| A | |
| ABL | Asset-based loan, i.e. a loan that is secured on, and has a priority interest in, capital assets. |
| Accruals | An amount due in respect of goods, services and periodic expenses used or incurred during the period, but not invoiced before the period end. |
| Amortizing bonds | A bond which pays its coupon and a part of the principal each year. |
| B | |
| Basel Committee on Banking Supervision | A committee established by central banks and regulators to regulate and control the risks inherent in banking and finance activities. Basel requirements are accepted and applied by national financial regulators around the world. |
| Bankruptcy | Legal status of a person or other entity that cannot repay the debts it owes to creditors |
| Bond | A debt instrument issued by a government or a company to raise funds, promising to repay the face value upon maturity and make periodic interest payments. |
| Bond index | A statistical measure of the performance of a portfolio of bonds representative of a specified financial market. |
| Bond yield curve | A graph that plots the yields of similar-quality bonds against their maturities. |
| Boston matrix | A tool to help diversified companies decide how to prioritize their different businesses and make strategic decisions by categorizing activities into star, cash cow, dog and question mark. Also known as the BCG matrix. |
| Bullet repayment | Where the loan/bond principal is repaid in full at maturity, with only interest payments being required during the credit term. |
| C | |
| Callable bond | A bond that the issuer may choose to buy back before the maturity date. |
| Cash flow available for debt servicing (CADS) | The cash from operations that is available following the payment of any essential or non-discretionary payments which need to be made before the company can pay any debt interest or principal, including taxes, capital expenditure, preference and ordinary dividends, etc. |
| Chapter 11 | A US restructuring process under which the management team may stay in place and operate the company, but under the court’s guidance. |
| Collateral | An asset that a borrower offers as a way for a lender to secure the loan. |
| Continuing guarantee | A guarantee covering on-going transactions which is typically provided for creditors of a subsidiary to ensure the parent company will continue to provide support to the entity to the extent that it is solvent. |
| Convertible bond | A bond that can be converted into a predetermined number of the company's shares at certain times during its life. |
| Cost of equity | The returns required by shareholders for the business to retain that equity finance. The costs incurred by a company in servicing its equity finance, which may be determined using CAPM. |
| Coupon | The annual interest rate paid on a bond. |
| Credit analysis | The process of evaluating an applicant's loan request or a corporation's debt issue to determine the likelihood that the borrower will live up to their obligations. |
| Credit rating | An evaluation of a potential borrower's ability to repay debt, prepared by a credit rating agency. |
| Credit report | A detailed report of an individual's credit history prepared by a credit bureau. |
| Credit risk | The risk of loss due to a debtor's non-payment of a loan or other line of credit. |
| Credit score | A statistical number that depicts a person's creditworthiness, based on their credit history. |
| Credit spread | The difference in yield between two bonds of similar maturity but different credit quality. |
| Creditworthiness | An evaluation of an entity's ability to repay its debts, or its default risk. |
| D | |
| Debenture | A type of unsecured bond that relies solely on the creditworthiness of the issuer. |
| Debt Service Coverage Ratio (DSCR) | A measure of cash flow available to pay current debt obligations. |
| Debt to equity | A financial risk ratio that assesses the interest bearing debt to the shareholders' equity: Debt to equity = Interest bearing debt/Shareholders’ equity. |
| Default | Failure to meet the legal obligations (or conditions) of a loan. |
| Differentiation | The ability to offer a product or service with a unique attribute that is deemed more attractive than those offered by rivals, e.g. brand, distribution, product quality, service quality, customer relationships. |
| Duration | A measure of the sensitivity of the price of a bond to a change in interest rates. |
| E | |
| Early repayment provision | A provision in a credit agreement that permits a loan to be repaid at any time prior to maturity, which may be of benefit to fixed rate borrowers when rates fall. |
| Economies of scale | The profit advantages that a business obtains due to the scale of their operations and the buyer and supplier power that this brings. |
| ESG (Environmental, Social and Governance) | A set of standards measuring a business's impact on society, the environment, and how transparent and accountable it is. |
| F | |
| Face value | The amount of money a bond will be worth at its maturity, also known as its par value. |
| Facility fee | A one off fee paid for administrative tasks performed in conjunction with the loan, such as the distribution of payments. |
| Fixed charge | A charge over specific, identifiable assets. Whilst a fixed charge does not provide the creditor with title in the property charged, it does result in the creditor having a proprietary interest in the asset, which restricts the debtor’s ability to deal with the asset until the debt is repaid. |
| Foreclosure | The action of taking possession of a mortgaged property when the mortgagor fails to keep up their mortgage payments. |
| Funding gap | The length of the working capital cycle in a trading company, i.e. the time from when cash is paid out to when it is received back in. Funding gap = Inventory days + Receivable days – Payable days. |
| G | |
| Grace period | A period where a borrower is forgiven an obligation to comply with a loan term or to make an interest or principal payment. Grace periods may prevent a technical default from becoming an actual default. They may also be used to postpone initial principal repayment requirements for amortizing loans. |
| Government related entity (GRE) | A company that is subject to government ownership or control, or which may be significantly influenced by the government. |
| Guarantor | An individual (natural or corporate) who provides a guarantee. |
| H | |
| High yield | A rating below investment grade, indicating the bond has a higher risk of default, but will offer a higher yield to compensate for the increased risk. |
| Hurdle rate | The minimum rate that a loan must charge in order to cover the business costs associated with providing the loan, also known as the minimum margin. |
| Hybrid finance | Business finance which combines both equity and debt characteristics such as fixed coupon redeemable preference shares, convertible preference shares and convertible bonds. |
| Hyperinflation | Economies in which cumulative inflation over three years is 100% or more. |
| I | |
| Indemnity | A contractual obligation of the borrower to compensate the lender for losses the lender incurs as a result of the borrowers acts, or vice versa. |
| Installment credit | A type of credit that has a fixed number of payments, such as a car loan or mortgage. |
| Interest rate | The proportion of a loan charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding. |
| Investment grade | A rating that indicates a bond has a relatively low risk of default. |
| Irredeemable bond | A bond with no set maturity date, potentially paying a coupon into perpetuity. Typically the issuer has call rights, i.e. may redeem the bond after a certain date if they wish, although they have no obligation to do so. Irredeemable bonds are also known as perpetual or undated bonds. |
| Issuing Bank | Under a letter of credit, the bank acting for the buyer/importer who issues the irrevocable guarantee. Under a guarantee, the bank providing the guarantee on behalf of the applicant. |
| J | |
| Joint and several liability | A liability that allows a creditor to make a claim for the full amount against all debtors collectively (joint), against any one debtor individually (several), or any combination of debtors. |
| Jump to default risk | The risk that a credit portfolio value may experience a sudden change in value because of an unexpected default on a particular credit. |
| Junk bond | A bond with a rating below investment grade, indicating a higher risk of default. |
| K | |
| Key Performance Indicators (KPIs) | Measures/metrics that are considered to be of importance for outsiders to understand business performance. |
| L | |
| Legal capacity | The ability of a party to enter into a legally binding contract within the relevant jurisdiction. For corporate credit arrangements this typically requires the loan to be permissible for the company, and for it to be authorized by the directors of the company. |
| Lien | A claim against property to secure payment of a debt. |
| Liquidation | Where a receiver or liquidator terminates the existence of a company by terminating the business operations, selling all business assets and settling all business liabilities (to the extent that they can be covered). Depending on the jurisdiction, there is a strict priority order for the settlement of liabilities with preference shareholders and ordinary shareholders being the second last and last respectively. A liquidation may also be referred to as a winding up. |
| Loan life coverage | A ratio which assesses the risk in a credit arrangement by comparing the debt service capacity and the opening amortizing loan balance. Loan life coverage = Debt service capacity/Opening amortizing loan balance. When the ratio exceeds 1.0 the company can service its debt from its operations, otherwise other sources of repayment may need to be found. |
| Loan-to-value ratio (LTV) | A financial metric used in secured lending to measure the ratio of a loan amount to the value of an asset purchased. |
| M | |
| Management oversight | An arrangement within an organizational structure which provides quality assurance and supervision. This may be achieved in a one-tier board system through non-executive directors, or in a 2-tier through a supervisory board composed of non-executive directors. |
| Maturity | The date on which the principal amount of a bond is to be paid in full. |
| MLA | Mandated lead arranger, i.e. the lead bank or banks in a syndicate that arrange and structure the loan. |
| Modified duration | A measure which allows a good (although not precise) estimation of the change in the bond price for a given change in the YTM as: Modified duration = Percentage change in the bond’s price for a 1% change in YTM. |
| Municipal bond | A bond issued by a state, municipality, or county to finance its capital expenditures. |
| N | |
| Negative covenant | A term prohibiting the borrower from doing something that may be detrimental to the lender, such as selling assets or paying excessive dividends. |
| Non-compliance risk | The risk related to compliance with contractual agreements, national, regional sector specific legislation and regulation and taxation. |
| Non-recourse loan | A loan which gives a lender no legal right to pursue the borrower’s other assets, hence must write off any shortfall as irrecoverable. |
| O | |
| Operating efficiencies | The cost advantages that a business obtains due to the scale of their operations and the buyer power that this brings. |
| Original issue discount (OID) | The discount that a bond or open market credit may have to its nominal value as a result of the bond terms and the market circumstances. |
| Overcapacity | A situation where the total supply to a market exceeds the volume of goods and services demanded (the capacity). |
| P | |
| Pari Passu clause | A credit contract term which ensures that any lender is granted the same level of security as that given to any subsequent higher-ranking lenders. |
| PESTEL | An acronym which stands for the six external factors affecting a business, each of which may have a significant impact on, and implications for, a business. The issues being: Political; Economic; Sociocultural; Technological; Environmental; Legal. |
| Pillar 3 | One of the three pillars of the Basel framework requiring public disclosures by banks (market discipline). |
| Principal | The initial size of a loan; it can also refer to the amount still owed on a loan. |
| Q | |
| Qualified audit report | The audit report issued when the auditor does not agrees that the accounts give a fair representation as a result of either a disagreement or a material uncertainty. |
| R | |
| Recourse loan | A loan which gives a lender the legal right to pursue other assets owned by the borrower and/or seek legal redress for the borrower’s income to be used to settle the shortfall amount. |
| Recovery rate | The proportion of any loan exposure that will be recoverable in the event of default, expressed either as a decimal or a percentage. |
| Revolving credit | A type of credit that does not have a fixed number of payments, such as credit cards. |
| Ring fence | A legal or contractual process that constrains access to the assets or cash flows of the ring-fenced entity. |
| S | |
| Second-lien term loan | Similar to a term loan B in structure and mechanics, except for priority, security and pricing. |
| Secured bond | A bond backed by the issuer's assets in the event of default. |
| Secured loan | A loan in which the borrower pledges an asset as collateral for the loan. |
| Sector | From a credit perspective, the microeconomic issues that affect the industrial sector in which the business operates, including issues such as the sector’s structure, performance and trends, the local industry’s cost structure and relative power in the value chain, and the overall industry capacity, all of which have an impact on the long-term growth prospects of entire sectors. |
| Sovereign bond | Bonds issued by a national government in a foreign currency, to support national borrowing. |
| Sovereign credit risk | The risk of a sovereign government failing to honor its debt obligations. |
| T | |
| Term loan A | A senior amortizing loan that is typically fully drawn at close and has meaningful amortization throughout the tenor of the loan, with the remaining balance due at maturity. The required amortization percentage typically increases over time. |
| Term loan B | A senior loan similar to a term loan A in operational mechanics, but with minimal amortization through the life of the loan (e.g. 1% per annum), with the bulk of the balance due at maturity. |
| Terminal value | The value that an investment will grow to at a specific future date/time if it experiences compounding returns. |
| Translation risk | The risk that the value of assets or liabilities denominated in one currency may vary when measured in another currency due to exchange rate fluctuations. This may lead to a currency mismatch. |
| U | |
| Underwriting risk | The risk that a lender who provides a committed credit facility may be unable to spread the risk through syndication. |
| Unsecured bond | A bond not backed by any assets; if the issuer defaults, the bondholder has no claim to specific assets. |
| Unsecured loan | Where a loan facility is provided without security, the lender relying entirely on the borrower’s income and financial capacity to service the debt. |
| Utilization fee | A one off fee paid to the lender on the drawn portion of any revolving credit facility. |
| V | |
| Value at Risk (VaR) | A statistical measure of the likely maximum potential loss over a given period of time at a given level of probability under normal market conditions. |
| Variable coupon bond | A bond whose coupon varies during the term in accordance with a specified reference, such as interest rates or inflation rates. |
| Veto rights | The ability of a particular shareholder or group of shareholders to overrule certain company decisions such as mergers or acquisitions. |
| W | |
| Warranty | A promise of indemnity given by a party to a contract that is payable in the event that a representation proves to be false. |
| Worldwide Governance Indicators (WGI) | A World Bank report for over 200 countries and territories summarizing their views on the quality of governance based upon many enterprises, citizens and expert survey respondents in industrial and developing countries. |
| Y | |
| Years to repayment (Debt to free cash flow) | A measure which assesses the ability of a company to service its debt obligations from its operating cash flow after interest, tax and capital expenditure. Years to repayment = Interest bearing debt/Operating cash flow after interest, tax and cap-ex. |
| Yield | The income return on an investment, such as the interest or dividends received. |
| Yield to maturity | An assessment of the total return offered by a bond (Income + Principal Gain/Loss). |
| Z | |
| Zero-coupon bonds | A bond that carries no coupon and is simply redeemed at face value at maturity. |
| Zombie company | A company in slow decline that is only able to cover its debt interest but no longer capable of reducing its debt levels. |