SGS 9 - Debt Finance for Companies

Question 1

What is a loan facility?

Answer 1

An agreement between a borrower and a lender which gives the borrower the right to borrow money on terms set out in the agreement.

Question 2

What is a debt security (bond)?

Answer 2

• Similar to an equity security (share).
• In return for the finance provided by an investor, a company (the ‘issuer’) issues a piece of paper acknowledging the investor’s rights against the company.
• This piece of paper (a security) can either be kept or sold to another investor
• investors in debt securities have rather different rights from investors in equity securities

Question 3

What is overdraft?

Answer 3

• An on-demand facility - the bank can call for all the money owed to be paid back at any time
• Not usually used as a long-term borrowing facility

Question 4

What is a term-loan?

Answer 4

• Borrowed for a fixed period of time and repaid on a certain date (“the maturity date”).
• Borrower pays interest to the lender on the amount borrowed for the duration of the loan.
• Can be repayable as a single lump sum at the end of agreement - a “bullet repayment” or repayable in installments which is “amortising”.

Question 5

What is a debt security?

Answer 5

• Bonds
• An alternative means to a term loan or overdraft
• A piece of paper issued by a company in return for an amount of money (the principal), it can be traded.
• Bonds are usually issued with the aim of being traded. Whoever holds the bond on maturity will receive the value of the bond back from the issuer.
• company will have to pay the holder back the amount stated on the paper + interest on maturity

Question 6

DEBT/EQUITY HYBRIDS:

What are convertible bonds?

Answer 6

• Bonds which can be converted into shares in the issuer.
• On conversion, the issuer issues shares to the bondholder in return for it agreeing to give up its right to receive interest and repayment of the principal amount invested.
• Has characteristics of both debt and equity, but not at the same time. Starts off as a debt security (a b ond). The investor receives interest and later on, if the investor wants to, the bond is swapped for shares at which point there is no longer any debt element as he becomes an ordinary shareholder.

Question 7

DEBT/EQUITY HYBRIDS:

What are preference shares?

Answer 7

• Wholly equity but often called hybrid b/c it has elements that make it look similar to debt .
• Holders of preference shares usually get a definite amount of dividend ahead of other shareholders and often have no voting rights and