Loan notes are commonly used for raising funds for a wide range of purposes, including institutional investments, securitisations, property development projects, public companies, owner-managed businesses and start-ups. They are also commonly used for restructuring existing businesses. They are extremely scaleable, and in theory there is no limit to the total amount that can be raised, or the number of note holders.
So what exactly are they?
The concept is very simple. A loan note is essentially just an IOU – a piece of paper recording a promise to repay a loan, usually with interest, on specified terms. They are an effective way of recording loans from multiple lenders on the same terms. Loan notes may be:
- Secured or unsecured
- Listed on a stock exchange, or unlisted
- Transferable or not transferable
However, the terminology around loan notes can be confusing. And by the way, “bond” and “loan note” often mean the same thing.
The “issuer” is the borrower under the loan notes. This is often a company – for example, a member of an existing trading group, or a new company established for a specific project.
The “loan note instrument” is the document which sets out the terms and conditions relating to the loan notes. It is signed by the issuer, and is addressed to the world at large. The loan note instrument contains schedules which include the commercial terms of the loan and the procedures for holding meetings of note holders.
The “note holders” or “subscribers” are the lenders – the people or legal entities who have agreed to lend money to the issuer by subscribing for loan notes. Sometimes, loan notes are issued to record the terms of an existing debt which is outstanding between issuer and subscriber.
The “loan note certificate” is like a share certificate. It is usually a one or two page document, and is signed by the issuer and given to each note holder. It constitutes formal evidence of the debt. Each loan note certificate will set out the names of the issuer and the holder, the date of issue, the maturity date, the interest rate and the amount of loan notes held. And it will attach the terms and conditions relating to the loan notes.
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