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Summary Cheat sheet for Debt Finance (Accelerated LPC)
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Everything you need to know for the Debt Finance module for the Accelerated LPC. Scored 94%.
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Debt Finance Cheat SheetISSUE I: SYNDICATION
OVERVIEW
PARTIES to a syndication
[1] ARRANGER – appointed by mandate letter which sets out legally binding provisions (attached to term sheet)
Responsibilities:
(a) advise the borrower as to the most appropriate loan structure, the cost and the purpose of the loan and
prevailing market conditions
(b) due diligence and preparation of information memorandum (to market the loan to potential other
syndicate lenders)
(c) drafting the loan documentation and negotiating with the borrower
(d) mandate letter will make it clear whether arranger has been appointed on a best efforts/ underwritten
basis
o Best efforts: arranger will promise to use best efforts to assemble a syndicate of banks (not a guarantee
that full amount will be raised)
o Underwritten: if full syndicate of banks cannot be put together, arranger and any fellow co-arrangers will
be obliged to make up the shortfall (buyer will have to pay underwriting fee for this)
o Can be a mix of both: underwrite up to a certain amount then best efforts the rest
Role ends on signing of Loan Agreement (LMA Clause 26.4)
Potential Liabilities + Preventing / Minimising them
[1] Misinformation about the borrower to syndicate lenders
Can be fraudulent/ negligent misrepresentation or negligent misstatement (Hedley Bryne v Heller)
Minimise [1]: by stating in the start of the info memorandum an important notice (!) disclaiming that:
o the borrower is solely responsible for the info memorandum and not the arranger
o arranger has not independently verified the contents
o the syndicate lenders will not rely on the memo to make their investment decision and each bank should
undertake its own assessment
o the arranger is not responsible for updating the information
o Note: in LOAN AGREEMENT – also include disclaimer that Agent/ Arranger not responsible/ liable for
accuracy/ completeness of info supplied in connection with Finance Doc/ Info Memo or the validity/
adequacy/ enforceability of the Finance Doc or other agreement in connection with it (LMA 26.8)
Minimise [2]: specifically provide in the facility agreement that the arranger is NOT a fiduciary of syndicate
lenders (LMA 26.5)
[2] Potential liability if breached fiduciary duties though fiduciary duties are thought to be inappropriate in this
context!
Minimise: specifically provide in the facility agreement that the arranger is NOT a fiduciary of the syndicate
lenders (LMA 26.5) – so the arranger’s only duty is not to withhold any info from the syndicate!
[2] AGENT – appointed by the arranger and syndicate lenders (LMA Clause 26.1)
Responsibilities:
[A] (Power of) Decision-making (based off the LMA)
CAN act by unilateral action in the absence of instructions if it considers it to be in the best interest of the
, lenders (LMA 26.2(e))
Except for some decisions which are so important they need unanimous consent (eg. change of borrower)
(LMA 26.2(a)(i)(A))
BUT will normally act on the instruction of Majority Lenders (usually et at 2/3 the value of total syndicate
commitments) which is binding on all syndicate members – because following this will absolve it of any
liability (LMA 26.2(a)(ii))
[B] Other duties
Paying agent (receive loan advances from syndicate lenders and pay them to borrower + receive repayment of
principal and payment of interest etc. from borrower to be distributed amongst syndicate lenders) [LMA29]
Checking conditions precedent [LMA 4.1; Sch 2]
Postman (receive and forward documents and notices to the intended recipients) [LMA 26.3(b) and (d)]
Banking duties [LMA 9.4] – will determine the applicable i/r by establishing the LUBOR and notify borrower
(and inform lenders of the principal amounts of the loan they are required to advance at any time)
Monitoring (in a limited sense) [LMA 26.3(d) and 26.9 limits the monitoring duty.
o 26.3(d): Says that except where a Finance Document specifically provides otherwise, Agent not obliged to
review/ check the adequacy, accuracy or completeness of any document it forwards to another Party
o 26.9: no duty to monitor – not bound to enquire whether Default/ performance/ other specified event
has occurred]
Action on default: [LMA 26.3(e);(f)] – have to notify other lenders if Agent is aware of EoD/ non-payment
Acceleration [LMA 23.13] – On/ after EoD (which is continuing), the Agent may, and shall if so directed by
Majority Lenders, give notice to Borrower to (a) cancel commitments/ (b) declare loan immediately due and
payable/ (c) declare loan payable on demand by Agent on the instructions of the Majority Lenders
Interpretation [LMA 26.7 (c) – (e)] – Agent may give confirmation to borrower on whether it can take on
particular transaction under loan agreement etc. – can rely on advice from lawyers
Administering loan transfer [LMA 24 and Sch 5 and 6] – transfer certs/ assignment agreements must be
executed by agent, who will liaise with borrower where consent to transfer is required
Pro rata sharing [LMA 28] – (sharing of when borrower returns funds) sharing administered by agent
o Exception to the basic concept under the LMA that banks have separate loans and several obligations
Potential Liabilities + Preventing / Minimising them
[1] Potential liability if breached fiduciary duties – though fiduciary duties are thought to be inappropriate in this
context!
Minimise [1]: specifically provide in the facility agreement that the agent is NOT a fiduciary of the syndicate
lenders (LMA 26.5) – so the arranger’s only duty is not to withhold any info from the syndicate!
Minimise [2]: the arranger may take an indemnity from the borrower for any liability it may incur as a result
of the borrower’s action or default (not very helpful as the borrower would likely be in financial difficulty)
Minimise [3]: Limit responsibility by disclaiming that Arranger/ Agent is not responsible/ liable for accuracy/
completeness of info supplied in connection with Finance Doc/ Info Memo or the validity/ adequacy/
enforceability of the Finance Doc or other agreement in connection with it (LMA 26.8)
[2] If take unilateral action on behalf of other syndicate lenders may lead to liability if there are unfortunate
consequences
Minimise [1]: agent’s duties have to be precisely defined and documented in Loan Agreement, and are mainly
restricted to administrative tasks (LMA 26.3(a))
Minimise [2] Agent will protect itself by seeking instructions from the syndicate lenders, esp the Majority
Lenders which will expressly absolve it of liability (LMA 26.2(a)(ii))
, DRAFTING
Best format to take in exam
1) Purpose of clause (why Bank wants it)
2) Borrower’s amendments + justification
3) Bank’s response
4) Compromise
Orange = Bank’s POV
Purple = Borrower’s POV
Blue = Compromised position
STUFF SPECIFIC TO A TERM SHEET
1. Should indicate at top that it is subject to contract and hence is not legally binding
But note: there should be a (i) confidentiality and (ii) costs clause that are legally binding
o Clause says: “notwithstanding that this Term Sheet is “subject to contract”, the following provision
shall be binding on the Lenders/ Borrower from the date of this Term Sheet.”
2. Purpose clause: Should make it wider – “for general corporate purposes”
This is in borrower’s interest to ensure flexibility in the use of loan proceeds and so inadvertent breach of
purpose does not occur
3. Availability period: This refers to the period during which the money can be drawn down – expressed as “X
months after execution of the Loan Agreement”
If borrower said that they will use $ to buy property in 2 months for example – try to give a bit of leeway –
like 3 months. This is a negotiation point
Make the date start from the Loan Agreement rather than Term Sheet as will give borrower more time!
4. Repayment: Expressed as “The Facility will be repaid in full on the XX anniversary of the date of the Loan
Agreement”
The term of the loan should be from the date of the loan agreement rather than the term sheet as
documents can take time to agree – this gives the borrower more time to repay the loan
5. Interest Rate: The sum of (a) LIBOR; (b) Mandatory Costs; and (c) a Margin of X% (note that 150 basis points =
1.5%)
6. Fees: Say “as set out in the fee letter”
Rationale: put it elsewhere (not Term Sheet) so that other Lenders who see Term Sheet will not know how
much arranger is charging
7. Security – what security given
In terms of security given by the borrower and its subs/ parents, borrower may have to be careful if it has
other lenders – check for negative pledge etc. in those loans. And even if the loans do not have negative
pledge, the other existing lenders may not be happy (esp if they are unsecured)
But the Lender here is likely to want additional recourse to assets if the borrower defaults
Compromise position: for security over only some assets (like shares)
Security review
Borrower does not want review too often as assisting with it could be time consuming/ expensive as it is
likely liable for Lender’s costs
But if sum loaned is huge Lenders will want to protect their investment
Can negotiate on the timeframe for any security review to come to compromise (eg. annual reviews)
8. Conditions precedent – borrower needs to ensure that they can comply with the CPs prior to drawing down
loan (not signing). If they cannot – Lenders will not be obliged to lend
So must consider whether the CP is in the borrower’s control
If something is in the control of the Lender’s solicitors/ accountants (eg. a CP regarding the Lender’s
, solicitors’ opinion on the documents) – need to have a discussion to make sure they can be provided quickly
9. Representations and Warranties: usually say “usual and customary for facilities of this type”
If any specific ones are included – ensure that they are carved out in the usual way (compromised wording
given) – see below
10. Undertakings – make sure they are reasonable
Eg. an undertaking that Borrower cannot pay dividend will minimise risk of Borrower not being able to pay
the interest or repay principle
But borrower will not be happy
Compromise could be to link the non-payment to either a time period, to the Borrower not being in default
of the loan agreement and/or a capped amount of dividend. Bank may be willing to remove this clause too if
parent is giving guarantee
11. Costs –
Recall that this should be expressed to be legally binding. Reasonable expenses incurred in preparing,
negotiating, executing and delivering Facility Agreement to be paid by borrower.
Ensure that expenses payable are expressed to be “reasonable”
12. Assignment clause
Bank wants to be able to assign all/ part of Facility to another Lender/ affiliate without consent
Borrower may want prior written consent to be necessary
Compromise (LMA Position): Lenders can assign to certain parties (ie. all other syndicate members/
affiliates) without needing consent but assignment to anyone else would require borrower consent)
13. Acceptance period
Bank wants it to be shorter because the risk otherwise is that the position of the borrower’s company may
deteriorate but can still take up term on the same loans (which did not account for its deterioration)
Borrower would need more time to agree/ sign
Compromise: 30 days is reasonable for accepting Term Sheet and 3 months to execute Loan Agreement
from date of offer
14. Confidentiality clause [may be included in mandate letter instead]
Should be expressed to be legally binding
State that the “Lenders will give a confidentiality undertaking in form and substance satisfactory to the
Borrower and Guarantor”
Another note on how borrower ensures confidentiality (since bank needs to give info to other potential
Lenders):
o The Term Sheet is just between the arranger and the borrower
o But Arranger may agree with Borrower that potential members will sign back-to-back confidentiality
agreements with Arranger on same terms it arranged with Borrower
LOAN AGREEMENT + general drafting clauses
1. REPRESENTATION: When clause is wrt something potentially bad happening (eg. litigation)
Check who is giving the representation at the start of the clause and any definitions
[Repeating Representations] Representations may be deemed to be repeated on the date of each
Utilisation Request and the first day of each Interest Period
o Borrower can argue not to repeat if:
(i) the representation is unlikely to change (eg. that borrower is duly incorporated, loan was
authorised, within corporate powers). But bank may still want it especially since there should be
no problem repeating them – to ensure legal situation does not change and it is an EoD if
incorrect
(ii) when the subject of the representation is also covered by undertaking/ indemnity (eg. no
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