Lecture Week 10 Flashcards
what constitutes the risk evaluation framework?
- macro risk
- industry risk
- company specific risk
- business risk (strategic & transactional risk) / financial risk (gearing & interest cover)
what makes up transactional risk?
cash
raw materials
work in progress
final product
debtors
back to cash (beginning)
corporate restructuring?
necessary when there’s a crisis
what does the legal system ensure regarding payment obligations?
ensures that the performance of payment obligations can be enforced by law
what is the sequential legal process for the enforcement of payment obligations?
- obtain legal judgement
- ## enforce legal judgement
syndicated loan?
multiple banks offering a large loan
security = ?
a tradable financial asset
collateralised in the scenario of insolvency/default
unsecured credit = ?
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
secured credit = ?
disrupts the equality among creditors
secured creditors are entitled under the law to satisfy his/her claim before unsecured creditors (priority) on collateralised assets
what is risk?
risk is an objective entity that can be measured (e.g., credit risk of a borrower is measured via credit score)
what is uncertainty?
an unmeasurable entity and it cannot be anticipated/foreseen
e.g., we cannot predict the next variant of COVID-19
what’s the difference between risk and uncertainty?
measurability
risk can be measured through laws of probability, you’ll never get 100% accuracy
business cycle of a company?
every company has a cycle of life and death
death is the liquidation procedure
what type of risk occurs whenever a sale/purchase is made by a company?
transactional risk
e.g., company may become insolvent, debtors default etc
liquidation = ?
winding up the administrative process through which the company is closed down and terminated
reorganisation/rescue proceeding = ?
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
pari passu = ?
equal ranking
why are unsecured creditors standing on equal footing?
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)
who collects the assets first when a company becomes insolvent?
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
when there are many lenders/creditors, how are the order of priorities settled?
inter-creditor agreement (ICA)
why do some creditors prefer to be postponed in the line of payments?
to charge a higher interest rate during the life of the loans they provide the debtor with and allow it to compound
what is the order of priorities established in an ICA called?
the ‘waterfall clause’
