NOTICE: It is unlawful to send these notes to anyone. Hopefully you find the notes helpful, and in return I ask that you please don't send them on to others. To share them, please direct people to download the notes at https://liamporritt.com, where 99% of my notes are available for free. Debt Finance · Loan facility - agreement between borrower which gives the borrower the right to borrow money on terms set out in the agreement · Debt security (bond) - in return for finance, a piece of paper (security) acknowledging the investor's rights is issued = can be kept or sold Types of debt Loan Facilities · Overdraft - on-demand, meaning bank can call for all money to be paid back at any time · Term loan - committed - borrowed for a fixed period and for a fixed purpose, repaid on maturity date o Repaid in single lump sum = bullet repayment o Repaid in instalments = amortising Debt Securities . Bonds - issuer promises to repay the value of the bond to the holder at maturity = capital markets Debt / equity hybrids . Convertible bonds - can be converted into shares in the issuer = debt securities until converted into shares, following which they become equity securities · Preference shares - equity, often with no voting rights, with a definite amount of dividend ahead of other shareholders o If fixed maturity date on which company must redeem / purchase the share and/or dividend fixed + cumulative = more like a debt o If no fixed maturity and/or dividend conditional on company declaring dividend = more like equity Debt finance documents . Term sheet - bank and borrower/issuer agree key terms of transaction · Loan agreement - commercial terms of the loan, generally for committed facilities (i.e. term loans) · Security document - assets taken by way of security and undertakings re: secured assets @ Liam Porritt 2020 1
Loan Agreement · The main provisions of a typical committed facility agreement can be divided into the following categories: o conditions precedent to the lender's obligations to lend; § Security executed by the group § Financial statements § Board minutes approving execution of facility § Business plan § Regulatory approval § Copies of acquisition / transaction agreements o representations, covenants, events of default and mandatory prepayment events; § Means by which lender has control over the borrower § Usually allow a grace period for the remedy of potential events of default, before they become actual events of default allowing repayment § Representations - legal (e.g. authority) + commercial § Covenants -e.g. to provide financial information re: borrower; not to spend certain amounts of money / drop below certain ratios o provisions dealing with the mechanics of the facility, i.e. the manner in which it can be utilised and when it has to be repaid; con Term loan or revolving credit facility o provisions setting out the commercial return the lender is charging for the facility (i.e. interest rate