FIN.10:5.2 - The holder of a financing right changes the dependable horizon

In a separate constructed case, the company has cash 10, a required reserve of 5 and an investment payment of 100 now. Each offered loan supplies 100 net before that payment. The investment produces net cash 112 at month 12, with no interim receipt or other cash difference. Interest of 3 is payable at month 6; if the principal remains outstanding, another 3 is payable at month 12. Compare three stipulated versions, with no fees or other acceleration condition:

• The principal is due at month 6, but the borrower can extend it to month 12 by giving notice by the end of month 5. Timely notice is sufficient under the agreement; lender consent is not required.
• The same extension requires the lender’s affirmative consent by the end of month 5. The borrower’s request alone does not extend the loan.
• The stated maturity is month 12, but the lender may require repayment at month 6 by giving notice by the end of month 5.

After the initial draw and investment, cash remains 10. With the first version and a valid extension notice, the month-6 interest leaves 7. At month 12, cash becomes 7 + 112 − 100 − 3 = 16. The borrower’s exercisable right supplies the required horizon on the stated conditions.

For the second version without obtained consent, or the third after the lender’s call, month 6 requires principal and interest of 103. Preserving the reserve needs 103 + 5 − 10 = 98 of replacement net proceeds by that date. The positive month-12 investment return cannot pay this earlier maturity. Before committing, the company needs an arrangement that covers that branch, a different initial instrument or a changed investment plan. It cannot choose the lender’s future action as though that were its own extension option.

Suppose a separate replacement commitment is actually obtained by month 5 and supplies 98 net before the month-6 repayment, with conditions already satisfied and repayment of 103 at month 12. The month-6 account is 10 + 98 − 103 = 5; the final account is 5 + 112 − 103 = 14. This arrangement makes the early-repayment branch feasible on the given premises. If its proceeds instead settle after the old loan falls due, the arrangement does not repair the maturity gap.

These timelines establish dated availability and the resulting payments. Pricing the contingent rights is a further question requiring the qualified valuation grounds in FIN.8; the difference between final cash balances is not itself a price for an extension or call. FDM.3 supplies the actual notice, consent and claim events; FIN.2 tests their settlement order.