When established business venture into new markets or a new product line they normally seek funding to finance the activities. Retained earnings are the cheapest form of finance, but if it is not sufficient, secured loans in Nigeria are the next option for many businesses.
Forms of secured loans include;
The term debenture is used to denote a secured transferable loan stock which may either be listed or unlisted. Such stocks are attractive to lenders because they are normally secured with specific assets or through a floating charge on the assets of the company. With well secured debentures, the borrower benefits by paying a generally lower rate of interest than for other methods of raising funds. Debentures and unsecured loan stocks are usually issued by longer established companies to raise money from institutional lenders like merchant banks, insurance companies, pension funds and specialist institutions.
Unlike the bank overdraft, debenture cannot be called in, during times of credit squeeze, provided the terms of the issue are met. In the case of a listed company, there will be a trust deed setting up the issue. Under its terms, the trustee for the debenture holders is empowered to act on their behalf, and in the event of default, to appoint a receiver.
Unsecured loan stocks
As regards loan stocks, normally made by first class companies with sound balance sheets and good management, the term usually contain a prohibition on offering the company’s assets as security in respect of other borrowing. This type of arrangement is referred to as a `negative pledge’.
A loan stock issue would normally stipulate the debt/equity ratio to be maintained during the loan period. It is possible to issue a convertible loan stock unsecured, which gives holders the right to convert their stock into ordinary shares at a specified price and time.
Acquisition finance means loans made to borrowers so they can take over other companies in M&A deals (M&A means mergers and acquisitions). As such it is called event-driven lending rather than general corporate lending. These takeovers can be highly leveraged (meaning a lot of debt supported by little equity). Whole business securitization (mentioned earlier) is a form of acquisition finance: it’s a way of turning a business’s revenue stream into a capital amount which can then be used to buy that business.
Most syndicated loans are done on a best efforts basis (see above), which the arranger makes clear in its offer letter to the borrower. But in acquisition finance, the borrower will want committed funds. It’s no good to the borrower for the bank to go into the market and come back empty-handed. The borrower has an acquisition to finance. So the bank advising on the acquisition will commit to lend the full amount if necessary but can syndicate the debt to other banks either before or after signing. In short the arranger generally makes an underwritten offer.
A lot of acquisition finance loans ended up as CDOs or CLOs (collateralized debt or loan obligations) – issues backed by leveraged loans. But as cheap credit dried up in the credit crunch, loans meant to provide temporary acquisition finance couldn’t be refinanced so banks were left holding the temporary loans – known as hung bridges.