Private Capital Investing

CHAPTER 2Debt Products

INTRODUCTION

Debt is a contract where financing is provided with a defined interest rate and principal repayment schedule. It is provided by banks, credit funds, insurance companies, investment firms, and collateralised obligations vehicles. In particular:

• Commercial banks: provide credit, term loans, and revolving loans. Most loans are made based on historical financial performance and minimum asset collateral values. Credit is extended based on character, collateral, and capacity to pay. Banks are the lowest-risk lenders. They will not generally lend to a company with a debt-to-equity ratio greater than 2x to 3x without additional guarantee or collateral.
• Asset-based lenders: provide debt financing by lending against the assets of a company. Although asset-based lenders may be owned by a bank, they are typically unregulated non-bank lenders that can make highly leveraged loans based on the collateral specific to their client's business. An asset-based loan will be repaid from the liquidation of the collateral no matter what the condition of the company. An asset-based lender's primary concern is the liquidation value of its loan's underlying assets and potential management fraud. The collateral is therefore closely monitored.
• Investment banks: assist corporations in raising capital by underwriting or acting as the client's agent in the issuance of securities.
• Other specialised lenders: include credit funds (closed or open funds in which core holdings ...