INTM511035 | Thin capitalisation: practical guidance: introduction: Critical features of debt and their interdependence

Lending and borrowing decisions are influenced by the macroeconomic circumstances of the period leading up to signing of contracts; thus, lending decisions are more generous in buoyant economic conditions than those arising during more pessimistic conditions such as recession. Similarly, lending decisions are critically dependant on the credit risk of the borrower which in turn is influenced by factors such as leverage and interest cover. The currency denomination of debt is a further significant feature. In some circumstances, the introduction of a foreign exchange conversion from one currency to another can lead to unhedged exposure that can make such a deal unacceptable for both lenders and borrowers. Consideration should also be given to the combination of magnitude of debt and the maturity (or “tenor”) of the debt. Under any particular macroeconomic backdrop, for any specific credit risk and for any currency denomination, relatively larger amounts of debt will generally only be available for shorter maturities whilst smaller amounts will be available for longer maturities.