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Is the commitment fee on the undrawn part of a loan generally higher or lower than interest otherwise payable on that part of the loan or is it simply not payable?
It is lower.
Are all 'high yield' or 'below investment grade' bonds 'junk bonds'?
Often they are - below investment grade bonds tend to be junk bonds.
Some high yield bonds are deliberately issued with an attractive coupon (e.g. short term bonds to fund an acquisition) and will not be regarded as junk by the market.
Name three types of facility which are generally committed and one which is not
- 1. Revolving credit facility
- 2. Term loan
- 3. Syndicated loan
- 1. Overdraft
Name three ways in which repayment might be made under a term loan (assuming there has been no default). Explain what they mean.
- 1. Amortisation - principal repaid in instalments over the term of the loan
- 2. Balloon - principal repaid in increaisngly large instalments
- 3. Bullet - whole of principal repaid on maturity date
What is the difference between an investment bank and a commercial bank?
Commercial banks lend money and investment banks give advise on the issuing of debt securities.
Bundled, integrated and conglomerate banks do both.
Increasingly the distinction between the two is blurred.
Name three bases on which a commercial bank may lend to a corporate borrower
- 1. At its own rate plus a margin
- 2. On a cost-plus basis
- 3. At LIBOR plus a margin
1 and 2 are essentially the same thing
Name two conduct issues which arise when agreeing to act for a bank for the first time
- - Conflict of interests (e.g. check you are not acting for the borrower)
- - Confidentiality
- - Check the bank appears in the FSA's list of recognised banks for money laundering purposes.
Name 8 things a bank may check when doing due diligence on a borrower. Name one thing they do not care about and why.
- 1. Business plans and future plans
- 2. Plans regarding the use of funds
- 3. Accounts
- 4. Ownership and control of business
- 5. Medical records and insurance of key figures
- 6. Company's articles of association
- 7. Security over assets and other borrowing/loans
- 8. Assets of the business, e.g. leases, machinery
They do NOT care about the credit rating very much. These are generally used for bonds and the bank will do its own due diligence.
Name 8 major differences between a loan and a bond
- 1. Publicity. Bond is public, loan is private
- 2. Cost of borrowing. Bond - more money can be raised, cost can be higher. Loan - max. £500m can be raised.
- 3. Flexibility/day-to-day control. Loans have more convenants but terms can be negotiated more.
- 4. Forgivement if payment missed. Bank more forgiving than bond-holders due to personal relationship with borrower.
- 5. Lender sell-on. Much easier with bonds
- 6. Set-up formalities. Due-diligences vs. prospectus
- 7. Security. Normally have to give security with a loan
- 8. Marketing. No need to market a loan
Name 6 advantages and 5 disadvatnages of a bond issue for a corporate borrower.
- 1. Can raise a lot more money
- 2. Access to willing lenders when bank loan impossible or undesirable
- 3. Fewer covenants by the isuer - more day-to-day control over business
- 4. More flexible interest rate options
- 5. Can be unsecured
- 6. Information that needs to be disclosed is often limited to what is already public knowledge
- 1. If amount of money needed is uncertain/dependent on an event this is not suitable
- 2. Money usually repatable all in one go with additional interest payments
- 3. Details of issue will become public if listed (circular and prospectus)
- 4. Hard to renegotiate the terms, will be sued if miss a repayment
- 5. Need a good credit rating
Name 5 advantages and 5 disadvantages of a term loan for a corporate borrower
- 1. More flexible - borrower can draw down money when needed, can provided a committed source of funding for contingencies.
- 2. Repayments can be in instalments/can repay and withdraw money as required
- 3. Private transaction
- 4. Possible to renegotiate
- 5. May be the only option if you have a bad credit rating/are a small company
- 1. Limit on amount that can be borrowed
- 2. Usually have more covenants attached
- 3. Usually only interest option is a floating rate
- 4. Secured
- 5. Lending bank will conduct thorough due diligence - more information must be disclosed.