Corporate Finance (I)
Structure of the Lecture
1) Sources of Financing
2) 2. Debt Finance
a) a. Types
b) b. Debentures
c) c. Company Charges
3) 3. Equity Finance
a) a. Shares and Classes of Shares
b) b. Legal Capital
c) c. Raising Capital (legal and equity capital)
Sources of Financing
1) Debt
a) Bank loans
b) Bonds
c) Trade creditors
d) Asset and trade financing
2) Equity
a) Issuance of shares
i) Ordinary
ii) Preference
iii) Redeemable
iv) Convertible
(1) Debentures that can convert into shares (SAFEs?)
3) Retained earnings
a) Profits that have not been spent or repaid to investors
4) Lease financing: for accounting purposes this is often treated as a term loan but for
financing purposes - it is distinct from debt or equity
a) Youre using this machine for which you pay for (hire purchase kind of thing)
b) The use of assets, without necessarily purchasing it
5) When talk about capital its about needing money.
a) Could be start up costs
b) Working capital
c) Capital for particular project/transaction
d) Perhaps as simple as solving a fin crisis
6) Typically a mixture of Debt and Equity finance
a) Some jurisdictions prefer one or the other
, 7) Going for debt capital means you get to hold on to control of coy, while w/ eq fin you’re
giving up control of coy
8) When deciding to what extent to use Debt or eq financing, its comm decision
Debt Finance: borrowing money
Debt finance
1) What is ‘Debt Finance’?
2) ! How do you determine the appropriate method of debt financing?
3) ! What is a debt security [CA2006 debentures]?
4) ! What forms do debt securities take?
5) ! What are bilateral and syndicated loans?
6) ! What forms do borrowings from bank take?
7) Can divide into
a) Loan capital (normal bank loans)
b) Debt security (FIs)
c) Vendor financing, securitisation
8) Issuer of debt security promise to pay the principal upon maturity, alongside interest
payments
a) Common debt security is bonds
b) Eg: govt bonds (diff ratings)
c) Bonds usually have maturity of one year
d) Shorter term debt security are : Notes
e) Commercial paper: shortest form of debt security: less than one year
9) Debt securities are freely transferable, bought and sold on open market
10) When you talk about debenture, you mean these are secured, and usually, the security
is in form of FLC
Loans
11) Can be either bilateral or syndicated loan
12) Bank loans tailored to needs of borrower
13) Shortest form of lending = overdraft
a) Common factor is its repayable after set period of time (usually 1 month)
14) Term loan
a) Loan repayable in full after a set period
b) Terms set out, and usually involves interest payment
15) Revolving facility
, a) Borrower is able to draw upon fund of money made available by lender (common
form of lending for large projects)
b) Can reborrow sums of money that has already been repaid
c) Fac revolves
Advantages of Debt securities vs Loans
1) Debt securities
a) Broad investor base
b) Ability to trade
c) fewer/ less stringent covenants
i) Might disclose less info
d) Flexible interest options
e) Frequently unsecured
f) Limited disclosure of information
i) Beyond like a prospectus for debt investors, the DD would be minimal,
unlike if it were a bank loan
ii) Usually limited to info thats publicly available
g) Cheaper and more flexible
h) More demanding (interest and capital)
2) Loans
a) Flexibility as to the draw down of funds
b) Flexibility as to repayments-instalments, revolving, etc.
c) Currency swaps possible in syndicated loans
d) Terms are pte
i) Banks do do DD, but terms are pte, so should be kept pte, whereas in
debt security, such info would become publicly available
e) (Re)negotiation of terms is possible
f) Not limited to established coys of sufficient size and credit worthiness
3) Debt capital is not legal capital, whereas eq capital IS legal capital
a) So limited in what you can and cannot do
b) Not to say debt capital is the only thing to use, but there are some advantages of
debt capital
4) Size of coy does affect ability to issue debentures
Debentures
1) REMEMBER, statutory debenture is not the commercial definition. Statutory debenture
simply means a debt security (also incls: secured/unsecured)
2) CA 2006 s 738 “…debenture” includes debenture stock, bonds and any other securities
of a company, whether or not constituting a charge on the assets of the company;”
3) Can be redeemable
, 4) Security”…is created where a person (‘the creditor’) to whom an obligation is owed by
another (‘the debtor’) …in addition to the personal promise of the debtor to discharge the
obligation, obtains rights exercisable against some property in which the debtor has an
interest in order to enforce the discharge of the debtor’s obligation to the creditor.” Bristol
Airport v Powdrill [1990] 2 WLR 1362 at 1372 per Browne-Wilkinson VC:
5) Why is security granted and why is security taken?
a) Because want ensure debt is repaid
b) To give you priority
c) Have also, by way of security, control of the use of that asset
d) Right to enforce security if insolvency, breach of terms
6) Whats the diff between having security or not
a) Protection
b) Debtor coy would likely give out less interest
c) If unsecured, then to hedge against risk, ask for higher interest
Registration of charges
1) Registration of charges: CA 2006 s 859A (21 day invisibility problem)
2) Charge for purposes of registration includes a ‘mortgage’:CA 2006 s 859A (7)
3) Issues with respect to ‘characterisation’ : charge or transfer of beneficial ownership?
4) Must be created by the company
5) What is the effect of non-registration? S 859H
a) Ensure that charges are sent for registration at CH
b) Ensure that the charges are valid
c) If void, affects borrower, as if void, the money becomes immediately payable
6) Charge is: mortgage, standard security, any other right of security
a) Why register charge?
i) So subsequent lenders know that there is security taken
ii) Reduces possibility of expropriation of coy property
Security for borrowing: Company charges
1) An asset of the company which can be appropriated by lender in the event of
default/insolvency
2) Fixed Charges
3) Floating Charges
a) Crystallisation: at some EOD, FLC crystallises. Hence, ability of borrower to use
rights in regard to the prop freezes
b) When does disposition of property subject to charge take place [s.127 IA 1986]?
Structure of the Lecture
1) Sources of Financing
2) 2. Debt Finance
a) a. Types
b) b. Debentures
c) c. Company Charges
3) 3. Equity Finance
a) a. Shares and Classes of Shares
b) b. Legal Capital
c) c. Raising Capital (legal and equity capital)
Sources of Financing
1) Debt
a) Bank loans
b) Bonds
c) Trade creditors
d) Asset and trade financing
2) Equity
a) Issuance of shares
i) Ordinary
ii) Preference
iii) Redeemable
iv) Convertible
(1) Debentures that can convert into shares (SAFEs?)
3) Retained earnings
a) Profits that have not been spent or repaid to investors
4) Lease financing: for accounting purposes this is often treated as a term loan but for
financing purposes - it is distinct from debt or equity
a) Youre using this machine for which you pay for (hire purchase kind of thing)
b) The use of assets, without necessarily purchasing it
5) When talk about capital its about needing money.
a) Could be start up costs
b) Working capital
c) Capital for particular project/transaction
d) Perhaps as simple as solving a fin crisis
6) Typically a mixture of Debt and Equity finance
a) Some jurisdictions prefer one or the other
, 7) Going for debt capital means you get to hold on to control of coy, while w/ eq fin you’re
giving up control of coy
8) When deciding to what extent to use Debt or eq financing, its comm decision
Debt Finance: borrowing money
Debt finance
1) What is ‘Debt Finance’?
2) ! How do you determine the appropriate method of debt financing?
3) ! What is a debt security [CA2006 debentures]?
4) ! What forms do debt securities take?
5) ! What are bilateral and syndicated loans?
6) ! What forms do borrowings from bank take?
7) Can divide into
a) Loan capital (normal bank loans)
b) Debt security (FIs)
c) Vendor financing, securitisation
8) Issuer of debt security promise to pay the principal upon maturity, alongside interest
payments
a) Common debt security is bonds
b) Eg: govt bonds (diff ratings)
c) Bonds usually have maturity of one year
d) Shorter term debt security are : Notes
e) Commercial paper: shortest form of debt security: less than one year
9) Debt securities are freely transferable, bought and sold on open market
10) When you talk about debenture, you mean these are secured, and usually, the security
is in form of FLC
Loans
11) Can be either bilateral or syndicated loan
12) Bank loans tailored to needs of borrower
13) Shortest form of lending = overdraft
a) Common factor is its repayable after set period of time (usually 1 month)
14) Term loan
a) Loan repayable in full after a set period
b) Terms set out, and usually involves interest payment
15) Revolving facility
, a) Borrower is able to draw upon fund of money made available by lender (common
form of lending for large projects)
b) Can reborrow sums of money that has already been repaid
c) Fac revolves
Advantages of Debt securities vs Loans
1) Debt securities
a) Broad investor base
b) Ability to trade
c) fewer/ less stringent covenants
i) Might disclose less info
d) Flexible interest options
e) Frequently unsecured
f) Limited disclosure of information
i) Beyond like a prospectus for debt investors, the DD would be minimal,
unlike if it were a bank loan
ii) Usually limited to info thats publicly available
g) Cheaper and more flexible
h) More demanding (interest and capital)
2) Loans
a) Flexibility as to the draw down of funds
b) Flexibility as to repayments-instalments, revolving, etc.
c) Currency swaps possible in syndicated loans
d) Terms are pte
i) Banks do do DD, but terms are pte, so should be kept pte, whereas in
debt security, such info would become publicly available
e) (Re)negotiation of terms is possible
f) Not limited to established coys of sufficient size and credit worthiness
3) Debt capital is not legal capital, whereas eq capital IS legal capital
a) So limited in what you can and cannot do
b) Not to say debt capital is the only thing to use, but there are some advantages of
debt capital
4) Size of coy does affect ability to issue debentures
Debentures
1) REMEMBER, statutory debenture is not the commercial definition. Statutory debenture
simply means a debt security (also incls: secured/unsecured)
2) CA 2006 s 738 “…debenture” includes debenture stock, bonds and any other securities
of a company, whether or not constituting a charge on the assets of the company;”
3) Can be redeemable
, 4) Security”…is created where a person (‘the creditor’) to whom an obligation is owed by
another (‘the debtor’) …in addition to the personal promise of the debtor to discharge the
obligation, obtains rights exercisable against some property in which the debtor has an
interest in order to enforce the discharge of the debtor’s obligation to the creditor.” Bristol
Airport v Powdrill [1990] 2 WLR 1362 at 1372 per Browne-Wilkinson VC:
5) Why is security granted and why is security taken?
a) Because want ensure debt is repaid
b) To give you priority
c) Have also, by way of security, control of the use of that asset
d) Right to enforce security if insolvency, breach of terms
6) Whats the diff between having security or not
a) Protection
b) Debtor coy would likely give out less interest
c) If unsecured, then to hedge against risk, ask for higher interest
Registration of charges
1) Registration of charges: CA 2006 s 859A (21 day invisibility problem)
2) Charge for purposes of registration includes a ‘mortgage’:CA 2006 s 859A (7)
3) Issues with respect to ‘characterisation’ : charge or transfer of beneficial ownership?
4) Must be created by the company
5) What is the effect of non-registration? S 859H
a) Ensure that charges are sent for registration at CH
b) Ensure that the charges are valid
c) If void, affects borrower, as if void, the money becomes immediately payable
6) Charge is: mortgage, standard security, any other right of security
a) Why register charge?
i) So subsequent lenders know that there is security taken
ii) Reduces possibility of expropriation of coy property
Security for borrowing: Company charges
1) An asset of the company which can be appropriated by lender in the event of
default/insolvency
2) Fixed Charges
3) Floating Charges
a) Crystallisation: at some EOD, FLC crystallises. Hence, ability of borrower to use
rights in regard to the prop freezes
b) When does disposition of property subject to charge take place [s.127 IA 1986]?
