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Questions and Answers
What is the primary purpose of working capital for a company?
Which factor does NOT influence a company’s choice of finance?
What type of financing involves borrowing from banks or issuing debt instruments?
Which is NOT a component of capital expenditure (Capex)?
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What is a likely consequence of a company needing high flexibility in financing?
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Which of the following is a source of equity financing?
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Which statement about the types of bank lending is true?
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Which of the following influences a company's finance options based on their immediate needs?
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Which of the following best describes the costs of utilization in lending?
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What is NOT included in the customary representations regarding legal aspects?
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In the context of covenants, what is primarily the reason for their existence?
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Which of the following is generally NOT a customary representation related to the state of business?
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What does 'pari passu ranking' imply in lending agreements?
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What is the primary characteristic of a syndicated loan?
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Which of the following best describes a revolving facility?
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In a facility agreement, what do 'covenants' generally refer to?
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What typically characterizes a secured loan?
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Which of the following is NOT a fundamental clause category typically found in a facility agreement?
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How is prepayment of a loan generally handled in facility agreements?
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What is a key feature of the maturity date in loans?
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What does the term 'events of default' refer to in a facility agreement?
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Which event is NOT considered a customary event of default?
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What is the primary reason for taking security from a borrower?
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Which type of mortgage provides the least risk to the lender?
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What consequence arises from failing to register security with ACRA?
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Which of the following is NOT a type of charge?
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Which of the following statements regarding information covenants is FALSE?
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Which is an example of a negative covenant?
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What does the term 'boilerplate' refer to in loan agreements?
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Study Notes
Introduction to Corporate Financing
- Companies require finance to cover working capital and capital expenditure.
- Working capital is used for the company's day-to-day operations, including inventory, accounts receivables and short-term debts.
- Capital expenditure includes funding for acquiring, upgrading, and maintenance of physical assets.
What influences a company's choice of finance
- Credit quality of the company
- Industry of the company
- The company's tax position
- Available sources and market conditions
- Need for flexibility in repayments or terms
- Pricing of various financing options
Types of Financing Available
- Equity - Private investors (venture capital) or public investors (IPO).
- Debt - Borrowing from financial institutions (bank loans) or issuing debt securities (bonds).
Key Features of Financing
- Characterisation - Is it equity or debt financing?
- Returns - How are profits realized?
- Maturity date - When does the funding expire?
- Increase in value - Does the funding contribute to the company's valuation?
- Treatment in insolvency - What happens to the financing in the event of bankruptcy?
Different Types of Bank Lending
- Number of Lenders - Single lender (bilateral loan) or multiple lenders (syndicated loan).
- Duration of the Loan - Fixed term facility (set repayment schedule) revolving facility (ongoing access to credit).
- Security - Secured (collateralized by assets) or Unsecured (no specific assets tied to the loan).
Overview of a Facility Agreement
- Mechanics: Drawdown of funds (the process of accessing the loan), conditions precedent (pre-requisites for accessing funds), and repayment (schedule for repaying the loan).
- Costs of Utilisation: Interest rates (includes base rate, margin, and other fees), default interest, and other fees.
- General Protection: Covenants (obligations the borrower agrees to), events of default (circumstances that trigger default on the loan).
- "Boilerplate" - Administrative and legal provisions (assignment of loans, amendments and waivers, payment mechanics, set-off rights, notices, partial invalidity, governing law).
Covenants (Undertakings)
- Covenants are designed to protect the lender, provide financial certainty, and ensure the borrower's actions do not endanger the loan's security.
- Positive covenants: The borrower agrees to actively take specific actions, typically related to maintaining financial stability and providing information.
- Negative covenants: The borrower undertakes not to take certain actions, including risky investments, excessive borrowing, or dividend payouts.
- Financial covenants: Limit the company's financial leverage, set minimum levels of profitability, and ensure the company meets specific solvency thresholds.
Customary events of default
- Non-payment (after a grace period)
- Breach of financial covenants
- Breach of other obligations (including information-related covenants)
- Misrepresentation of information provided
- Cross default (default on one loan triggers default on another)
- Insolvency (bankruptcy or insolvency proceedings)
- Change in control of the borrowing company
- Illegality (violation of laws)
- Repudiation (breach of contract)
Taking Security
- Reasons for taking security: Protection for the lender in the event of the borrower's insolvency. Security allows the lender to take possession of assets pledged as collateral to recover funds owed.
- Types of security: A mortgage grants the lender a legal or equitable interest in real estate, while a charge provides a legal or equitable interest in movable assets.
- Perfecting security: Registration is crucial to ensure the lender's claim to the collateral.
Perfecting the Security
- Registration with specialist asset registers is required to perfect the security.
- Land: Singapore Land Authority (SLA)
- Intellectual Property: Intellectual Property Office of Singapore (IPOS)
- Ships: Maritime Port Authority of Singapore (MPA)
- All companies must register security interests with ACRA.
- Failing to register security interests can result in loss of priority over other creditors.
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Description
Explore the key concepts and types of corporate financing in this quiz. Learn about working capital, capital expenditure, and the factors influencing a company's choice of financing. Test your understanding of equity and debt financing options.