How do you think companies decide which type of private debt they will use? Do they...

How do you think companies decide which type of private debt they will use? Do they have a choice? Do managers consider what is being offered by financial institutions? Conversely, what do financial institutions look for in firms? What considerations are taken into account by both sides? What kinds of negotiations do you think are involved?

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How do you think companies decide which type of private debt they will use? Do they have a choice? Do managers consider what is being offered by financial institutions?

Companies decide which type of debt they will use on the basis of following:

Interest rate offered
How restrictive the covenants are?
Severity of even of default.
Flexibility in debt servicing: principal moratorium period
Ability to call back the debt

Companies do have a choice. A company with impeccable past and track record and credit score can get debt offers from multiple institutions. So they do have a choice.

Yes, the managers do consider what is being offered by the financial institutions. Managers can't work in isolation. The provider and receiver of the capital have to come together, discuss, negotiate and close the transaction. Either party not considering what the other party has to offer, will not lead any fruitful outcome.

Conversely, what do financial institutions look for in firms?

Ability to service the debt
Ability to pay the interest and principal
Credit worthiness
Good credit score
Financial health and financial ratios
Security package
Security cover

What considerations are taken into account by both sides? What kinds of negotiations do you think are involved?

Flexibility of the either party
Transparency in sharing information
Ability to work together and on the long term
Track record of each other

Negotiations are involved over:

Interest rate
Penal interest
Events of default
Consequences of events of default
Positive and negative covenants
Repayment schedule

jeff jeffy answered 4 months ago

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