‘
Loan notes and debenturesare issued for periods outside that range. Indeed, perpetual loan notes (no redemption
date) do exist.
The popularity of loan notes, as a means of raising long-term finance, seems to
fluctuate rather wildly from year to year.
Many businesses obtain a capital market listing for their loan notes, so that poten-
tial lenders can buypart of a business’s borrowings from a previous lender. The new
owner of the loan notes will, from the date of acquiring them, receive interest pay-
ments as well as the capital repayment if the notes are held until the redemption date.
Loan notes attract all types of investors who seek relatively low-risk returns. Institu-
tional investors are particularly attracted by them, especially those institutions that need
regular cash receipts to meet recurring payment obligations, for example pension funds.
As with most types of loan, most loan notes are secured, either on specified assets
of the borrowing business or on the assets generally. For example, the UK airline busi-
ness British Airways plchas, according to its 2007 annual report, pledged £205 million
of the value of its aircraft as security for loans. Alternatively, the lender may simply
have the security that the law of contract gives any unsecured creditor to enforce
payment of interest or capital if the business defaults. Whether loan notes are secured
or not determines where in the queue for payment the loan notes holder will stand in
the event of the liquidation of the borrowing business.
Since it is not usually practical for individual loan notes holders to monitor their
security at all times, trustees are often appointed by the business to do this for them.
Businesses will be prepared to do this so that the issue will attract lenders.Loan notes (bond ) ratings
Where loan notes are listed on the LSE, they tend to be rated by two independent
assessors, Moody’s and Standard and Poor’s, both of which are commercial financial
services providers. The rating indicates the assessors’ opinion of the quality of the
loan notes in terms of the commercial and financial prospects of the business that
issued the loan notes concerned. The rating views things from the potential investors’
perspective. It is, therefore, the ability of the business concerned to pay interest and
redeem the loan notes, in full, on the contracted dates, that is the key factor. The asses-
sors keep their loan notes ratings constantly under review and alter them as circum-
stances change. Businesses with high ratings will find it comparatively easy to borrow
and/or can borrow more cheaply.
Both of these assessors rate loan notes into one of ten classes. Table 8.2 shows the
Standard and Poor’s classification.
Standard and Poor’s sees the demarcation line between BBB and BB loan notes as
a key one. BBB and higher are seen as ‘investment grade’ loan notes and broadly rep-
resent a safe investment. BB and below are considered risky and speculative. BB and
lower are often known as junk bonds.
The Financial Timeson 23 January 2008 made the following comment about General
Motors Corporation, the US car giant whose brands include Chevrolet, Saab and
Vauxhall: ‘The Detroit carmaker’s finances remain on shaky ground, with a credit
rating deep in junk territory.’
In its 2007 annual report, the troubled electricity generator British Energy plcre-
ported that its loss of investment grade status had caused it problems. It had to provide
collateral to those with whom it dealt on credit and this caused liquidity problems for
the business.