Lecture Week 10

Question 1

what constitutes the risk evaluation framework?

Answer 1

• macro risk
• industry risk
• company specific risk
• business risk (strategic & transactional risk) / financial risk (gearing & interest cover)

Question 2

what makes up transactional risk?

Answer 2

cash
raw materials
work in progress
final product
debtors

back to cash (beginning)

Question 3

corporate restructuring?

Answer 3

necessary when there’s a crisis

Question 4

what does the legal system ensure regarding payment obligations?

Answer 4

ensures that the performance of payment obligations can be enforced by law

Question 5

what is the sequential legal process for the enforcement of payment obligations?

Answer 5

• obtain legal judgement
• ## enforce legal judgement

Question 6

syndicated loan?

Answer 6

multiple banks offering a large loan

Question 7

security = ?

Answer 7

a tradable financial asset

collateralised in the scenario of insolvency/default

Question 8

unsecured credit = ?

Answer 8

in the event of debtor’s insolvency, all creditors are treated on an equal level

no creditor is allowed to satisfy his/her claims from the assets of the debtor before the other creditors

Question 9

secured credit = ?

Answer 9

disrupts the equality among creditors

secured creditors are entitled under the law to satisfy his/her claim before unsecured creditors (priority) on collateralised assets

Question 10

what is risk?

Answer 10

risk is an objective entity that can be measured (e.g., credit risk of a borrower is measured via credit score)

Question 11

what is uncertainty?

Answer 11

an unmeasurable entity and it cannot be anticipated/foreseen

e.g., we cannot predict the next variant of COVID-19

Question 12

what’s the difference between risk and uncertainty?

Answer 12

measurability

risk can be measured through laws of probability, you’ll never get 100% accuracy

Question 13

business cycle of a company?

Answer 13

every company has a cycle of life and death

death is the liquidation procedure

Question 14

what type of risk occurs whenever a sale/purchase is made by a company?

Answer 14

transactional risk

e.g., company may become insolvent, debtors default etc

Question 15

liquidation = ?

Answer 15

winding up the administrative process through which the company is closed down and terminated

Question 16

reorganisation/rescue proceeding = ?

Answer 16

a process where the company is kept alive as a viable business

e.g., restructuring of its shareholding capital or selling parts of the business to enable continuation

Question 17

pari passu = ?

Answer 17

equal ranking

Question 18

why are unsecured creditors standing on equal footing?

Answer 18

because each one of them do not possess any collateral on the assets

for these reasons, it says that unsecured creditors rank pari passu (equal ranking)

Question 19

who collects the assets first when a company becomes insolvent?

Answer 19

secured creditors

they have security over the assets and have a priority to be paid first opposed to an unsecured creditor, who have no collateral

Question 20

when there are many lenders/creditors, how are the order of priorities settled?

Answer 20

inter-creditor agreement (ICA)

Question 21

why do some creditors prefer to be postponed in the line of payments?

Answer 21

to charge a higher interest rate during the life of the loans they provide the debtor with and allow it to compound

Question 22

what is the order of priorities established in an ICA called?

Answer 22

the ‘waterfall clause’