OT22097 - Interest and Financing

Gearing. Loan Agreements as Equity.

It may sometimes be necessary to consider whether loan agreements have features which give them the quality of equity, or which indicate that other loans have the quality of equity. Where debt is a mixture of third party and group debt the third party debt may well throw light on the associated company debt. In financial arrangements at arm' s length a lender will be reluctant to accept security any less secure than other lenders. Therefore if loans from associated companies have terms within them that subordinate those loans to loans lent by third parties, or if there is an agreement with a third party that its loan is to take priority over the associated company loan, it is prima facie evidence there is too much debt, and that the associated company loan ought to be re-characterised as equity.