 Hey guys, it's MJ the students at tree and in this audio talk We're going to be looking at subject CT to chapter 4 and we're going to be focusing on Loan capital so in the previous talk I focused on share capital So take a listen to that But if you just want to learn more about loan capital, you've come to the right place The whole idea with the loan is something a lot of us are familiar with Let's say I want to buy a house Houses cost a lot of money. I don't necessarily have You know, let's say a million dollars in my pocket to just go buy a house But what I do have is I've got a nice job and it is paying me out a steady income stream So what I do is I go to the bank and I say please give me the million rent now And I have the salary of the salary. I will pay you so much interest For the next 10 30 years or something like that The bank says, okay, we agree to this We're going to give you the one million Dollars to buy a house in exchange for interest payments throughout a certain period of time And that's what a loan is you're getting liquidity now in exchange for paying interest rates and The idea is that if you look at all the payment rates that you make it is significantly higher Then the amount you initially borrowed. So if you have a lot of money, you don't need to borrow more money because you're paying for that money you're paying for the usage of it and What we're going to see with companies is that they've got two options. They can either sell shares and equity but they might not be Too keen to do that because that means they're giving away voting rights. They're giving away You know if the company does really well in 10 years time, they've sold it at such a cheap price There's a lot of reasons against equity And so there is the second option known as loan capital in which case they go to a Creditor which is either a bank or a very wealthy individual or could be a bunch of other people and they say Give me a lot of money now and I will give you interest payments throughout a course of a term With loan capital, we have something called a debenture now The debenture is the most secure type of loan in the sense that If we go back to our example, the bank says here's one million dollars to buy your house If you don't make your interest payments We're gonna come and we're gonna take that house away from you And we're gonna take that house and we're gonna sell it on the market and get our money back Because the loan is backed by an asset. There is Significantly less risk for the bank. So they charge you a much lower interest rate It's all gonna charge you an interest rate That is quite high in the sense that there's a lot of effort involved in trying to take that house and Selling it and you know, they might not get the best price for it and there's real estate There's there's all this this effort involved in turning the asset into cash to settle the loan So there still will be some sort of Interest or risk premium to account for that But the main idea is saying that this person is gonna be more likely to pay the interest and not default Because there is a serious consequence if he doesn't do that This the venture in contrast there is unsecured loan stock and this is when you just give someone money and You say if you don't pay tough luck for both parties You can maybe try sue and go into liquidation and all that type of stuff but the idea is I give you some money and You pay me the money back in Installments every month and the whole idea is why they do this is because we say well this guy has a job or this company is Making profit. We're seeing these income streams. They just need the liquidity now There's a very low chance that they will default therefore. I'm prepared to make this loan In South Africa my home country there was a company who was issuing quite a lot of unsecured loan to the general public African Bank they were giving people loans charging extremely high interest rates to Count for the the high risk that the person might default But because the interest rates were so high the people were defaulting and Of course massive problems and African Bank is not in a very good financial situation as of now so that is unsecured loan stock and When it comes to to loan capital just like I was talking about in the previous talk is there's three things there's Risk return and market ability. So what we're gonna see is that the higher the risk It's more likely the higher return So the unsecured loan stock has got a higher risk for the bank. So they're gonna want to have a higher interest rate payment But beyond risk and return, there's this third one called market ability and Market ability when it comes to loans Again, it's the same idea the more buyers the more sellers in the market the more marketable that asset is So you want something to have a big secondary market in order to make sure that these loans can get traded and Marked ability is improved by issuing large amounts of it because Issuing large large amounts of it and if there is that take up you've got a lot of buyers in the market Which means remember you need lots of buyers lots of sellers. You've got one part of that deal done What is quite interesting when it comes to Loans and the trading of all this type of stuff New technology is currently being developed a lot of stuff around the blockchain Which is the infrastructure behind Bitcoin can be used in these financial instruments in order to make the transferring of loans from one person to another person easier and this blockchain technology is Going to help hopefully increase marketability and if something is more marketable Investors will therefore be prepared to accept less return and if they accepting less return Then it means people can loan money at a cheaper rate Which is a good thing for the economy in the sense that it stimulates activity although if interest rates are too low, we might see people just borrowing money for reasons that maybe aren't the best economically and It could cause mess messes up with supply and demand Which is what we saw with the world recession what was happening there people were taking loan stocks doing a little bit of magic in the background and and selling them off but By doing it at such a massive scale because interest rates were so low They altered the supply and demand of the housing markets, which these things were then backed on they fell down The stocks that went from being secured debentures. They took on a junk status Mass selling and it kind of caused a financial problem all around the world But then we're getting into a little bit too too much detail So let me let me wrap up this this talk by talking about a Thing called a euro bond a euro bond is when you issue a bond outside of your legal and tax Jurisdiction so the idea being that if I'm in South Africa and I issue a bond in America in order to tap into more Investors that is known as a euro bond The word euro just meaning that it's outside your country. I think it was generally done between the Americans and the Europeans Hence why I got that name euro but it doesn't have to go through through Europe and Euro bonds are normally unsecured loan stock, but when it comes to the issuing of loans I mean there's so many subtle features that you can tweak and you can customize to create your own financial Instrument that you feel is best targeted towards your investors and it's the best way to raise finance for your company But shot that is just a brief introduction on loan capital Go through the material because you'll see I haven't spoken about stuff like par value or nominal value and coupons and redemptions and Various options on when to pay it back and all that type of stuff just because that is kind of boring and It's best Understood when you read that material and you figure it out for yourself Rather than just hearing someone talk if I had to talk about it It would be a much much longer video So don't kid yourself. There is still a lot of material you need to go and find out for yourself but I hope this has given you a good enough introduction to loan capital and Yeah, the next video is going to be on Derivatives and that's gonna be chapter five and that stuff gets quite exciting So make sure you stay subscribed in order to get notified when I release that video. Thanks guys for listening. Cheers