BCM Workshop 1

It is lower.

No.

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.

• Committed:
• 1. Revolving credit facility
• 2. Term loan
• 3. Syndicated loan

• Not-committed:
• 1. Overdraft

• 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

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.

• 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

• - 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.

• 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.

• 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

• Advantages:
• 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

• Disadvantages:
• 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

• Advantages:
• 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

• Disadvantages:
• 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.