Chapter 39Implementing a debt policy

Just the right mix

Once a certain level of debt has been chosen, the financial director should think about the structuring of the firm's gross debt and the amount of cash that he wants to keep, on average, on the asset side of the balance sheet. But as we'll see with the SEB example, implementing a debt policy goes beyond the simple choice of the parameters of the debt products issued or contracted, and includes the strategy of relationships over time between the firm and its various debt providers.

Section 39.1 Debt structure

Structuring a debt means defining its main parameters and negotiating them with lenders. The most important points are:

  • lenders' strategic choices and guarantees:
    • should loans be backed up by assets or not;
    • should financing be sought on the bond market or on the bank market;
    • diversifying risk among lenders (nature and number of lenders);
  • choice of a structure:
    • choosing a maturity date;
    • choosing a currency;
    • choosing a type of interest rate;
  • related terms and conditions:
    • defining a hierarchy (seniority) for repayment;
    • defining appropriate legal agreements and in particular, the covenants to be accepted.

1/ Should loans be backed up by assets or not?

The main aim of lenders is to ensure that the firm will pay the interest and reimburse the loan. One of the most secure ways of guaranteeing reimbursement is to use one of the company's assets as a form of collateral. This results in heavy restrictions on the ...

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