#10312 - Equity Finance And Security - Finance and Capital Markets

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	Disadvantages
Term Loans P.20 Specific sum for a specific period Repayment date is set (“term”) Used to purchase a capital asset Can be bilateral or syndicated May be secured or unsecured	Allows financial planning. But withdrawing the money is not as flexible as the Revolving Credit Facility (but may still be able to withdraw in “tranches”). Certainty of term as not repayable on demand as with overdrafts (unless borrower defaults) Cash can be tied up by the borrower without worry Borrower has more control “Committed” i.e. gives bank NO discretion before advancing $	Once capital has been repaid, it can’t be re-borrowed by the Co. (but if loan was subject to “bullet repayment” it may be re-negotiated) Time and expense of agreeing contract + all the legal documentation
Revolving Credit Facility P.22 A working capital facility but much larger than an overdraft Good for seasonal Co.s whose income fluctuates thru the year. Maximum aggregate amount can be borrowed over a set period Usually subject to a ‘clean down’ provision to stop borrower misusing the facility	Flexibility of overdraft as may withdraw in “Tranches” at will. Certainty of term as not repayable on demand as with overdrafts Borrower can draw down and then repay funds to reduce interest payments May be secured or unsecured bilateral or syndicated “Committed” i.e. gives bank NO discretion before advancing $	Often subject to more restrictions than overdrafts (such as notice periods to draw or repay, max or min amounts, frequencies) A commitment fee is normally payable Need to ‘clean down’
Overdraft P.20 It’s tool to aid cash flow by providing a reserve of easily accessible money to meet shortfall in working capital Aids cash flow on day to day basis Shows as a current liability on the balance sheet Given on lender’s standard terms with a maximum limit	Very flexible Few formalities (doc’s) required Easy instant access to funds Easily supply daily needs “Uncommitted” bank is not obliged to advance money at borrower’s request. A Co.’s attempt to withdraw money in excess of its funds is regarded as an offer, which the bank accepts by providing the $	Payable on demand even if borrower has not defaulted (but bank will not pull the plug and demand repayment without good reason) Expensive form of borrowing Usually unsecured (bad for bank) Little room for negotiating its terms with the lender. Fee and interest payable by Co. Subject to a capped amount.
Debt Securities P Issued to investors by a Co. to raise money. Investors give cash to Co. & Co. promises repayment + interests. Essentially an IOU (a signed document acknowledging a debt) E.g. commercial paper, bonds or EMTN programme	Commercial Papers are an alternative to short term borrowing from a bank – 12 months Bonds are long term debt alternative + 12 months. In London Stock Exchange EMTN is medium/long term debt alternative.
Debentures P. The Common Law defines them as “A document that creates a debt or acknowledges one”	A company must send a copy of their accounts to every debenture holder (s.423(1))

Executing Docs: Lender’s Searches

Due Diligence on companies’ finance and business plan
1. 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 :
  1. Acid test + Current ratio Test (See Note on Tests)
2. Group Information = Bank will want to carry out more Co. and group searches
Money laundering checks
Documents:
1. Articles and Co. Registration. Check factual information about the Co. (Name, Accounting Period, Company Number)
2. 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 3^rd 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.
1. Can Co. grant security over its assets? (MA no restriction but check articles TA=Check articles)(remove restriction by S’holder SR s 21 CA 2006)
2. Certificate of incorporation of the company
3. Other mortgages charged against eh Co.’s property (Check Companies House)
4. Check Co.’s land title (Land Registry)
5. Prior charge documentation (for negative pledges)
6. Minutes showing board resolutions approving the terms of the loan or guarantee

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.

Are all the Ds are who they say they are (register of Ds and AP01s) any issues with D’s likely to be resolved?
Is the Property owned by the Co. and theirs to deal with (title deeds, LR, specialist searches, etc.)?
1. Is the property valuable?
2. What is the condition of the property, marketable and easy sellable?
3. Are there any issues attached to the Co. (environmental Problems, Planning permissions etc.)
Survey and value the assets to see that you’re getting your money’s worth
Insolvency search(Companies Court)

Distribution of Assets on Liquidation

Assets are distributed in accordance to the order in ss.175, 176A and 176ZA IA 1986:

Fixed Charge Holder

The asset will be sold and the debt satisfied with the proceeds. Any shortfall in price for the debt will rank as an unsecured creditor (stage 6)

Liquidator’s Expenses
Preferential Creditors
Such as employees’ wages. Wages for work done in the 4 months before insolvency at a maximum of 800 per person (Sch 6 Para 9) as well as Occupational Pension Schemes
Ring-fencing for Ordinary Unsecured Creditors
Secured creditors do not benefit of ring-fencing for any unsecured portion of their debts (Re Airbase (UK))
50% of the first 10,000 net assets after the preferential creditors have been satisfied
20% of the balance remaining on it
Maximum of 600,000 may be ring-fenced
Post-15/09/03 Floating Charge Holder
Ordinary Unsecured Creditors
In proportion to what they’re owed – “pari passu” principle
How much is left how much is still owed = X pence for every 1 they are owed
Shareholder
In the very unlikely event that there is anything left to distribute

Rights and Duties of the Liquidator (Sch 4 IA 1986)

To collect assets and distribute them in accordance with the statutory order
To sell assets at a reasonable price
To use the company bank account
To appoint agents
To litigate on the company’s behalf
To carry on the company’s business
To do everything necessary to wind-up

Insolvency: Security Priority

Provided they have all been registered properly under s.860 CA:

Fixed charge or a mortgage takes priority over a floating charge over the same asset even if floating charge was created earlier than the fixed.
If more than one fixed charge over same asset, it is priority of creation date
If more than one floating charge over same asset, it is priority of creation date
If a validly registered “floating charge is granted over “N Co.’s” whole undertaking to secure all moneys outstanding to the “X Bank” at any time” and the same X Bank had a failed earlier fixed charge against N Co.’s property then, the posterior floating charge will secure any debts owed to X Bank from the earlier failed fixed charge. This is a trick that can be used by a Bank whose fixed charge has failed due to failure to register it properly. The new floating charge will be a rescue charge which will make recoverable what otherwise would be a failed fix charge which would have rendered the Bank another unsecured creditor.

Registration

A charge must be registered at CH (s.860(7)) within 21 days of creation (s.870(1)) and is available for public inspection (s.869(7)) and kept in company’s registers (s.876)
Company’s responsibility to register the charge (s.860(1)), but in practice it is the lender who does it to reflect their interest (s.860(2))
The original charging document and particulars of the charge should be sent along with the fee
A mortgage or fixed charge over land should also be...

#10312 - Equity Finance And Security - Finance and Capital Markets

About Oxbridge

More Finance And Capital Markets Samples