VERNIMMEN.COM
Summary of chapter 27 : Other debt products
 
  Deciding on an absolute level of net debt, that is, of debt vs. equity, is a capital structure issue. Once this ratio has been decided, it is up to the CFO and the corporate treasurer to lower the cost of debt and monitor the return on investments. At the same time, treasurers must ensure that the company can meet its debt obligations and that the liquidity of the investments is adapted to the company's development needs. Given these constraints the CFO/treasurer will be choosing between the various financial products available and evaluating banks versus investors.
Financing products differ in terms of type of counterparty, maturity and seniority of redemption rights as well as the existence of collateral or accounting, legal and tax advantages. However, this wealth of options can become confusing when the actual cost of the various products is analysed. We therefore distinguish between:
- bank and market products,
- short-, medium- or long-term borrowings,
- loans backed by collateral, unsecured senior loans and subordinated loans

For small and medium-sized companies, the choice between bank financing (bank loans) and market financing is skewed in favour of bank financing as their needs do not correspond to the size and liquidity required by financial markets.

The distinction between long, medium and short-term financial resources reflects the treasurer's main forecast horizons and, accordingly, the type of information available.

Giving guarantees or seniority to a loan often allow to lower the interests paid but limits the financial flexibility of the firm.

Debt market products include long term financing: bonds (investment grade or high yield depending on the rating of the company) and short term financing: commercial paper.

Bank debt products include loans for general purpose financing (business loans) for which agreements include standard covenants (Positive covenants to comply with certain requirements ; Negative covenants to limit the financial flexibility of the company ; Pari passu clauses ; cross default clause). Specific purpose financing are backed by assets (factoring, export credit, loans on inventories, …).

Chapitre précédent INDEXChapitre suivant