Asset-backed finance (securitisation)except that the loan notes continue after the warrant has been used to subscribe for
shares. Thus the loan notes, unlike convertible loan notes, are not self-liquidating.
Like convertible loan notes, warrants are financial derivatives. In most ways, war-
rants so resemble convertibles that the important factors are much the same.8.8 Term loans
Term loansare negotiated between the borrowing business and a financial institution
such as a clearing bank, an insurance business or a merchant bank. This sort of finance
is extremely important, perhaps accounting for as much as 25 per cent of new finance
raised by businesses other than through retained profits.
In many ways, term loans are like loan notes in that security is usually given to the
lender and loans are made for up to 20 years. They differ from loan notes in that they
are not usually transferred from lender to lender in the way that loan notes typically
are. They are not traded in the capital market. Some term loans are repayable in instal-
ments so that each monthly or annual payment consists of part interest, part capital
repayment, in a similar manner to mortgage loan payments made by private house
purchasers under repayment mortgages.
Term loans tend to be very cheap to negotiate, that is, issue costs are very low since
the borrowing business deals with only one lender (at least in respect of each loan) and
there is room for much more flexibility in the conditions of the loan than is usually
possible with an issue of loan notes.
The cheapness and flexibility of term loans make them very popular with busi-
nesses of all sizes. For most businesses, finance raised through term loans vastly out-
weighs the amounts raised through loan notes. Term loans, usually granted by banks,
represent a very major source of medium to long-term finance.
Clearly, term loans so closely resemble loan notes that, with the exception of the
points concerning transferability and the possible spreading of capital repayment, the
factors affecting both borrower and lender are much the same as those that we
reviewed in respect of loan notes.8.9 Asset-backed finance (securitisation)
Where a business has expectations of a stream of future positive cash flows, it effect-
ively owns an asset, the value of which is the (discounted) present value of those cash
flows. It is possible to turn this asset into a security and sell it to an investor and so
raise funds; this is known as securitisation. An example of such streams of cash flows
is monthly repayments made by those who have borrowed money to buy their homes
from a mortgage lender. This had become a popular thing for US mortgage lenders to
do during the early years of the 2000s. Here the monthly repayments were ‘secur-
itised’ and sold to many of the major banks, particularly in the US. Unfortunately,
many of the mortgage loans were made to people on low incomes who were not
good credit risks (sub-prime loans). When the borrowers started to default on their
obligations, it was realised that the securities, now owned by the banks, were worth
much less than the banks had paid the mortgage lenders for them. This led to the
so-called ‘sub-prime’ crisis that triggered the major worldwide economic problems
being experienced at the time of writing.‘
‘