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Work Shop 1 B&CM
There are two main types of debt finance: Loans (bank overdraft, a term loan and a revolving credit facility) and Debt Securities to investors in return for a cash payment (IOUs). IOUs have to be redeemed (i.e. repaid) by the Co. at an agreed future. Type Advantages DisadvantagesAllows financial planning. But withdrawing the money is not as flexible as the Revolving Credit Facility Term Loans P.20Once capital has been (but may still be able toSpecific sum for a specific repaid, it can't be rewithdraw in "tranches"). period borrowed by the Co. (butCertainty of term as notRepayment date is set if loan was subject to repayable on demand as ("term") "bullet repayment" it with overdrafts (unlessUsed to purchase a capital may be re-negotiated) borrower defaults)Time and expense of assetCash can be tied up by theCan be bilateral or syndicated agreeing contract + all borrower without worry the legal documentationMay be secured or unsecuredBorrower has more control "Committed" i.e. gives bank NO discretion before advancing $Flexibility of overdraft as may withdraw in Revolving Credit Facility P.22 "Tranches" at will.A working capital facility butCertainty of term as not ? Often subject to more much larger than an overdraft repayable on demand as restrictions thanGood for seasonal Co.s whose with overdrafts overdrafts (such as notice income fluctuates thru theBorrower can draw down periods to draw or repay, year. max or min amounts, and then repay funds toMaximum aggregate amount frequencies) reduce interest payments can be borrowed over a setMay be secured or ? A commitment fee is period normally payable unsecured bilateral orUsually subject to a 'cleanNeed to 'clean down' syndicated down' provision to stop"Committed" i.e. gives borrower misusing the facility bank NO discretion before advancing $Payable on demand even if borrower has notVery flexible defaulted (but bank willFew formalities (doc's) Overdraft P.20 not pull the plug and requiredIt's tool to aid cash flow by demand repaymentEasy instant access to without good reason) providing a reserve of easily fundsExpensive form of accessible money to meetEasily supply daily needs shortfall in working capital borrowing"Uncommitted" bank isAids cash flow on day to dayUsually unsecured (bad not obliged to advance basis for bank) money at borrower'sShows as a current liability onLittle room for request. A Co.'s attempt to the balance sheet negotiating its terms with withdraw money in excessGiven on lender's standard the lender. of its funds is regarded asFee and interest payable terms with a maximum limit an offer, which the bank by Co. accepts by providing the $Subject to a capped amount. Debt Securities PCommercial Papers are anIssued to investors by a Co. to alternative to short term raise money. Investors give borrowing from a bank - 12 cash to Co. & Co. promises months repayment + interests.Bonds are long term debtEssentially an IOU (a signed alternative + 12 months. In document acknowledging a London Stock Exchange debt)EMTN is medium/long term
Debt Loan Securities
Debt Loan Finance
Type of Debt Finance
Work Shop 1 B&CM E.g. commercial paper, bonds or EMTN programme Debentures P.The Common Law defines them as "A document that creates a debt or acknowledges one"debt alternative.A company must send a copy of their accounts to every debenture holder (s.423(1))
Work Shop 1 B&CM
Executing Docs: Lender's Searches
1. Due Diligence on companies' finance and business plan a. Financial performance of Co. The Bank will want to see the Co.'s
Balance Sheet and other financial documents, like interim and management accounts in order to run tests on liquidity, finance and prospects of the Co : i. Acid test + Current ratio Test (See Note on Tests) b. Group Information = Bank will want to carry out more Co. and group searches
2. Money laundering checks
3. Documents: a. Articles and Co. Registration. Check factual information about the Co. (Name, Accounting Period, Company Number) b. Articles: Directors Authority: can the Directors borrow, guarantee,
buy or sell property as relevant? (MA-3 / TA-70).???
Unless company's articles restrict its objects, they are unrestricted. (s31 CA 2006). If Incorporated under old act ? check if they have incorporated s31 CA 2006 If not, check articles for specific restrictions to objects (e.g. relating to borrowing, guarantees, security) Bank could rely on s39 ? contract with 3rd party dealing with Co. in good faith will not be ultra vires. BUT Bank unlikely to so because s39 is only linked to capacity to act under the constitution. - doesn't cover anything going wrong with the agreement outside the capacity under the const. E.g. illegality. Bank could make company incorporate s31 into their articles via SR of SHs.
c. Can Co. grant security over its assets? (MA no restriction but check
d. e. f. g.
articles TA=Check articles)(remove restriction by S'holder SR s 21 CA 2006) Certificate of incorporation of the company Other mortgages charged against eh Co.'s property (Check Companies House) Check Co.'s land title (Land Registry) Prior charge documentation (for negative pledges)
h. Minutes showing board resolutions approving the terms of the loan
Actual Authority Can be given by articles, but check for restrictions on limits and appointing an attorney to execute a document and agree to last minute changes. An agent cannot have actual authority to bind Co. to a transaction which is not for the purpose of, or reasonably incidental to, attaining or pursuing the Co.'s objects (Rolled Steel Products (H) Ltd v BSC) Apparent Authority - s40 CA 2006 The bank's solicitor should ensure that the borrower holds a board meeting which explicitly addresses the implications for the borrower of executing the facility agreement and any ancillary documentation, and authorising the Co. to execute all the documentation through specified agents (eg, the directors). The meeting must satisfy any conditions as to quorum, and certified copies of the minutes should be required as a condition precedent to utilisation.
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