FIN.10:4.4 - Match service obligations to the business under relevant states

Use the operating cash available after essential payments and investment to test service, preserving the required reserve. Compare dates and amounts, not merely the maturity label. A five-year facility with large annual amortization can demand more early cash than a shorter bullet loan. A bullet can fit early cash better while creating a concentrated refinancing or disposal need. Prove the proposed source of that repayment or retain it as a condition.

Consider which business exposures make financing harder to service. Floating interest can rise when operating cash is weak; fixed interest can cost more initially but reduce that exposure. Debt in a foreign currency may match genuine cash receipts in that currency, but a product sold there does not establish such a match if its price or settlement is actually in another currency. FIN.13 supplies the exposure analysis; FIN.14 handles a separate hedging choice where required. Asset and liability sensitivities can inform the design; approximate matching is not a guarantee against default.

An option to prepay, extend, convert or redraw has value only on its terms and in the states where it can be exercised. Identify who holds it. A lender’s call right can shorten the borrower’s dependable horizon, while a borrower’s extension subject to lender consent is not unconditional protection. A convertible’s lower coupon is paid for partly with an ownership claim; compare the joint instrument rather than treating the coupon reduction as free. Use a qualified valuation for material contingent terms or return the unresolved price as a range.