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Corporate Finance, 5th Edition
book

Corporate Finance, 5th Edition

by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann Le Fur, Antonio Salvi
December 2017
Intermediate to advanced content levelIntermediate to advanced
1024 pages
32h 22m
English
Wiley
Content preview from Corporate Finance, 5th Edition

Chapter 39 Implementing a debt policy

Just the right mix

Once a certain level of debt has been chosen, the CFO should think about the structuring of the firm’s gross debt, the amount of cash that he wants to keep, on average, on the asset side of the balance sheet, and the amount of the undrawn available credit facility that he wants to keep. 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 ...

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Publisher Resources

ISBN: 9781119424482Purchase book