#3277 - Advantages & Disadvantages Of Lending & Debt Securities Crib Sheet - Finance and Capital Markets

Advantages/Disadvantages Lending & Debt Securities (Borrower’s Perspective)

1. Advantages of Lending

   1. Quick

      1. Can take less than 6 weeks

   2. Cost

      1. Cheaper to set up

      2. Does not require underwriting

   3. Confidentiality

      1. Others do not have to know about it

   4. Flexibility

      1. Ability to draw down the loan

      2. Repayments can be varied

   5. Multi-currency option

   6. Credit Ratings

      1. A Company can have a low credit rating or uncertainty over cash flow in a loan

         1. Although if the borrower is at investment grade then it will obtain more favourable terms in a loan agreement

   7. Business relationships

      1. Borrowers know who the lenders are
         

2. Advantages of Debt Securities

   1. Lower interest rates

      1. Normally 500 million is the minimum in the Capital Markets, but the large amount borrower does experience lower interest rates

      2. There are more investors in the Capital Markets, therefore the risk is more spread out resulting in greater liquidity

      3. The bonds are transferable

      4. Regulatory costs are lower

   2. Unsecured

      1. Debt Securities are often unsecured

   3. Less onerous

      1. Minimum restrictive covenants

      2. Investors do not have too much scope to negotiate

   4. Liability

      1. Joint & Several liability between the co-managers

      2. Underwriting

         1. Guarantee that the borrower will receive all its money

   5. Financial Information

      1. Borrower does not need to release a multitude of financial information to investors after the issue
         

3. Disadvantage of Lending

   1. Restrictions

      1. A borrower will be subject to a multitude of covenants, undertakings, warranties and indemnities that can restrict its functioning

      2. There is little room for negotiation by the borrower

   2. Financial Information

      1. A bank will require a borrower to release various information to it before it will agree to lend

   3. Secured

   4. Higher interest rates

      1. Regulatory costs of borrower

      2. Mandatory fees of the bank

4. Disadvantages of Debt Securities

   1. Business relationships

      1. A borrower invariably does not know who its lenders are so cannot foster a business relationship

   2. Rigidity

      1. As a borrower does not know who its investors are, agreements are less flexible and there is little leeway on varying interest repayments

   3. Credit Rating

      1. A borrower will require an investment grade rating or have ‘junk bonds’

   4. Public

      1. As traded on the markets, there is minimal scope for confidentiality
         

5. Factors to consider when choosing between the two:

   1. Are there competitors?

      1. Lending is quicker to establish

      2. Lending is more confidentiality so competitors do not need to know the company is raising the requisite finance for the bid

   2. Can the borrower pay the expenses?

      1. Lending is cheaper to set up

      2. Lending also can involve a revolving credit facility which means interest is not paid on money which is not needed at the start

   3. Does the borrower need the money all in one go?

      1. Lending can have a revolving credit facility and drawdowns

   4. Is a foreign group involved?

      1. Lending can involve a multi-currency option

   5. Does a borrower have a long-standing relationship with a bank

      1. Lending can strengthen business relationships

   6. How much is being borrowed?

      1. The larger the amount, the more favourable it is to go into the capital markets because of the lower interest rates

   7. Are there any assets to be secured, or is there a dissenting director...