1. Bank Lending

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Questions and Answers

What is the primary purpose of working capital for a company?

To cover day-to-day operational expenses (correct)

To maintain fixed assets

To fund long-term investments

To manage cash flow fluctuations

Which factor does NOT influence a company’s choice of finance?

Company’s geographic location (correct)

Credit quality

Tax implications

Available sources and market conditions

What type of financing involves borrowing from banks or issuing debt instruments?

Equity financing

Public financing

Crowdfunding

Debt financing (correct)

Which is NOT a component of capital expenditure (Capex)?

Daily operational expenses Signup and view all the answers

What is a likely consequence of a company needing high flexibility in financing?

It may seek short-term lending options Signup and view all the answers

Which of the following is a source of equity financing?

Venture capital Signup and view all the answers

Which statement about the types of bank lending is true?

They include commercial loans and institutional loans. Signup and view all the answers

Which of the following influences a company's finance options based on their immediate needs?

Need for flexibility Signup and view all the answers

Which of the following best describes the costs of utilization in lending?

Consists of interest, default interest, and other fees. Signup and view all the answers

What is NOT included in the customary representations regarding legal aspects?

Existence of a recent financial audit Signup and view all the answers

In the context of covenants, what is primarily the reason for their existence?

To mitigate risk and ensure borrower compliance. Signup and view all the answers

Which of the following is generally NOT a customary representation related to the state of business?

Ownership of intellectual property rights Signup and view all the answers

What does 'pari passu ranking' imply in lending agreements?

All debts rank equally in terms of repayment priority. Signup and view all the answers

What is the primary characteristic of a syndicated loan?

Multiple lenders collaborate to provide the loan, spreading the risk. Signup and view all the answers

Which of the following best describes a revolving facility?

A type of loan where the borrower can withdraw and repay multiple times up to a limit. Signup and view all the answers

In a facility agreement, what do 'covenants' generally refer to?

Promises made by the borrower to uphold certain financial standards. Signup and view all the answers

What typically characterizes a secured loan?

Collateral is provided, reducing the lender's risk in case of default. Signup and view all the answers

Which of the following is NOT a fundamental clause category typically found in a facility agreement?

Legal remedies Signup and view all the answers

How is prepayment of a loan generally handled in facility agreements?

A fee for prepayment is often required to compensate the lender. Signup and view all the answers

What is a key feature of the maturity date in loans?

It marks the last date by which the loan must be fully repaid. Signup and view all the answers

What does the term 'events of default' refer to in a facility agreement?

Situations where the borrower fails to meet contractual obligations. Signup and view all the answers

Which event is NOT considered a customary event of default?

Reorganization Signup and view all the answers

What is the primary reason for taking security from a borrower?

Protection in case of insolvency Signup and view all the answers

Which type of mortgage provides the least risk to the lender?

Legal mortgage Signup and view all the answers

What consequence arises from failing to register security with ACRA?

Inability to enforce the security Signup and view all the answers

Which of the following is NOT a type of charge?

Variable charge Signup and view all the answers

Which of the following statements regarding information covenants is FALSE?

They are only applicable to commercial covenants Signup and view all the answers

Which is an example of a negative covenant?

Prohibiting additional borrowing Signup and view all the answers

What does the term 'boilerplate' refer to in loan agreements?

Standard contractual clauses Signup and view all the answers

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.