LPC
DEBT FINANCE CONSOLIDATION NOTES
SGS 1: OVERVIEW OF A BANKING TRANSACTION, SYNDICATION AND TERM SHEET // SGS 2: DUE DILIGENCE/CONDITIONS
PRECEDENT/LEGAL OPINIONS AND TRANSACTION STRUCTURE
NB Borrower or any security granter = obligor
[LIBOR] -- This is the interbank offered rate (interest one bank will demand, on money lent to another bank).
[Capital adequacy]
Requires bank to have 8% capital, compared to amount lent by bank, as buffer for depositors if loans are not repaid - need a certain
amount of capital for a certain level of risk of default
o Without enough capital, either issue extra shares or transfer existing loans off balance sheet
[Profit]
The issue is that LIBOR fluctuates – so LIBOR could wipe out any profits made; thus they are sometimes priced on ‘cost-plus’ LIBOR
plus the lender’s other costs in making the loan available e,g, FCA fees (but these are usually included with the margin) plus the sum
making the profit (margin) – which reflects the risk the lender makes on the loan
a. Derivatives
May need to spot a derivative; when a swap would be advisable and how it might be advantageous – no need to understand how they work
Often a CP to a loan agreement
About mitigating the interest rate/exchange rate of the company
need to protect against financial risks (solvency, potential default, adverse market movements) by hedging against certain risks
[Interest rate swap] – if income is fixed
Hedges against LIBOR going up
Issue is that your income is not linked to LIBOR but interest rate payments are risk that there will be a mismatch between income
and interest rate payments. Need to hedge against this – e.g. interest is LIBOR + 2% - if LIBOR raises, income not enough
Have a floating rate of interest to be paid by co to bank, customers pay in contract payments to co (e.g. Vodafone), if LIBOR shoots
up the bank is worried that co can’t pay increased rate of interest so Vodafone enters into agreement with Swap Counterparty to
balance fixed income with floating LIBOR rate, co will pay a fee for this
o Interest rate swaps fixes the interest rate on the amount – borrower will pay swap counter party the fixed rate and they’ll
pay back the interest rate plus whatever floating libor rate is
NB. Would only have this where the fact pattern indicates:
o that there is a floating rate of interest on the loan; and/or
o that the Subsidiaries will be providing security (cf. only providing guarantees)
[Cross-currency swap] learn to spot this: if several subsidiaries are overseas, income is in that currency – exposure
Exposure to exchange rate can fix currency. Sort of insurance product. So won’t suffer from downside of change in rates
Agreement in place with swap counterparty so that the co can mitigate exchange rate risk/exposure on part of company to exchange
rate fluctuations. Money comes into the co in one currency and leaves in the form of interest payments in another. Bank will want to
see the agreement. Swap Counterparty will be another company whose job is to offer derivative products. They’ll hedge themselves
by entering into all sorts of swaps. Essentially a currency converter
Rate of exchange is fixed between two currencies (bank will take on risk for a fee) and B will pay them back amount they need --
Bank also makes money if currency works in their favour e.g. bought US$1.40 to Euro, but becomes US$1.50 to Euro
o Mitigates the risk of there not being enough Euros on conversion to sterling to cover the obligations of the B under the
loan agreement
Would be applicable e.g. where Subsidiaries giving a guarantee operate in another country and are therefore likely to generate
income in a currency other than sterling BUT the term loan has been provided in sterling currency mismatch
Credit default swaps – transfers risk of default by borrower where counterparty makes payments on occurrence of trigger events e.g. non-
payment – could be linked to other debts of borrower e.g. bonds (but fee for this could = margin)
E.g. bond investor might take out CDS for trigger events including change of government
[Order of priority]
Fixed charge holders
liquidator’s costs
Preferential creditors (employees)
PPF
floating charge holders
Unsecured creditors
Shareholders
a. The banking system – an overview
[Key business issues for banks]
[Relationship]
Bank and borrower will often maintain relationship as first bank to which borrower turns – want to maintain and become borrower’s
‘relationship bank’ to which borrower’s will turn first when in need of loans/other financial products (this may affect the action the
bank may take e.g. if BR breaches agreement)
1
, LPC
o The relationship manager may approach the client e.g. when loan is due to arrange re-financing or to see how the bank can
help it further – maximising the products it sells = maximising profits
[Risk]
Banks need to ensure they’re protected against credit risk despite the relationship (that BR won’t repay the loan)
o Protect via DD, well drafted loan agreement
Will be more willing to lend to trading co than one that’s newly incorporated without trading history – high transaction risk (they
typically incorporate subsidiaries to isolate risky new business)
[Recourse]
Working out where borrower’s going to get the money to pay the loan – from operations? On assets on insolvency? recourse is
the claim on certain assets to repayment of loan so needs to make sure it has ‘recourse’ to sufficient assets via security
I.e. lender’s claim on certain assets for repayment – what access to borrower’s assets does bank have to minimise risk of non-
payment/default?
o Borrower might seek to limit the assets the lender has recourse to via special purpose vehicles
Think e.g. a property developer who may not want all his assets to be on the hook for an unsuccessful
development; so a SPV will be set up to develop to property and if unsuccessful, the only assets bank can access
will be the SPV’s assets (property/rental income) – not property developer’s assets as a whole
o This is an issue wrt holding co and subsidiaries subsidiaries are usually the ones owning productive assets, while holding
co merely has shares so lenders have to be very careful about their revenue sources
Borrower and sister subsidiaries may give cross-guarantees – as a group, the ones giving security guarantees are obligors
o May have full security package over all assets of subsidiary via debenture (properties, contracts, IP)
o Parent co guarantee + security over shares being bought from subsidiary (non-negotiable, could sell this to recover debts
and orevent the co saying no to selling the co)
[Structural subordination/contractual subordination]
Issue: structural subordination
o Bank X lends money to Hold Co A
o Bank Y lends money co HoldCo’s subsidiary, B
o A’s main assets are shares in B, main income is dividends, but Bank X won’t have recourse to these until after B’s taken
what it needs for its debt (and their income stops)
o Because… A is a shareholder and last in the OOP
Does not matter whether the loan is secured or not, will still rank above A regardless whether fixed chargeholder
or unsecured creditor
o Draw diagram!!
o Red flags for structural subordination:
holding co that isn’t trading – really dependent on money coming up from subsidiaries
lending going on at two levels
Solutions:
o Contractual subordination – enter into contractual agreement to vary priority. (Intercreditor/subordination/priority
agreement)
= Intercreditor agreement i.e. agreement between two/more banks + the co (often will want co to be a member)
circumvents priority (could make this a CP before drawdown)
Where there are different lenders in a group structure, lenders can decide among themselves the order in which
they will be paid if borrower defaults
Senior creditor will agree that junior creditor cannot recover debt until it has been paid in full, nor enforce
security
Junior lender may charge more fees/higher margin as a result to borrower due to higher risk of default
Behind the scenes – distribution in accordance with OOP as per usual but then jnr lender will pay snr lender the
money it gets pursuant to this contract remember this is only effective on insolvency
2
, LPC
Shareholder who lends money and agrees to intercreditor agreement accepts this, despite his being secured
loan, because amount of money injected into borrower will be so beneficial to his shares (co may go insolvent
otherwise, this could be the only way to attract a new lender) + he can charge a higher interest rate
o Guarantee from subsidiary – so have direct claim against B
Avoids the risk of structural subordination and at least puts in better position on OOP
Bank would rank as an unsecured creditor (higher in the statutory OOP on insolvency)
NB. May need consent to prevent breach of indebtedness restriction
o Security from subsidiary
(Not from borrower)
Bank will rank as a secured creditor/fixed chargeholder and will therefore better its position in terms of
statutory OOPs on insolvency + can send in receiver
NB. Consent may be required for prevent breach of negative pledge – SGS 7
o Undertaking to X to restrict A and its subsidiaries from certain amount of debt – to reduce amount owed to creditors
ranking ahead on a winding up
o Try to get them to pay off loans (unlikely, but clean slate – could take on more debt to get rid of this debt)
But negative pledge, NFI – will be breached, could be EOD, check how expensive waiver is – could make waiver a
CP to completion but doesn’t solve subordination, just prevents new security from pushing HoldCo down OOP
Intercreditor deeds will state Priorities, Enforcement of Security, Borrower covenants, Jr. L’s obligations, Duration
b. The Lender/Borrower relationship/tension
Always bear this in mind. DF is about negotiation agreement will be a compromise, depending also on market factors and credit risks
[Lender’s perspective] – maximise probability of being repaid
Will always want to get money back – but this will be with the borrower
Will find out info about borrower e.g. via DD, internal credit assessment (which will determine interest rate, financial covenants etc)
ensure agreement is watertight to reduce the risk of not getting money back e.g. by ensuring borrower does not change business,
dispose of assets, let other lenders take security over its assets
ensuring it’s notified at a sufficiently early stage + that it will be able to get money back
[Borrower’s perspective]
Will want to retain flexibility and control over business and assets – e.g. purpose clause being wide enough so can borrow more to
grow without lender’s interference or change business/assets
[Finance Documents]
Refers to loan agreement, security documents, ancillary documents – important in taking security as collateral, to cover all payment
obligations under Finance Documents as they may be amended from time to time
c. Types of facility
[Overdraft] – not the focus of the course – more short-term, smaller amounts
Borrow to specified limit, interest charged on daily overdrawn balance and repay/then redraw up to the limit again and again – not
committed, can withdraw anytime; no negotiation of terms and no need to wait for any breach to recall payment
Overdraft is meant to assist cash flow, providing reserve of easily accessible money to meet shortfalls – only needs facility letter
[Term loan] – for medium to long period, specific sum e.g. purchase of assets like aircraft/acquisition of a co
Fixed amount over fixed period, can only draw down once – most inflexible facility (e.g. a mortgage)
You draw down the loan during a short period after the loan agreement is executed – the ‘availability period’
Committed facility – so lender is bound to lend, with repayment dates scheduled unless EOD. Might have prepayment fees
o Amortisation – repayment of amounts at regular intervals
o Balloon repayment – several instalments but final payment > rest
o Bullet repayment – one instalment at end
Repeating Representations on first day of each interest period + on each respective tranche (so borrowers need to check regularly
during loan’s life that Repeating Representations can be given) – failure to do so means early repayment
o Interest periods start on drawdown, each subsequent interest period starts on the last day of the preceding one –
mirroring the LIBOR rate available to the L
[Revolving credit facility (RCF)] – larger amounts, need certainty of cash when it needs it
Lending on a recurring basis on predefined terms – typically 3-5 years, B can draw down and repay capital as it chooses during
Availability Period (which is almost as long as term loan) subject to overall limit
o Administrative easements e.g. capital is made available over spec term typically 3-5 years and individual loans are
borrowed for an ‘Interest Period’ (1, 2, 3 or 6 months at a time) then repaid at end of Interest Period
In practice, the borrowing is ‘rolled over’ after 1m IP into another 1M, until loan matures
o Would spec that borrower can have no more than certain amount of loans outstanding (eg. 5 loans at any one time)
usually has to give no of days notice to draw down
So individual drawdowns are short term in nature; amount outstanding fluctuates in nature but interest periods are usually rolled
over (e.g. 1 month IP – at the end, you say let’s roll over) – but must give Repeating Representations including no EOD occurred
so need to check that RRs can be given immed, prior to draw down, or risk triggering EOD
3
, LPC
o Can draw down multiple times so concurrent loans with differing interest periods, paying back when not req
Advantage for borrower draws down only when it needs capital; interest costs kept to minimum
o But bank gets a commitment fee which is small % of undrawn amounts for time to time since they have to put a certain
amount of capital aside based on the total committed facility to B, to comply with capital adequacy (committed facility)
o Flexibility of overdraft with certainty of term loan
There might be a cleandown provision to ensure it’s more for cash flow and not a long term debt e.g. repay whole facility and have a
‘nil’ balance for 5 b.d.s in any 12 month period
d. How a loan is put together
Some stages can be simultaneous 3, 6, 9
[Chronological order of the stages of a loan transaction]
1. Initial approach (typically rls mgr)
2. Credit approval (to work on commitment docs)
3. Due diligence
4. Mandate letter (commitment letter) + fee letter
5. Term sheet
6. Negotiation of finance docs (LA, guarantee, debenture)
7. Credit Committee Approval (final CCA)
8. Signing of loan agreement
9. Satisfaction of CPs incl issue of Legal Opinion
10. First Drawdown/Utilisation
[1. Approach]
Borrower (such as the finance director/corporate treasurer) contacts Relationship Manager to consider proposal for borrowing
[2. Credit approval]
Lender’s rls mgr obtains approval from internal credit committee (ICC) who assess risk etc (ensuring that lender doesn’t take on
excessive risk; such risk as it does take on is matched by an appropriate return based on proposed terms of loan e.g. interest rate)
Looking at existing exposures:
o Sector exposure – if you’re a bank and exposed to one particular business sector, makes you v vulnerable to the economy
o National exposure – if you’re an international bank, don’t want to be too exposed to one country etc
NB. This is will keep going for a while – need final sign off before sign agreement after full DD conducted
o And if terms change in the loan’s lifetime, may need to seek approval from ICC on new negotiated terms
High credit risk if new start-up so minimize this via guarantee from parent co + full securities over all assets incl shares + SL
o Then DD needs to check e.g. if property is FH/LH with building regs complied with etc.
[3. Due diligence] – mobile, conducted throughout
Bank conducts DD to assess obligors on capacity to pay -- borrower’s financial position and that of any guarantor/person providing
security and therefore the borrower’s credit risk – may reveal the need for security so can also ascertain what assets available
NB. This is will keep going for a while – need final sign off before sign agreement
Basic package will be put together here covering repayment dates and main covenants to be given – leads to term sheet
CPS – waiver letters required + business plans/cashflow forecast for newly incorporated co + building regs or planning permission
Factors include size of loan/type of loan (committed?)/secured loan or not/ whether borrower known to lender
Credit approval will require annual audited accounts or other accounts
Legal DD – will depend on transaction e.g. redeveloping petrol stations will require environmental reports
o Companies House Searches (see below)
o Central Registry of winding up petitions at companies court to verify no such petitions (it’s not insolvency but merely to
see if a creditor petitioned for winding-up)
o Land Registry title, review of key contracts, or e.g. IP/ship/aircrafts registry
o Security issues could include valuation of assets + checking AoAs if security over their shares (right to refuse transfer/PER)
and consider restrictions on caps which will require SH approval/amending AoAs
[Companies House searches] = DIPs QC will also need consti documents for each guarantor
Information required with respect to each obligor Documents to obtain information
Correct co name, no and date of incorporation (I) Certificate of incorporation
Directors’ details (D) (i) Register of Directors
(ii) Forms appointing directors (and showing resignations)
Co’s powers and its capacity + authority to execute + perform the (i) Articles of Association (+ memorandum if pre-2009 co)
finance docs (P) (NB. Although CA 2006 did away with req for an objects
clause, co’s articles may still place restrictions on a co’s
ability to borrow or grant security/guarantees – so must
4
DEBT FINANCE CONSOLIDATION NOTES
SGS 1: OVERVIEW OF A BANKING TRANSACTION, SYNDICATION AND TERM SHEET // SGS 2: DUE DILIGENCE/CONDITIONS
PRECEDENT/LEGAL OPINIONS AND TRANSACTION STRUCTURE
NB Borrower or any security granter = obligor
[LIBOR] -- This is the interbank offered rate (interest one bank will demand, on money lent to another bank).
[Capital adequacy]
Requires bank to have 8% capital, compared to amount lent by bank, as buffer for depositors if loans are not repaid - need a certain
amount of capital for a certain level of risk of default
o Without enough capital, either issue extra shares or transfer existing loans off balance sheet
[Profit]
The issue is that LIBOR fluctuates – so LIBOR could wipe out any profits made; thus they are sometimes priced on ‘cost-plus’ LIBOR
plus the lender’s other costs in making the loan available e,g, FCA fees (but these are usually included with the margin) plus the sum
making the profit (margin) – which reflects the risk the lender makes on the loan
a. Derivatives
May need to spot a derivative; when a swap would be advisable and how it might be advantageous – no need to understand how they work
Often a CP to a loan agreement
About mitigating the interest rate/exchange rate of the company
need to protect against financial risks (solvency, potential default, adverse market movements) by hedging against certain risks
[Interest rate swap] – if income is fixed
Hedges against LIBOR going up
Issue is that your income is not linked to LIBOR but interest rate payments are risk that there will be a mismatch between income
and interest rate payments. Need to hedge against this – e.g. interest is LIBOR + 2% - if LIBOR raises, income not enough
Have a floating rate of interest to be paid by co to bank, customers pay in contract payments to co (e.g. Vodafone), if LIBOR shoots
up the bank is worried that co can’t pay increased rate of interest so Vodafone enters into agreement with Swap Counterparty to
balance fixed income with floating LIBOR rate, co will pay a fee for this
o Interest rate swaps fixes the interest rate on the amount – borrower will pay swap counter party the fixed rate and they’ll
pay back the interest rate plus whatever floating libor rate is
NB. Would only have this where the fact pattern indicates:
o that there is a floating rate of interest on the loan; and/or
o that the Subsidiaries will be providing security (cf. only providing guarantees)
[Cross-currency swap] learn to spot this: if several subsidiaries are overseas, income is in that currency – exposure
Exposure to exchange rate can fix currency. Sort of insurance product. So won’t suffer from downside of change in rates
Agreement in place with swap counterparty so that the co can mitigate exchange rate risk/exposure on part of company to exchange
rate fluctuations. Money comes into the co in one currency and leaves in the form of interest payments in another. Bank will want to
see the agreement. Swap Counterparty will be another company whose job is to offer derivative products. They’ll hedge themselves
by entering into all sorts of swaps. Essentially a currency converter
Rate of exchange is fixed between two currencies (bank will take on risk for a fee) and B will pay them back amount they need --
Bank also makes money if currency works in their favour e.g. bought US$1.40 to Euro, but becomes US$1.50 to Euro
o Mitigates the risk of there not being enough Euros on conversion to sterling to cover the obligations of the B under the
loan agreement
Would be applicable e.g. where Subsidiaries giving a guarantee operate in another country and are therefore likely to generate
income in a currency other than sterling BUT the term loan has been provided in sterling currency mismatch
Credit default swaps – transfers risk of default by borrower where counterparty makes payments on occurrence of trigger events e.g. non-
payment – could be linked to other debts of borrower e.g. bonds (but fee for this could = margin)
E.g. bond investor might take out CDS for trigger events including change of government
[Order of priority]
Fixed charge holders
liquidator’s costs
Preferential creditors (employees)
PPF
floating charge holders
Unsecured creditors
Shareholders
a. The banking system – an overview
[Key business issues for banks]
[Relationship]
Bank and borrower will often maintain relationship as first bank to which borrower turns – want to maintain and become borrower’s
‘relationship bank’ to which borrower’s will turn first when in need of loans/other financial products (this may affect the action the
bank may take e.g. if BR breaches agreement)
1
, LPC
o The relationship manager may approach the client e.g. when loan is due to arrange re-financing or to see how the bank can
help it further – maximising the products it sells = maximising profits
[Risk]
Banks need to ensure they’re protected against credit risk despite the relationship (that BR won’t repay the loan)
o Protect via DD, well drafted loan agreement
Will be more willing to lend to trading co than one that’s newly incorporated without trading history – high transaction risk (they
typically incorporate subsidiaries to isolate risky new business)
[Recourse]
Working out where borrower’s going to get the money to pay the loan – from operations? On assets on insolvency? recourse is
the claim on certain assets to repayment of loan so needs to make sure it has ‘recourse’ to sufficient assets via security
I.e. lender’s claim on certain assets for repayment – what access to borrower’s assets does bank have to minimise risk of non-
payment/default?
o Borrower might seek to limit the assets the lender has recourse to via special purpose vehicles
Think e.g. a property developer who may not want all his assets to be on the hook for an unsuccessful
development; so a SPV will be set up to develop to property and if unsuccessful, the only assets bank can access
will be the SPV’s assets (property/rental income) – not property developer’s assets as a whole
o This is an issue wrt holding co and subsidiaries subsidiaries are usually the ones owning productive assets, while holding
co merely has shares so lenders have to be very careful about their revenue sources
Borrower and sister subsidiaries may give cross-guarantees – as a group, the ones giving security guarantees are obligors
o May have full security package over all assets of subsidiary via debenture (properties, contracts, IP)
o Parent co guarantee + security over shares being bought from subsidiary (non-negotiable, could sell this to recover debts
and orevent the co saying no to selling the co)
[Structural subordination/contractual subordination]
Issue: structural subordination
o Bank X lends money to Hold Co A
o Bank Y lends money co HoldCo’s subsidiary, B
o A’s main assets are shares in B, main income is dividends, but Bank X won’t have recourse to these until after B’s taken
what it needs for its debt (and their income stops)
o Because… A is a shareholder and last in the OOP
Does not matter whether the loan is secured or not, will still rank above A regardless whether fixed chargeholder
or unsecured creditor
o Draw diagram!!
o Red flags for structural subordination:
holding co that isn’t trading – really dependent on money coming up from subsidiaries
lending going on at two levels
Solutions:
o Contractual subordination – enter into contractual agreement to vary priority. (Intercreditor/subordination/priority
agreement)
= Intercreditor agreement i.e. agreement between two/more banks + the co (often will want co to be a member)
circumvents priority (could make this a CP before drawdown)
Where there are different lenders in a group structure, lenders can decide among themselves the order in which
they will be paid if borrower defaults
Senior creditor will agree that junior creditor cannot recover debt until it has been paid in full, nor enforce
security
Junior lender may charge more fees/higher margin as a result to borrower due to higher risk of default
Behind the scenes – distribution in accordance with OOP as per usual but then jnr lender will pay snr lender the
money it gets pursuant to this contract remember this is only effective on insolvency
2
, LPC
Shareholder who lends money and agrees to intercreditor agreement accepts this, despite his being secured
loan, because amount of money injected into borrower will be so beneficial to his shares (co may go insolvent
otherwise, this could be the only way to attract a new lender) + he can charge a higher interest rate
o Guarantee from subsidiary – so have direct claim against B
Avoids the risk of structural subordination and at least puts in better position on OOP
Bank would rank as an unsecured creditor (higher in the statutory OOP on insolvency)
NB. May need consent to prevent breach of indebtedness restriction
o Security from subsidiary
(Not from borrower)
Bank will rank as a secured creditor/fixed chargeholder and will therefore better its position in terms of
statutory OOPs on insolvency + can send in receiver
NB. Consent may be required for prevent breach of negative pledge – SGS 7
o Undertaking to X to restrict A and its subsidiaries from certain amount of debt – to reduce amount owed to creditors
ranking ahead on a winding up
o Try to get them to pay off loans (unlikely, but clean slate – could take on more debt to get rid of this debt)
But negative pledge, NFI – will be breached, could be EOD, check how expensive waiver is – could make waiver a
CP to completion but doesn’t solve subordination, just prevents new security from pushing HoldCo down OOP
Intercreditor deeds will state Priorities, Enforcement of Security, Borrower covenants, Jr. L’s obligations, Duration
b. The Lender/Borrower relationship/tension
Always bear this in mind. DF is about negotiation agreement will be a compromise, depending also on market factors and credit risks
[Lender’s perspective] – maximise probability of being repaid
Will always want to get money back – but this will be with the borrower
Will find out info about borrower e.g. via DD, internal credit assessment (which will determine interest rate, financial covenants etc)
ensure agreement is watertight to reduce the risk of not getting money back e.g. by ensuring borrower does not change business,
dispose of assets, let other lenders take security over its assets
ensuring it’s notified at a sufficiently early stage + that it will be able to get money back
[Borrower’s perspective]
Will want to retain flexibility and control over business and assets – e.g. purpose clause being wide enough so can borrow more to
grow without lender’s interference or change business/assets
[Finance Documents]
Refers to loan agreement, security documents, ancillary documents – important in taking security as collateral, to cover all payment
obligations under Finance Documents as they may be amended from time to time
c. Types of facility
[Overdraft] – not the focus of the course – more short-term, smaller amounts
Borrow to specified limit, interest charged on daily overdrawn balance and repay/then redraw up to the limit again and again – not
committed, can withdraw anytime; no negotiation of terms and no need to wait for any breach to recall payment
Overdraft is meant to assist cash flow, providing reserve of easily accessible money to meet shortfalls – only needs facility letter
[Term loan] – for medium to long period, specific sum e.g. purchase of assets like aircraft/acquisition of a co
Fixed amount over fixed period, can only draw down once – most inflexible facility (e.g. a mortgage)
You draw down the loan during a short period after the loan agreement is executed – the ‘availability period’
Committed facility – so lender is bound to lend, with repayment dates scheduled unless EOD. Might have prepayment fees
o Amortisation – repayment of amounts at regular intervals
o Balloon repayment – several instalments but final payment > rest
o Bullet repayment – one instalment at end
Repeating Representations on first day of each interest period + on each respective tranche (so borrowers need to check regularly
during loan’s life that Repeating Representations can be given) – failure to do so means early repayment
o Interest periods start on drawdown, each subsequent interest period starts on the last day of the preceding one –
mirroring the LIBOR rate available to the L
[Revolving credit facility (RCF)] – larger amounts, need certainty of cash when it needs it
Lending on a recurring basis on predefined terms – typically 3-5 years, B can draw down and repay capital as it chooses during
Availability Period (which is almost as long as term loan) subject to overall limit
o Administrative easements e.g. capital is made available over spec term typically 3-5 years and individual loans are
borrowed for an ‘Interest Period’ (1, 2, 3 or 6 months at a time) then repaid at end of Interest Period
In practice, the borrowing is ‘rolled over’ after 1m IP into another 1M, until loan matures
o Would spec that borrower can have no more than certain amount of loans outstanding (eg. 5 loans at any one time)
usually has to give no of days notice to draw down
So individual drawdowns are short term in nature; amount outstanding fluctuates in nature but interest periods are usually rolled
over (e.g. 1 month IP – at the end, you say let’s roll over) – but must give Repeating Representations including no EOD occurred
so need to check that RRs can be given immed, prior to draw down, or risk triggering EOD
3
, LPC
o Can draw down multiple times so concurrent loans with differing interest periods, paying back when not req
Advantage for borrower draws down only when it needs capital; interest costs kept to minimum
o But bank gets a commitment fee which is small % of undrawn amounts for time to time since they have to put a certain
amount of capital aside based on the total committed facility to B, to comply with capital adequacy (committed facility)
o Flexibility of overdraft with certainty of term loan
There might be a cleandown provision to ensure it’s more for cash flow and not a long term debt e.g. repay whole facility and have a
‘nil’ balance for 5 b.d.s in any 12 month period
d. How a loan is put together
Some stages can be simultaneous 3, 6, 9
[Chronological order of the stages of a loan transaction]
1. Initial approach (typically rls mgr)
2. Credit approval (to work on commitment docs)
3. Due diligence
4. Mandate letter (commitment letter) + fee letter
5. Term sheet
6. Negotiation of finance docs (LA, guarantee, debenture)
7. Credit Committee Approval (final CCA)
8. Signing of loan agreement
9. Satisfaction of CPs incl issue of Legal Opinion
10. First Drawdown/Utilisation
[1. Approach]
Borrower (such as the finance director/corporate treasurer) contacts Relationship Manager to consider proposal for borrowing
[2. Credit approval]
Lender’s rls mgr obtains approval from internal credit committee (ICC) who assess risk etc (ensuring that lender doesn’t take on
excessive risk; such risk as it does take on is matched by an appropriate return based on proposed terms of loan e.g. interest rate)
Looking at existing exposures:
o Sector exposure – if you’re a bank and exposed to one particular business sector, makes you v vulnerable to the economy
o National exposure – if you’re an international bank, don’t want to be too exposed to one country etc
NB. This is will keep going for a while – need final sign off before sign agreement after full DD conducted
o And if terms change in the loan’s lifetime, may need to seek approval from ICC on new negotiated terms
High credit risk if new start-up so minimize this via guarantee from parent co + full securities over all assets incl shares + SL
o Then DD needs to check e.g. if property is FH/LH with building regs complied with etc.
[3. Due diligence] – mobile, conducted throughout
Bank conducts DD to assess obligors on capacity to pay -- borrower’s financial position and that of any guarantor/person providing
security and therefore the borrower’s credit risk – may reveal the need for security so can also ascertain what assets available
NB. This is will keep going for a while – need final sign off before sign agreement
Basic package will be put together here covering repayment dates and main covenants to be given – leads to term sheet
CPS – waiver letters required + business plans/cashflow forecast for newly incorporated co + building regs or planning permission
Factors include size of loan/type of loan (committed?)/secured loan or not/ whether borrower known to lender
Credit approval will require annual audited accounts or other accounts
Legal DD – will depend on transaction e.g. redeveloping petrol stations will require environmental reports
o Companies House Searches (see below)
o Central Registry of winding up petitions at companies court to verify no such petitions (it’s not insolvency but merely to
see if a creditor petitioned for winding-up)
o Land Registry title, review of key contracts, or e.g. IP/ship/aircrafts registry
o Security issues could include valuation of assets + checking AoAs if security over their shares (right to refuse transfer/PER)
and consider restrictions on caps which will require SH approval/amending AoAs
[Companies House searches] = DIPs QC will also need consti documents for each guarantor
Information required with respect to each obligor Documents to obtain information
Correct co name, no and date of incorporation (I) Certificate of incorporation
Directors’ details (D) (i) Register of Directors
(ii) Forms appointing directors (and showing resignations)
Co’s powers and its capacity + authority to execute + perform the (i) Articles of Association (+ memorandum if pre-2009 co)
finance docs (P) (NB. Although CA 2006 did away with req for an objects
clause, co’s articles may still place restrictions on a co’s
ability to borrow or grant security/guarantees – so must
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