武汉理工大学：《财务管理》课程PPT教学课件（英文版）Chapter 21 Term Loans and Leases

Chapter 21 erm loans and leases 21-1

21-1 Chapter 21 Term Loans and Leases

Term Loans and leases Term loans Provisions of Loan Agreements Equipment Financing Lease Financing Evaluating Lease Financing in Relation to Debt Financing 21-2

21-2 Term Loans and Leases Term Loans Provisions of Loan Agreements Equipment Financing Lease Financing Evaluating Lease Financing in Relation to Debt Financing

Term loans Term Loan --Debt originally scheduled for repayment in more than 1 year, but generally in less than 10 years. Credit is extended under a formal loan arrangement Usually payments that cover both interest and principal are made quarterly, semiannually, or annually The repayment schedule is geared to the borrower fa cash-flow ability and may be amortized or have a balloon payment 21-3

21-3 Term Loan -- Debt originally scheduled for repayment in more than 1 year, but generally in less than 10 years. Term Loans Credit is extended under a formal loan arrangement. Usually payments that cover both interest and principal are made quarterly, semiannually, or annually. The repayment schedule is geared to the borrower 抯 cash-flow ability and may be amortized or have a balloon payment

Costs of a Term loan The interest rate is higher than on a short- term loan to the same borrower( 25 to 50 basis points on a low risk borrower) Interest rates are either (1)fixed or(2) variable depending on changing market conditions-possibly with a floor or ceiling Borrower is also required to pay legal expenses (loan agreement and a commitment fee(25 to 75 basis points)may be imposed on the unused portion 21-4

21-4 Costs of a Term Loan The interest rate is higher than on a short￾term loan to the same borrower (25 to 50 basis points on a low risk borrower). Interest rates are either (1) fixed or (2) variable depending on changing market conditions -- possibly with a floor or ceiling. Borrower is also required to pay legal expenses (loan agreement) and a commitment fee (25 to 75 basis points) may be imposed on the unused portion

Benefits of a Term loan The borrower can tailor a loan to their specific needs through direct negotiation ith the lender Flexibility in terms of changing needs allows the borrower to revise the loan more quickly and more easily Term loan financing is more readily available over time making it a more dependable source of financing than say, the capital markets 21-5

21-5 Benefits of a Term Loan The borrower can tailor a loan to their specific needs through direct negotiation with the lender. Flexibility in terms of changing needs allows the borrower to revise the loan more quickly and more easily. Term loan financing is more readily available over time making it a more dependable source of financing than say, the capital markets

Revolving Credit Agreements Revolving Credit Agreement -A formal, legal commitment to extend credit up to some maximum amount over a stated period of time Agreements are frequently for three years The actual notes are usually 90 days, but the company can renew them per the agreement Most useful when funding needs are uncertain Many are set up so at maturity the borrower has the option of converting into a term loan 21-6

21-6 Revolving Credit Agreements Agreements are frequently for three years. The actual notes are usually 90 days, but the company can renew them per the agreement. Most useful when funding needs are uncertain. Many are set up so at maturity the borrower has the option of converting into a term loan. Revolving Credit Agreement -- A formal, legal commitment to extend credit up to some maximum amount over a stated period of time

nsurance Company Term Heane These term loans usually have final maturities in excess of seven years These companies do not have compensating balances to generate additional revenue and usually have a prepayment penalty Loans must yield a return commensurate with the risks and costs involved in making the loan As such, the rate is ty pically higher than what a bank would charge but the term is longer 21-7

21-7 Insurance Company Term Loans These term loans usually have final maturities in excess of seven years. These companies do not have compensating balances to generate additional revenue and usually have a prepayment penalty. Loans must yield a return commensurate with the risks and costs involved in making the loan. As such, the rate is typically higher than what a bank would charge, but the term is longer

Medium-Term Note Medium-Term Note(MTN--A corporate or government debt instrument that is offered to investors on a continuous basis Maturities range from 9 months to 30 years(or more) Shelf registration makes it practical for corporate issuers to offer small amounts of MtNs to the public Issuers include finance companies banks or bank holding companies, and industrial companies Euro MTN-A MtN issue sold internationally outside the country in whose currency the MTN is denominated 21-8

21-8 Medium-Term Note Maturities range from 9 months to 30 years (or more). Shelf registration makes it practical for corporate issuers to offer small amounts of MTNs to the public. Issuers include finance companies, banks or bank holding companies, and industrial companies. Medium-Term Note (MTN) -- A corporate or government debt instrument that is offered to investors on a continuous basis. Euro MTN -- A MTN issue sold internationally outside the country in whose currency the MTN is denominated

Provisions of Loan Agreements Loan Agreement -A legal agreement specifying the terms of a loan and the obligations of the borrower n Covenant --A restriction on a borrower im posed by a lender; for example, the borrower must maintain a minimum amount of working capital This allows the lender to act (or be narned early )when adverse developments are occurring that will affect the borrowing firm 21-9

21-9 Provisions of Loan Agreements Covenant -- A restriction on a borrower imposed by a lender; for example, the borrower must maintain a minimum amount of working capital. This allows the lender to act (or be narned early) when adverse developments are occurring that will affect the borrowing firm. Loan Agreement -- A legal agreement specifying the terms of a loan and the obligations of the borrower

Formulation of provisions The important protective covenants* fall into three different categories. o General provisions are used in most loan agreements, which are usually variable to fit the situation o Routine provisions used in most loan agreements, which are usually not variable o Specific provisions that are used according to the situation Restrictions are negotiated between 21-10 the borrower and lender

21-10 Formulation of Provisions General provisions are used in most loan agreements, which are usually variable to fit the situation. Routine provisions used in most loan agreements, which are usually not variable. Specific provisions that are used according to the situation. The important protective covenants* fall into three different categories. * Restrictions are negotiated between the borrower and lender