Loan Notes

Loan notes are a type of debt instrument that allows companies to raise capital from investors. They are essentially promissory notes that pledge the company to repay the debt to the investor with interest at a specified future date.

In our experience loan notes offer great flexibility within a company’s financing strategy. They can be secured or unsecured, and can have varying interest rates and repayment terms.

Use of Corporate Loan Notes

Loan notes are a popular financing tool for UK private companies. They are often used to:

• Purchase assets - loan notes can be used to purchase new equipment or real estate.

• Invest in growth - loan notes can be used to finance the company's expansion plans.

• Fund an M & A transaction - as part of agreed financing for buying a business.

Convertible Loan Notes

Convertible loan notes (CLNs) can be converted into shares of the company at a specified price. This means that investors have the option to convert their debt into equity if the company's value increases or even as a way to possibly gain control of the company for their own benefit.

Convertible loan notes are versatile and can often be relatively quickly finalised, and we have found are a way for early stage, high growth businesses to raise capital before their initial round of equity financing (seed or series A).

There are a number of important considerations and risks with convertible loans – read our detailed guide to find out more.

Non-Convertible Loan Notes

Non-convertible loan notes are loan notes that do not have the option to be converted into shares. These notes are typically used for more established companies that are not seeking to raise equity capital.

What we do and who we act for

We are instructed by and have experience in advising borrowers and investors (and also sometimes shareholders who will be impacted by loan notes being issued) for a variety of different sized businesses and transaction sizes. Our fees are flexible, proportionate and competitive.

We provide advice from the initial strategy underpinning the investment through to the drafting and implementation of the loan notes.

Experience and services for Investors

When acting for investors we are looking to protect their capital and ensure that they receive a proper return on their investment. Where loan notes are a potential part of the investment deal, we help investors with;

• Due Diligence – assessing borrower risk by evaluating the financial health of the Borrower and review the documentation by ensuring the Loan Note terms are clear, enforceable, and legally compliant.

• Structuring and Negotiation - help with structuring the deal to balance risk and return. We negotiate on behalf of Investors on issues typically including interest rates, security (e.g., charge over assets), covenants and default terms.

• Security and Enforcement – drafting the required documents and ensuring security is properly registered (e.g. debentures, charges).

• Regulatory Compliance - ensuring the investment offering complies with financial regulations (e.g., FCA rules in the UK) and whether the Loan Notes are structured as regulated or unregulated instruments.

• Default, restructuring or refinancing – we represent investors in any restructuring or refinancing discussions. On default we initiate enforcement actions, work with insolvency practitioners and recover funds where possible

• Exit Strategy - advice on correct formalities and process with repayment, early redemption, or transfer of the loan note.

How we help Borrowers

We ensure that borrower clients are protected, understand the terms and risks (with convertible loans and default terms) compliant, and positioned for success. Key areas where we advise include :

• Structuring the Loan Note - advice on the structure, including secured vs unsecured, convertible vs non-convertible, bullet repayment vs amortising, the appropriate interest rate and maturity terms.

• Ensuring clients are fully briefed – key areas for clients to fully understand include events of default, investor rights, redemption terms, conversion rights (if applicable).

• Internal corporate processes - issuing loan notes by a UK private company requires proper internal authorisation, typically approval by the board of directors (and, if the company’s articles or shareholder agreements require, by the shareholders.

• Working with tax advisors to ensure the structure is efficient.

• Drafting & Reviewing Documentation - whether the loan note instrument, subscription agreements, security documents (e.g., debentures, charges) or information memoranda

• Regulatory and Legal Compliance - determine whether the offer is regulated or unregulated (especially important in the UK, where unauthorised promotion of unregulated loan notes can be illegal) and ensure compliance with FSMA 2000 and FCA rules (UK), Prospectus exemptions and Companies Act provisions for issuing debt

• Managing Default or Restructuring - advice on options in case of financial distress, such as negotiating standstills or restructuring, managing communication with investors and minimising personal liability for directors

Examples of loan note instructions

• Unsecured Loan Notes - acted on behalf of a Golf Club who wished to raise finance for the construction of a new clubhouse without incurring external debt or providing security over the club or it’s facilities.

• Secured Loan Notes - acted on an MBO of part of a national group in relation to which the Vendor group provided part of the purchase finance to the Buyers secured by a combination of secured Loan Notes and Preference Shares.