Cost of financial distress and GLP: Difference between pages

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''Corporate finance''.
''Sustainability''.


According to Modigliani and Miller's theory, as a company’s capital structure is composed of more and more debt a point is reached where equity cost and debt cost increase beyond that predicted by pure arbitrage of the appropriate cost of capital for the business. 
Green Loan Principles.
This extra cost is described as the cost of financial distress; potentially the cost of dealing with a near-insolvency situation.


Financial distress costs can include:
A voluntary framework for green loans, issued by the Loan Market Association (LMA).  
o Higher rates of interest payable on borrowings.
o Additional fees payable on new borrowings.
o Additional restrictive covenants for new borrowings.
o Reduced availability of borrowings.
o Reduced availability of trade credit.
o Management time and loss of operational focus through the additional communications needed with lenders.
o In the worst case, actual insolvency.


The point at which financial distress costs become significant can be difficult to predict with precision.
However it can be estimated by reference to industry norms for key financial credit assessment ratios such as interest cover and debt equity ratios.


At the point at which the borrower breaches the industry norm for key ratios, it is likely that significant financial distress costs will be incurred.
== See also ==
* [[Green Bond Principles]]  (GBP)
* [[Green loan]]
* [[Green Loan Principles]] 
* [[Loan Market Association]]  (LMA)
* [[Sustainability]]


Also known as Bankruptcy costs.


== See also ==
==External link==
* [[Debt equity ratio]]
[http://www.lma.eu.com/application/files/8415/2162/5092/LMA_Green_Loan_Principles_Bookletpdf.pdf?utm_medium=email&utm_campaign=Press%20Release%20The%20LMA%20publishes%20Green%20Loan%20Principles&utm_content=Press%20Release%20The%20LMA%20publishes%20Green%20Loan%20Principles+Preview+CID_51b125e77a2eaf285bacd35d7e340a3a&utm_source=Campaign%20Monitor&utm_term=View%20Green%20Loan%20Principles LMA summary of Green Loan Principles]
* [[Insolvency]]
 
* [[Interest cover]]
[[Category:Financial_products_and_markets]]
* [[Modigliani and Miller]]

Revision as of 10:29, 23 April 2023

Sustainability.

Green Loan Principles.

A voluntary framework for green loans, issued by the Loan Market Association (LMA).


See also


External link

LMA summary of Green Loan Principles

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