender can repeatedly borrow and repay loans up to an agreed maximum overall amount when it chooses.
Type of loan facility
What are Debt Securities?
In return for finance provided by an investor, a company issues a security acknowledging the investor’s rights.
What is the purpose of a security in Debt Securities?
It acknowledges the debt and can be kept or sold to another investor.
What happens at the maturity date of a security?
The company pays the value of the security back to the holder.
What is a Bond?
A type of debt security issued to investors.
What are Debt/Equity Hybrids?
Financial instruments that combine elements of both debt and equity.
e.g convertible bonds
What are Convertible Bonds?
Bonds which can be converted into shares in the issuer.
What does a bondholder receive in exchange for giving up interest and principal repayment in Convertible Bonds?
Shares in the issuer.
Where will equity finance be recorded in a company’s accounts?
Shares issued at a nominal value:
- Bottom 1/2 - share capital increases
- Top 1/2 - increase in cash therefore current assets increase
Shares issued at a premium:
- Bottom 1/2 - nominal amount shown by an increase in share capital AND premium per share shown in a new share premium account
- Top 1/2 - increase in cash therefore current assets increase
How is gearing calculated?
Long term debt / total equity x 100
Highly geared = lots of loans
How does debt finance affect the BS?
Affects the top half only:
- liabilities increase
- assets increase
No effect on capital
What is a Term Sheet?
Statement of key terms of the transaction (not legally binding).
What does a Loan Agreement set out?
Sets out the main commercial terms of the loan.
What are Representations in a Loan Agreement?
Statements of fact as to legal and commercial matters made on signing of the loan agreement and repeated periodically during the life of the loan.
What are Undertakings in a Loan Agreement?
Promises to do or not to do something.
What is an Event of Default?
Contractual remedies where the breach constitutes an event of default.
What is a Security Document?
Document used if a loan is secured.
Public doc - must be registered at CH. Contains the right to appoint a receiver
What are Debentures?
Either any form of debt security issued by a company or a particular document which creates a security.
What is a characteristic of highly geared companies?
They are seen as more of a credit risk due to having less equity to protect lenders.
Why do highly geared companies need to make more profits?
They need to make more profits before interest and tax to meet demands for interest payments.
What is an advantage of high gearing for a company?
A company can make a far bigger investment than it could have made using just its own resources.
