BKF 1 - Bank Lending

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Questions and Answers

What does a borrower need to provide in order to request funds from a lender?

A payment schedule

A loan assessment form

A credit report

A drawdown notice (correct)

Which of the following statements about a revolving loan is true?

Funds can only be borrowed once.

Repaid amounts are unavailable for reborrowing.

Funds can be borrowed at any time during the specified period. (correct)

The maximum borrowing amount decreases over time.

What are the four broad categories of clauses in a facility agreement?

Mechanics, Cost, Protection, Boilerplate (correct)

Cost, Protection, Mechanics, Duration

Duration, Mechanics, Risk, Indemnity

Protection, Fees, Mechanics, Duration

What typically occurs after the borrower signs a loan agreement?

There is a gap in time before requesting funds. (D) Signup and view all the answers

What allows a bank to terminate and accelerate a loan early?

General protection clauses (A) Signup and view all the answers

What must a borrower consider regarding the interest period on a tranche?

The borrower decides whether to repay or roll over. (A) Signup and view all the answers

Which type of loans requires a comprehensive security and guarantee package?

Secured loans (D) Signup and view all the answers

What are companies primarily interested in raising finance for?

To fund working capital and CAPEX (C) Signup and view all the answers

How can a company issue debt to the public?

By issuing debt instruments instead of bilateral agreements (D) Signup and view all the answers

What do lenders assess to determine creditworthiness?

Borrower's credit history (D) Signup and view all the answers

Which option is NOT a typical characteristic of a term loan compared to a revolving loan?

Flexibility in withdrawal times (C) Signup and view all the answers

What distinguishes the accounting treatment of borrowed funds versus equity investments?

Borrowed funds are treated as a liability, equity as capital (D) Signup and view all the answers

Which of the following statements about equity financing is correct?

Equity financing does not require repayment like debt financing (A) Signup and view all the answers

What is a unique characteristic of debt as a financing method compared to equity?

Debt must be repaid at a specified date or on demand (D) Signup and view all the answers

Which factor is NOT typically considered when determining a company's choice of finance?

Potential for employee bonuses (B) Signup and view all the answers

In the context of corporate financing, what is referred to as CAPEX?

Capital expenditure to maintain physical assets (C) Signup and view all the answers

What is the primary purpose of covenants in facility agreements?

To protect the lender's interests throughout the facility's life (B) Signup and view all the answers

Which type of covenant is described as a promise to refrain from a specific action?

Negative covenant (D) Signup and view all the answers

What are general covenants primarily concerned with?

Specific operational restrictions identified by the lender (A) Signup and view all the answers

Which of the following best describes financial covenants?

Tests to evaluate a borrower's business performance against projections (D) Signup and view all the answers

Negative pledges within covenants typically restrict the borrower from:

Incurring any new contingent liabilities like guarantees (C) Signup and view all the answers

What is included in the lender's financial projections for a facility?

Forecasts to ensure the borrower can service interest and principal payments (A) Signup and view all the answers

Which aspect is NOT typically part of general covenants?

Requirements for meeting liquidity tests (D) Signup and view all the answers

Which of the following is a characteristic of financial covenants?

They require regular calculations of the borrower's performance (A) Signup and view all the answers

In facility agreements, what is meant by the 'ranking' of the borrower's obligations?

The priority of repayment among different types of debts (A) Signup and view all the answers

What are events of default primarily designed to do?

Allow the lender to demand immediate repayment or enforce security. (A) Signup and view all the answers

Which of the following would NOT typically constitute an event of default?

A minor breach of a facility agreement. (D) Signup and view all the answers

What does cross-acceleration refer to in loan agreements?

A condition where all loans become payable due to any one loan default. (B) Signup and view all the answers

How are breaches of undertakeings treated in relation to events of default?

They may be treated as events of default only after a grace period. (D) Signup and view all the answers

What might be included in boilerplate provisions of a loan agreement?

Standardized terms that are generally non-negotiable. (D) Signup and view all the answers

What might entitle a lender to cancel undrawn commitments?

An event of default occurring. (B) Signup and view all the answers

In the context of loans, what does security typically refer to?

Assets pledged to guarantee repayment of a loan. (D) Signup and view all the answers

Which term describes the opportunity given to a borrower to remedy a breach?

Grace period. (B) Signup and view all the answers

What can happen if a borrower fails to respond to a stipulated grace period?

Immediate repayment and enforcement of security may occur. (B) Signup and view all the answers

What might event of default breach in loan agreements typically include?

Legal actions initiated by creditors against the borrower. (C) Signup and view all the answers

What happens when a lender makes an unsecured loan and the borrower defaults?

The lender ranks alongside other unsecured creditors in claims. (D) Signup and view all the answers

What is a primary advantage of a lender taking security for a loan?

The lender can enforce security by selling the secured asset. (A) Signup and view all the answers

What are the three most common types of security typically seen in common law jurisdictions?

Mortgage, charge, and pledge. (C) Signup and view all the answers

In a legal mortgage, what does the mortgageor transfer to the creditor?

Legal title of the secured asset. (B) Signup and view all the answers

What characteristic differentiates an equitable mortgage from a legal mortgage?

The debtor retains legal title but transfers equitable interest. (C) Signup and view all the answers

Study Notes

Bank Lending Module

Introduction to Corporate Financing: Companies raise finance to fund working capital and capital expenditure (CAPEX). Working capital is used for day-to-day operations, while CAPEX funds the purchase of physical assets.
Factors Influencing Finance Choices: Companies choose finance based on several factors, although these were not detailed in the presentation
Types of Financing: Companies can raise funds privately or publicly through debt or equity. Debt involves borrowing money from lenders (banks or other entities) and equity involves issuing shares to investors.
Debt Financing: Raising money through debt can be done directly through a bank or other lender, or via public markets with debt instruments (e.g. bonds)
Equity Financing: Equity financing is not returned to the shareholders in the normal course of operations. It may be possible in certain situations (e.g. Singapore companies) to reduce the company's capital
Bank Lending Types: Loans can be categorized by the number of lenders (bilateral, syndicated, or club loans), loan duration, and whether the loan is secured.
Term Loans: Typically have a short availability period (e.g., up to three months) for drawing down funds and are repaid in one lump sum at the end of the loan tenure, or in installments. The loan tenure is between 1 and 5 years.
Revolving Credit Facilities: Provide a maximum borrowable amount over an agreed period. The availability period extends throughout the loan tenure. Borrower can draw down and repay amounts as needed.
Secured Loans: Common for lenders to require a comprehensive security and guarantee package.
Facility Agreements: Key components include: loan mechanics, cost of utilization (interest, fees), general protection for lenders (Representations, covenants, and events of default, to allow the bank to terminate or accelerate loan repayment in case of breach )and Boilerplate (general provisions & protections for the bank)

Security for Loan Agreements

Secured vs. Unsecured Loans: Secured loans give the lender priority in case of borrower insolvency.
Types of Security: Lenders may take mortgages, charges, or pledges as security, which have different implications, including when property ownership changes and debtor retains possession of the assets.
Legal vs. Equitable Mortgages: Legal mortgages involve the transfer of title to the lender, while equitable mortgages retain the legal title but transfer the beneficial ownership.
Fixed vs. Floating Charges: Fixed charges are attached to specific assets, while floating charges cover a wider range of assets. Floating charges crystallize into fixed charges when certain events trigger (e.g., insolvency).
Enforcement of Security: In case of insolvency, secured creditors are prioritized in the distribution of assets. If assets are insufficient to cover all debts, unsecured creditors will follow the secured creditors for the remainder of the proceeds.

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Description

This quiz covers the essential aspects of corporate financing, including working capital, capital expenditure, and the various types of financing such as debt and equity. Understand how companies make financial choices and the implications of raising funds through different methods. Test your knowledge on the fundamentals of bank lending and corporate finance.