Association of Corporate Treasurers (ACT) Qualifications Funding and Capital Markets Syllabus

What is supply chain finance (reverse factoring)?

Reverse factoring is buyer-led: a finance provider pays the buyer's approved supplier invoices early (at a discount based on the buyer's stronger credit), while the buyer pays the provider at the original/extended due date. It improves supplier liquidity and can extend the buyer's payables, but must be assessed for accounting (trade payable vs borrowing) treatment.

What is project finance and what is its key credit feature?

Project finance funds a discrete project through a ring-fenced SPV, with lenders relying primarily on the project's future cash flows and assets for repayment (limited or non-recourse to sponsors). The key feature is that risk is borne by the project itself, allocated among parties via contracts, rather than the sponsor's balance sheet.

What are the main sections typically found in a loan facility agreement?

Typical sections: definitions/interpretation; the facility (amount, purpose, availability); conditions precedent; interest and fees; repayment/prepayment; representations and warranties; covenants (information, financial, general); events of default; changes to parties (transfers); and boilerplate (governing law, notices). The LMA template standardises this structure.

What are 'conditions precedent' (CPs) in a facility agreement?

Conditions precedent are documents and conditions the borrower must satisfy before the lender is obliged to advance funds, e.g. constitutional documents, board resolutions, legal opinions, executed security, KYC and evidence of authority. Drawdown cannot occur until CPs are met to the lender's satisfaction.

What does a 'representations and warranties' clause do, and how does it differ from a covenant?

Representations and warranties are statements of fact (e.g. legal status, no litigation, accurate accounts) given by the borrower, often repeated on drawdown/interest dates; a breach can trigger default. A covenant is a promise as to future conduct (to do or not do something). Reps describe the present; covenants govern future behaviour.

What is the LMA and why is it relevant to facility agreements?

The Loan Market Association (LMA) publishes standardised, market-recommended documentation and templates for loans (investment grade, leveraged, etc.) used across the European/EMEA syndicated loan market. Using LMA standards speeds negotiation, improves consistency and provides a common reference framework for lenders and borrowers.

What is a 'transfer' / assignment clause and why do lenders want it?

It governs how a lender can transfer or assign its rights and obligations to another lender (e.g. via novation or assignment), enabling secondary-market trading of the loan and management of exposures. Borrowers often negotiate restrictions (e.g. consent rights, no transfers to competitors/loan-to-own funds).

How is floating-rate loan interest typically composed?

Floating-rate interest = a reference rate + a margin (credit spread), e.g. $\text{Interest rate} = \text{SONIA/SOFR} + \text{margin}$. Following LIBOR's discontinuation, risk-free rates (RFRs) such as compounded SONIA (GBP) or SOFR (USD) are used, often with a credit-adjustment spread on transition.

What is a margin ratchet (pricing grid)?

A margin ratchet adjusts the loan's margin up or down according to the borrower's performance, typically a leverage ratio (e.g. net debt/EBITDA) or, increasingly, ESG/sustainability KPIs. Better performance lowers the margin; deterioration raises it, linking the cost of borrowing to credit risk.

Define a commitment fee and explain on what it is charged.

A commitment fee compensates a lender for keeping committed funds available. It is charged on the undrawn (available but unused) portion of a committed facility, usually as a percentage of the margin (e.g. 35-40% of margin), and accrues until the facility is drawn or cancelled.

What is an arrangement (upfront) fee?

An arrangement or upfront fee is a one-off fee paid to the arranger(s)/lenders at the outset for structuring and providing the facility, expressed as a percentage of the total commitment. It is a key component of the all-in cost and effectively raises the effective yield to lenders.

What is the difference between a utilisation fee and a commitment fee?

A commitment fee is paid on undrawn commitments to keep funds available. A utilisation fee is a tiered fee charged when drawings exceed certain thresholds of the facility (e.g. >33%, >66% utilised), incentivising lower usage and compensating lenders for higher balance-sheet consumption when heavily drawn.

Distinguish maintenance covenants from incurrence covenants.

Maintenance covenants are tested at regular intervals (e.g. quarterly) and require the borrower to keep within set financial ratios at all times; they are typical of bank loans. Incurrence covenants are tested only when the borrower takes a specific action (e.g. issuing new debt, paying a dividend); they are typical of high-yield bonds and cov-lite loans.

Give two common financial covenant ratios and what they measure.

Leverage: $\text{Net debt}/\text{EBITDA}$ measures total indebtedness relative to earnings. Interest cover: $\text{EBITDA}/\text{Net interest}$ measures ability to service interest. Others include gearing (debt/equity) and DSCR ($\text{cash available for debt service}/\text{debt service}$).

Write the formula for the Debt Service Coverage Ratio (DSCR) and state a healthy benchmark.

$$\text{DSCR} = \frac{\text{Cash available for debt service}}{\text{Principal} + \text{Interest due}}$$ A DSCR greater than 1.0 means cash flow covers debt service; lenders typically require a cushion such as $\geq 1.2\times$ to $1.5\times$ depending on sector and risk.

What is a 'cov-lite' loan?

A cov-lite (covenant-light) loan lacks the usual maintenance financial covenants, instead relying on incurrence covenants more akin to high-yield bonds. It gives borrowers greater operating flexibility and fewer trip-wires, but reduces lenders' early warning and ability to intervene before serious deterioration.

What is an 'equity cure' right in a leveraged facility?

An equity cure allows the borrower's shareholders to inject new equity (or subordinated funds) to remedy a breach of a financial covenant, deeming the covenant met. Documentation typically limits the number of cures (e.g. not in consecutive periods, a maximum over the life) and how the proceeds are applied.

List the typical events of default (EoD) in a facility agreement.

Common EoDs: non-payment; breach of financial or other covenant; misrepresentation; cross-default; insolvency/insolvency proceedings; unlawfulness/invalidity; cessation of business; material adverse change (MAC); and unenforceability of security. On an EoD the lender may accelerate and enforce security.

What is a cross-default clause and how does it differ from cross-acceleration?

A cross-default makes a default under one piece of the borrower's other indebtedness an automatic event of default under this agreement. Cross-acceleration (a narrower, more borrower-friendly version) only triggers when the other debt has actually been accelerated/declared due, not merely defaulted on.

Distinguish a fixed charge from a floating charge.

A fixed charge attaches to specific identified assets (e.g. land, machinery) that the borrower cannot dispose of without lender consent. A floating charge hovers over a class of changing assets (e.g. stock, receivables) allowing the borrower to deal with them in the ordinary course until 'crystallisation', when it fixes onto the then-existing assets.

What is the difference between a guarantee and an indemnity?

A guarantee is a secondary obligation: the guarantor is liable only if the primary obligor defaults, and the guarantee falls away if the underlying debt is void. An indemnity is a primary, independent obligation to make good a loss that stands even if the principal obligation is unenforceable, giving the lender stronger protection.

Explain the typical order of priority (ranking) on insolvency for a secured corporate borrower.

Broadly: (1) fixed-charge secured creditors; (2) insolvency expenses; (3) preferential creditors (e.g. certain employee/HMRC claims); (4) prescribed part for unsecured creditors; (5) floating-charge holders; (6) unsecured creditors; (7) subordinated creditors; (8) shareholders. Senior secured ranks ahead of mezzanine, which ranks ahead of equity.

What is the purpose of an intercreditor agreement?

An intercreditor agreement governs the relationship between different classes of creditors (e.g. senior, mezzanine, hedging, shareholder debt) to the same borrower. It sets out ranking/priority of payments and security, subordination, standstill periods, enforcement rights and turnover provisions, so each class knows its position in distress.

What is structural subordination?

Structural subordination arises from the position of debt within a group's structure rather than contractual ranking: creditors of a holding company rank behind creditors of an operating subsidiary because the subsidiary's assets must first satisfy its own (operating-company) creditors before any value flows up to the holdco. Upstream guarantees can mitigate it.

Compare a rights issue with a placing as equity-raising routes.

A rights issue offers new shares to existing shareholders pro rata, preserving pre-emption rights and usually at a discount; it suits larger raisings. A placing sells new shares to selected (often institutional) investors, is faster and cheaper but dilutes existing holders and is limited by pre-emption/authorised limits unless disapplied.

What are pre-emption rights and why do they matter in equity raising?

Pre-emption rights give existing shareholders the first right to subscribe for new shares pro rata to their holdings, protecting them from dilution of ownership and value. UK listed companies must offer new equity for cash to existing holders unless shareholders disapply pre-emption (e.g. within Pre-Emption Group limits), which constrains how placings are done.

What is the difference between an IPO and a secondary offering?

An IPO (initial public offering) is a company's first sale of shares to the public, listing it on an exchange and raising primary capital and/or selling existing shares. A secondary offering is a further issue or sale of shares by an already-listed company (e.g. follow-on/rights issue or vendor placing of existing shares).

What is a convertible bond and why might a company issue one?

A convertible bond is debt that the holder can convert into a predetermined number of the issuer's shares (the conversion ratio) at the conversion price. Issuers gain lower coupons than straight debt (investors pay for the option), defer/avoid immediate dilution, and effectively sell equity at a premium to the current share price if conversion occurs.

Define the conversion price and conversion ratio of a convertible bond.

The conversion ratio is the number of shares received per bond on conversion. The conversion price is the effective price paid per share, $\text{Conversion price} = \frac{\text{Par value of bond}}{\text{Conversion ratio}}$. Bonds are usually issued with the conversion price set at a premium to the current share price.

What is a perpetual / hybrid bond and why may it receive partial equity credit?

A hybrid (e.g. perpetual subordinated bond with optional/deferrable coupons and a call) has no fixed maturity and deeply subordinated, equity-like features. Because it absorbs losses and lacks a maturity/coupon obligation like senior debt, rating agencies may assign partial equity credit (e.g. 50%), improving leverage metrics while interest may remain tax-deductible.

What is a warrant in equity-linked finance?

A warrant is a security giving the holder the right (not obligation) to buy a company's shares at a fixed exercise price before/at a set date. Often attached as an 'equity kicker' to mezzanine or venture debt, warrants enhance lender returns and, when exercised, create new shares and cash for the issuer (dilutive).

What is the dilution effect of equity-linked instruments and why does it matter?

Conversion of convertibles or exercise of warrants/options creates new shares, increasing the share count and reducing existing holders' proportional ownership and earnings per share (diluted EPS). It matters for control, valuation and reported EPS; companies disclose fully diluted figures so investors can assess potential dilution.

What are the UK Listing Rules and who administers them?

The UK Listing Rules are the rules companies must satisfy to list and remain listed on a UK regulated market, administered by the FCA acting as the UK Listing Authority. They cover eligibility, continuing obligations, significant transactions, related-party transactions and disclosure, protecting investors and maintaining market integrity.

What is the purpose of investor relations (IR) for a debt or equity issuer?

IR manages two-way communication between the company and its investors/analysts (and rating agencies), providing accurate, timely information on strategy and performance. Good IR builds credibility, broadens and stabilises the investor base, supports fair valuation, narrows credit spreads/lowers cost of capital, and ensures market access in good and bad times.

What are the key building blocks of a corporate funding strategy?

A funding strategy aligns financing with business strategy and risk appetite: appropriate amount and tenor (matching assets/cash flows), diversification of sources and maturities, balance of fixed/floating and currency, target capital structure/credit rating, adequate liquidity headroom/committed back-up, and flexibility/covenant headroom to withstand stress.

Why is maturity diversification (avoiding a 'maturity wall') important in funding strategy?

Concentrating large amounts of debt maturing at one time creates refinancing risk: the borrower may have to refinance a big slug when markets are closed or expensive. Spreading (laddering) maturities reduces the amount due in any single period, smoothing refinancing needs and reducing exposure to adverse market conditions.

What does 'matching' the funding profile to assets mean?

Matching means aligning the tenor and currency of funding with the assets/cash flows it supports: long-term assets financed with long-term debt or equity, and short-term/working-capital needs with short-term facilities. This reduces refinancing and interest-rate risk; financing long-term assets with short-term debt creates dangerous rollover risk.

Outline the typical stages of a bond issuance process.

Stages: appoint lead managers/bookrunners and advisers; due diligence and documentation (prospectus, legal opinions); obtain/confirm credit ratings; announce the deal and conduct investor roadshow; open the order book (bookbuilding) and gather demand; set the price/coupon and allocate; sign, close and settle; then admission to listing and ongoing reporting.

What is 'bookbuilding' in a securities issue?

Bookbuilding is the process by which bookrunners collect indications of interest (bids at various prices/yields) from investors to gauge demand. The resulting order book lets the issuer set the final price/coupon and allocate the securities; strong oversubscription supports tighter pricing for the issuer.

What is a prospectus and when is it required?

A prospectus is the formal disclosure document giving investors the information needed to assess a securities offering (business, financials, risks, terms). It is generally required when securities are offered to the public or admitted to trading on a regulated market, and must be approved by the relevant competent authority (e.g. FCA in the UK).

What is a credit rating and why do issuers seek one?

A credit rating is an independent agency opinion (e.g. S&P, Moody's, Fitch) of an issuer's or instrument's relative creditworthiness/default risk. Issuers seek ratings to access a wider investor base, achieve lower spreads/pricing, satisfy investor mandates, and benchmark themselves; ratings drive cost of debt and market access.

How should a treasurer manage the relationship with rating agencies?

Treat agencies like key investors: maintain regular, transparent two-way dialogue; present a clear strategy and credit story; provide forward-looking information and forecasts; understand the agency's rating methodology and the metrics/thresholds that drive the rating; flag material developments early; and manage the balance sheet to protect the target rating.

What is a 'rating trigger' and why can it be dangerous?

A rating trigger is a contractual clause activated by a downgrade (e.g. coupon step-ups, additional collateral/margin calls, mandatory prepayment, or loss of contracts). It is dangerous because it can compound stress: a downgrade simultaneously raises costs or demands cash exactly when the company is weakest, potentially accelerating a liquidity crisis.

What is a liability management exercise (LME)?

An LME is a proactive transaction to reshape existing debt rather than wait for maturity, e.g. tender offers, exchange offers, bond buybacks, consent solicitations or refinancings. Aims include extending maturities, reducing the amount/cost of debt, capturing discounts, removing/amending covenants, and managing the maturity profile.

Distinguish a tender offer from an exchange offer in liability management.

A tender offer invites bondholders to sell their bonds back to the issuer for cash (often at or near par or a set price), reducing debt. An exchange offer invites holders to swap existing bonds for new securities (e.g. longer maturity or different terms), extending or restructuring debt without (or with limited) cash outlay.

What is a consent solicitation?

A consent solicitation is a process by which an issuer asks existing bondholders to approve amendments to the terms of outstanding bonds (e.g. waiving or changing covenants, extending maturity), usually requiring a specified majority and often accompanied by a consent fee to incentivise holders to vote in favour.

Why might a company buy back its own bonds below par?

Buying back bonds trading below par lets the issuer retire debt at a discount, generating an accounting gain, reducing leverage and future interest cost, and managing the maturity profile. It uses surplus liquidity efficiently when its own debt is cheap, though it must consider liquidity, market signalling and equal-treatment of holders.

What is the all-in cost of debt and why does it matter more than the headline coupon?

The all-in cost captures every cost of borrowing: the coupon/margin plus reference rate, arrangement and commitment fees, agency and legal costs, and any hedging costs, expressed as an effective annual rate. It matters because two facilities with the same headline rate can differ materially once fees are included, so it is the true basis for comparison.