#10290 - Banking Consolidation - Finance and Capital Markets

Reasons for Banking

¿Why borrow money?

To make money

¿Why Lend?

To make money

¿Why banking matters?

Because people want to make money

Main issues in Banking

First issue:

¿Will the lender get its money bank?

Second issue:

¿Will the borrower be able to make payments when due?

These two issues are the RISKS that the client wants to identify, reduce, manage and eliminate. Everything we did in banking has to do with making sure that these RISKS are dealt with:

Dealing with the risk:

1. Identifying the risk

From Lender’s point of view = Due diligence
From Borrower’s point of view = ¿Is it sound and for the benefit of the Co. to borrow?

2. Protecting against the risk

Reduce the risk to acceptable levels
Manage an on-going risk
Eliminate unacceptable risk (including not lending)

Bank Loans v Bonds

They fundamentally do the same thing, the risks are “in principle” the same
The difference are in “scale” and “practicality”
- Scale = bonds are used for larger amounts (if Co. needs 100s of millions use a Bond, if Co. needs 10s of millions use a loan). Bonds are more expensive to set up therefore they are only economic when raising substantial funds.

- Banks are reluctant (or unable) to lend very large sums because:

a) are required by law to keep a certain amount of money in their accounts

b) the risk may be to high, or

c) because they do not have all the money

- there are more bondholders than banks in a syndicate – so the borrower is spreading the risk as well as the lenders (don’t have to lend large sums).

- Practicality = bonds have very different dynamics:

- Terms are set by the issuer (subject to market advice) not the bank

- No detailed negotiations with bondholders

- No relationship with bondholders

¿Why use a bond? – there are many more potential bondholders willing to invest than banks willing to lend large amounts.

OVERVIEW of BANKING

Unit	Topic	Risk Objective	What it comprises
1	Due diligence Loans = Banks always do them Bonds = typically in the form checking the credit ratings of the Co. (AAA or BB)	Managing the Risk and Identifying/spot risks	Identify the risk: - Company search – is the borrower company well managed and properly run? - Business activities – does the borrower co. have a good prospect for future earnings? Do they have enough contracts? Do the contracts have a break/change of control clause? - Environmental and reputational issues – because the co. has a big problem with contaminated land. The reputation of the co. is bad or is threatened by massive law suits. - Anyone about to sue them? If security is to be taken – is it of high value? Is it good? Once that the risk has been Identified what is going to do next? - Condition Precedent? (See below WS 6) - Representation or Covenant? - repeating or one-off? - Re-work contractual definitions? i.e. changing the definitions to adjust to potential risks - Financial Covenants? i.e. make sure that the management of the co. is going smoothly and if something smells fishy the bank can take action. FC have two purposes: 1 to control the borrower’s fiscal behaviour and 2 to trigger an event of default if finances worsen. These can be used to fulfill purposes 1 and 2. - minimum net worth - current ratio/acid test - EBITDA (i.e. a gross earnings rating) - Cash-flow tests, etc
2	Financial Covenants and LIBOR	Managing the risk and Reducing the risk. By attaching the i rate to LIBOR the bank will make sure that if they have an interbank loan to finance the Co.’s loan then the Bank’s interbank loan will not be compromised	- Security? Get insurance, get the D’s to give personal guarantees, how good is the land. Choice will depend on the nature on the nature of the risk. What is the commercial consequence of the information that is being given to you on the facts and how, depending on whether representing a Lender or a Borrower, you will reduce the risk for you client.
3	Representations & Warranties	Manage the risk & Monitor risk by making borrower give promises about the Co & if they breach the terms or promises are false the bank will regain its money	Part of identifying the risks – forces the borrower to disclose relevant information. Helps manage risk – by triggering events of default Consider drafting techniques – make sure clause does what you want it to do (all reasonable efforts, satisfactory to the agent, will v would etc.)
4	Guarantees	Reducing the risk Reassurance that the money will be able to get the money from someone else	A long history – lots of case law Courts try to protect guarantors (there is actually no real consideration and thus the court will protect them) but, Freedom of contract prevails in English Law, so the Consequence is that: - long, detail provisions - know why each is there and be able to explain them Look at the guarantee document and be able to explain why each one of them is there.
5	Security	Eliminating the risk Reassurance that the money will be able to get the...

#10290 - Banking Consolidation - Finance and Capital Markets

About Oxbridge

More Finance And Capital Markets Samples