Debt finance

Question 1

What are the key terms in a term sheet?

Answer 1

• loan amount
• interest rate
• fees to be paid
• key representations
• undertakings
• events of default to be included in the loan agreement
• bond terms and conditions

Question 2

What are the main commercial terms in a loan agreement?

Answer 2

• Amount of interest
• dates on which interest will be paid
• the date on which principal needs to be repaid and any fees due.

Question 3

What are set out in a security document?

Answer 3

• What assets are being given by way of security
• The specific type of security which will be taken over each asset
• Any specific provisions or undertakings relating to the secured assets (e.g. an obligation to insure any property and a restriction on the chargor’s ability to sell the asset)

Question 4

How do you calculate geraing?

Answer 4

Long term debt (non-current liabilities) / Equity (total equity) X 100%

Question 5

What is the implication of a highly geared company?

Answer 5

To be seen as more of a credit risk by banks, so they might find it more difficult to raise further loans in the future.

This is because they have less equity to absorb any losses the company might make

Question 6

What does it mean to have a high level of gearing?

Answer 6

The amount of long-term loan capital is very high compared to the amount of shareholder funds (total equity in the balance sheet) in a company.

Question 7

What are the advantages of being highly geared?

Answer 7

Can make a far bigger investment than it could have made if it was just using its own resources.

Increasing gearing can enhance the return to shareholders because raising money through debt finance does not require share dilution through the issue of new shares.

Question 8

What is the advantage of debt finance?

Answer 8

Have no effect on the returns to shareholders

Issuing more shares will mean that the profits are shared between more shareholders.

Question 9

What does amortising mean?

Answer 9

When the loan is repayable in instalments.

Question 10

Why would the lender wants security?

Answer 10

To give the lender control over the assets.

To have temporary ownership, possession or other proprietary interest in an asset to ensure that the debt owed is repaid.

Question 11

What is a bond?

Answer 11

A type of debt security

Each bond is represented by a piece of paper (a security) which records the rights of the investor.

The issuer promises to repay the value of the bond to the holder of the bond at maturity.

Until then, the issuer promises to pay interest to the holder on a periodic basis. (bi-annually)

Question 12

What is the benefit of taking security?

Answer 12

To protect the creditor in the event that the borrower enters into a formal insolvency procedure.

Question 13

How does a pledge work?

Answer 13

It’s a form of security

The security provider (usually the borrower or another company in the borrower’s group) gives possession of the asset to the creditor until the debt is paid back.

Question 14

What is a lien?

Answer 14

A form of security.

The creditor retains possession of the asset until the debt is paid back.

E.g allowing a mechanic to retain possession of a repaired vehicle until the invoice is paid.

Question 15

What sort of security does a charge create?

Answer 15

A charge involves the creation of an equitable proprietary interest in the asset in favour of the creditor.

The security provider retains possession of the asset.

The charging document will give the lender certain contractual rights over the asset if the debt is not paid back when it should be.

Question 16

What are the key element of a fixed charge, and what can the creditor do?

Answer 16

The creditor can control what the security provider can do with the fixed charge assets.

The security provider will promise not to dispose, or create further charges over the charged assets without the creditor’s consent.

Question 17

What is crystallisation and when does it normally happen?

Answer 17

When the floating charge stops floating and fixes to the assets in the relevant class.

A crystallised floating charge is like a fixed charge.

Question 18

When does crystallisation normally happen?

Answer 18

Crystallisation may occur by operation of law or may be triggered by certain events as contractually agreed between the creditor and security provider.

Usually occur when the borrower has breached certain significant terms of the loan agreement - including by reasons of its insolvency.

Question 19

What are the time limit for a company to register any security created?

Answer 19

Under s.859A(2) CA 2006

Within 21 days, a company shall register (either electronically or by paper filing) any security created by the company and any person interested in the charge.

Question 20

What is a 859D statement of particulars?

Answer 20

A statement of particulars relating to a charge created by a company.

Question 21

What is the effect of not registering a charge either within 21 days or not at all?

Answer 21

s.859H provides that:

• the charge is void against a liquidator, administrator and any creditor of the company; and
• the debt becomes immediately payable.

Question 22

What is the order of priority between creditors?

Answer 22

Creditors with fixed charges – first call
Preferential creditors – primarily wages and occupational pensions
Creditors with floating charges – will have crystallised
Unsecured creditors – to the extent not paid off from the prescribed part fund
Shareholders

Question 23

What does a deed of priority do?

Answer 23

Creditors can make specific provision for the order in which they will rank and do not need to rely on the complex and uncertain rules.

The order can be varied by agreement between the creditors. These are for priority among secured creditors.