SGS 9 (Debt Finance) Flashcards
Effect on balance sheet of debt vs equity?
D: non-current liabilities and gearing increases.
E: equity increases / gearing and EPS decrease.
What is an advantage of debt finance in terms of funding cost?
Floating rate interest (debt may be cheaper than equity if interest rates low)
Loan interest payments are tax deductible.
How might debt finance impact power within the Company?
Any scrutiny?
Loan agreement may give bank significant controls over how the Company manages its affairs through undertakings and covenants.
Loan agreement may contain undertakings requiring company to provide bank with info about finances.
Why is debt finance risky to a company going through financial difficulties?
loan agreement may have financial performance targets .
If bank calls an event of default this could lead to acceleration of loan and enforcement of security.
Give examples of common events of default
breaches of:
financial undertaking, obligations under the loan agreement
subject to insolvency procedure.
Aside from events of default, how can a bank further protect itself?
negative pledge undertaking
security in respect of money owed.
guarantee from another group company.
Security for debt?
Borrower agrees to give lender proprietary rights over an asset to protect lender against non-payment.
What other document aside from a loan agreement is usual for debt finance?
Security document - sets out terms of any security. These are public and certified copies must be registered at CH (s.859A), and another copy kept available for inspection at registered office.
Why are the loan agreement and security documents commonly separate?
Loan agreement is not registrable so commercially sensitive info (interest rate, fees charged etc) can remain confidential. Security documents can be inspected by anyone for a fee (s.859Q(4).
What does a fixed charge give the holder?
What is required for a fixed charge?
equitable rights over the property (cannot sell or deal with it without consent).
Holder has priority rights to sale proceeds over other creditors.
Chargeholder must demonstrate sufficient control - borrower gives undertaking not to dispose of, or create further charges over the asset without chargeholder’s consent.
How do fixed charges rank?
In order of creation provided duly registered in accordance with s.859A(4)
Why is it necessary for the borrower’s solicitors to check for a restriction on the company’s power to borrow money / restriction on director’s authority?
ss.39 and 40 mean bank need not worry agreement will be unenforceable for lack of authority BUT shareholders could still get an injunction and directors may be personally liable for any loss.
How is a the loan agreement and security document executed?
LA: simple contract
SD: deed.
What are the first five main steps in a debt finance transaction?
Bank checks finances of borrower & carries out anti-money laundering checks.
Bank sends draft term sheet to borrower.
Solicitors instructed
Borrower’s solicitors check company’s articles for restrictions on lending and authority of directors/
What are the second main set of steps?
Loan agreement and security document negotiated.
BM resolving to enter into the agreements.
LA and SD signed.
Conditions precedent fulfilled and money available
Bank’s solicitors register security at CH (s.859(A).
