Introduction to Debt Finance Flashcards
What are the 3 main ways a company can raise funds?
1.** Equity Finance** - investors provide capital in return for shares in the company;
2. Debt Finance - investors provide capital for a limited period in return for periodic interest payments; and
3. **Retained Profit **- if a company is making profits, it can retain all or some of the profits to finance the business rather than distributing them by way of dividend.
What factors influence the choice of financing option for a company?
The purpose of the finance, the type of company, its history, future plans, and relevant market conditions.
What is debt in the context of corporate finance?
Debt involves raising money through loans or capital market instruments like bonds, with an agreement to repay the capital amount and interest over time.
What are the main types of loan facilities a corporate borrower can use?
1) Term loan
2) Revolving credit facility
3) Overdraft
How does a company raise funds through a bond?
Companines can raise funds by issuing a capital markets instrument, such as a bond.
The company issues a bond to investors in return for the capital amount borrowed. The company will agree to repay the capital borrowed on a specified date and pay interest to investorys during the bond’s lifetime.
What does the term ‘capital markets’ refer to?
The global market where investors provide finance to corporations, governments, and other issuers in hopes of making a profit on their investment.
What is required when a bond is offered to the public or admitted to trading on a regulated exchange?
A bond prospectus, which discloses extensive information about the company and its finances, is required to comply with regulatory and disclosure requirements.
What is the difference between a bilateral loan and a syndicated loan?
A bilateral loan involves two parties (the borrower and lender) and is often used for smalled loan amounts, while a syndicated loan involves multiple lenders and requires one lender to act as the arranger.
What is the role of the arranger in a syndicated loan?
The arranger is responsible for putting together the group of lenders in a syndicated loan and managing the process.
What is the role of the facility agent in a syndicated loan?
The facility agent acts as a representative of the lenders and arrangers, handling administrative tasks and ensuring the loan agreement is followed.
What is the fiduciary relationship between an agent and their principal?
The agent is a person authorised to act for another. They must act in the best interests of the principal, avoid conflicts of interest, and account for all money and property received and not make secret profit.
The loan agreement will limit the exposure of the agent through express provisions, namely:
- agent’s duties are precisely defined and are mainly restricted to administrative tasks
- The loan agreement will also exclude any liability of the arranger or agent for breach of fiduciary duties and liability to account to any lender for any other profits.
- the agent will protect itself by seeking instructions from the syndicate lenders, which will expressly absolve it of liability (e.g., when deciding whether to call an event of default).
- If the syndicate is taking security for the loan an entity known as a security trustee or security agent will be appointed to hold the security for the benefit of all
What is the role of a security trustee or security agent in a syndicated loan?
The security trustee or agent holds the security for the benefit of all lenders involved in the syndicated loan.
What types of debt providers exist in the commercial loan market?
Debt providers include traditional banks (e.g., Barclays, HSBC), investment banks (e.g., JP Morgan, Goldman Sachs), credit funds, and institutional asset managers (e.g., Legal & General, M&G plc).
How is a loan facility documented?
- In a loan agreement, commonly referred to as a ‘facility agreement’, ‘facility’ or ‘credit agreement’.
- A legally binding document between a lender, any other finance parties and the borrower.
- Sets out the terms on which the lender is prepared to loan the money to the borrower and the mutual obligations of each party.
What elements must a loan agreement satisfy?
offer; acceptance; consideration and intention to create legal relations.
A party must have the legal capacity to contract. Without capacity the contract may not be valid and, if so, it won’t be enforceable.
How do companies have capacity to contract?
- A registered company on incorporation has legal personality and the capacity to contract.
- Any person authorised by the company can enter into a contract on behalf of a company.
- Every director and the company secretary are authorised signatories to a contract.
- This is subject to any restrictions on borrowing in the company’s constitutional documents.
Steps of a loan transation
- Commonly a borrower will approach its relationship bank with a need to raise finance.
- The arranger bank will commence an initial due diligence process (investigation and credit analysis) with the relationship manager putting together an initial package of terms for the loan.
- The lender’s credit committee will then be consulted for approval of the lending terms.
- A term sheet will be agreed between the lender and the borrower. Solicitors will be instructed by both parties.
- Solicitors commence legal due diligence & drafting / negotiation of documentation.
- Signing and completion. Provided any conditions precedent are satisfied, the borrower can draw down funds.
What is the initial step for a corporate borrower to raise money through a loan?
The borrower approaches their relationship bank and discusses financing needs with the relationship manager.
Who typically makes the initial approach for a loan in a company?
The finance director (for small companies) or the corporate treasurer (for large companies) usually makes the initial approach.
What is a “facility agreement”?
A facility agreement is a legally binding document between a lender and a borrower that sets out the terms on which the lender is prepared to loan the money.
