DEBT FINANCE EXAM BUNDLE
Table of Contents
SGS 1 – Overview of Loan Transaction, Syndication, Term Sheet ............................................................................................ 3
Stages of Corporate Loan Transaction .................................................................................................................................. 3
Types of Facility ............................................................................................................................................................... 9
Syndication and Parties to Syndicated LA……………………………………………………………………………13
Analyse & Amend Term Sheet Provisions (Exam Structure)………………………………………………19
Redrafted Term Sheet…………………………………………………………………………………………………….24
SGS 2 – Representations, Undertakings & Margin Protection ............................................................................................... 30
Purpose of Representations & Undertakings in LA ............................................................................................................. 30
Draft Amendments to Reps (Exam Structure) ............................................................................................................... 35
Draft Amendments to Undertakings (Exam Structure)………………………………………………………….38
Tax Gross Up Clause (Margin Protection)……………………………………………………………………………41
Increased Costs (Margin Protection)………………………………………………………………………………43
SGS 3 – Events of Default……………………………………………………………………………………………………………….45
Purpose of EOD Clause & Analyse concerns of Borrower & Lender…………………………………………….45
Cross Default…………………………………………………………………………………………………………………………….49
Lender’s Options following EOD……………………………………………………………………………………………..54
Advise Borrower & Lender on their Position following EOD & Waivers………………………………55
Role & Powers of Agent on EOD…………………………………………………………………………………..62
SGS 4 – Due diligence, Conditions Precedent, Legal Opinions & Transaction Structure (Subordination)
……………………………………………………………………………………………………………………………..66
Carry Out Legal Due Diligence…………………………………………………………………………………………………….66
Purpose of Conditions Precedent…………………………………………………………………………………………..67
Table Checklist of Conditions Precedent…………………………………………………………………………….68
Understand Purpose/Provisions Legal Opinion………………………………………………………………75
Redrafting a Legal Opinion………………………………………………………………………………………...78
Impact of another jurisdiction on Legal Opinion (MCQ)………………………………………….79
Subordination (Structural)…………………………………………………………………………………81
Subordination (Contractual) …………………………………………………………………………83
Exam Structure on Subordination …………………………………………………………….84
SGS 5 – Loan Transfers…………………………………………………………………………………………………………………87
Operation of Different Methods………………………………………………………………………………………………….87
Comparison Table for Exam………………………………………………………………………………………………………92
Pros + Cons – Novation…………………………………………………………………………………………………………100
1
, Pros+ Cons – LMA Assignment…………………………………………………………………………………………….102
Pros + Cons – Sub Participation…………………………………………………………………………………………103
Pros + Cons – Risk Participation……………………………………………………………………………………105
Exam Structure – Loan Transfers…………………………………………………………………………….106
SGS 6 – Bonds (Parties + Documentation)………………………………………………………………………………….117
Bonds Pros + Cons………………………………………………………………………………………………………………………..119
Syndicated Loan vs. Bond Issue…………………………………………………………………………………………………122
Principal Parties in Bond Issue…………………………………………………………………………………………….123
Fiscal Agent vs. Trustee……………………………………………………………………………………………………128
Content of some Key Bond Issue Docs…………………………………………………………………………132
SGS 7 – Issuing a Eurobond……………………………………………………………………………………………………….137
Timetable for Bond Issue……………………………………………………………………………………………………………137
Factors that could impact timing…………………………………………………………………………………………….140
Procedure for Issuing Listed Bond……………………………………………………………………………………….141
Content of a Prospectus……………………………………………………………………………………………………143
Demonstrating compliance to relevant authority…………………………………………………………..146
Potential liabilities arising from a bond issue……………………………………………………………..148
SGS 8 – Security – Assets + Priorities………………………………………………………………………………………..152
Comparing types of security (table)…………………………………………………………………………………………153
Identifying Assets + Method of Perfection……………………………………………………………………………157
Purpose + Method of Perfection……………………………………………………………………………………….161
Practical + Commercial Issues Raised by Security Package……………………………………………..166
Priority Rules for Security…………………………………………………………………………………………….167
SGS 9 – Security – Risks……………………………………………………………………………………………………………169
Form MR01 + Process of Registration at Companies House………………………………………………………169
Issues arising from Due Diligence + Solutions (Exam Structure)………………………………………………179
Financial Assistance………………………………………………………………………………………………………………184
Financial Assistance (Exam Structure)………………………………………………………………………………………..189
Common Law dealing with problems impacting security……………………………………………………………195
SGS 10 – Guarantees + Debentures……………………………………………………………………………………………197
Exam Structure + table for Key Clauses in Debenture………………………………………………………………….197
Enforcing Security using rights in debenture……………………………………………………………………………201
Comfort Letter, Guarantee, Security…………………………………………………………………………………….205
Key clauses in guarantee…………………………………………………………………………………………………..208
2
,SGS 1 – OVERVIEW OF A BANKING TRANSACTION, SYNDICATION
AND TERM SHEET
• describe the stages of a corporate loan transaction;
• understand the basic aspects of syndication and the roles of the different parties in a
syndicated loan transaction;
• analyse and amend a term sheet to reflect your client’s needs; and
• explain the meaning of some key banking terms featured in typical loan documentation.
Describe the stages of a corporate loan transaction
1.RELATIONSHIP MANAGER/ACCOUNT OFFICER:
Each borrower is assigned a particular individual within the bank who provides a consistent point of
contact and someone who the borrower’s officers can build a relationship.
- AO will put together a basic package for the terms of the proposed loan.
- Amount and term of loan, repayment dates, principal financial covenants.
2.CREDIT COMMITTEE:
Assesses the risk in light of all of the bank’s loans, decides whether to approve the loan or not.
Credit Department/Credit Committee of a Bank sees all credit requests and takes a view on the
overall lending of the bank.
- Ultimate say as to whether bank is prepared to lend funds.
- Credit approval is not automatic and will be viewed within context of what other risks the
bank is exposed to.
- Credit Committee will wish to see as a minimum the company’s annual audited accounts.
Credit Committee may approve, amend or reject the lending proposal.
3.DUE DILIGENCE:
PURPOSE
Fact finding exercise – aim to flush out potential future problems in order to assess the overall credit
risk of the borrower and any other entity giving security (carried out on behalf of bank)
Investigation will vary with the identity of the bank and the borrower as well as:
a. Size of the loan
b. Type of loan and its purpose
c. Whether the loan is secured
d. Whether the borrower is already known to the bank
e. Market liquidity (numerous or few lenders willing to lend)
f. Loan is integral part of a larger transaction such as floatation or acquisition.
3
, Legal due diligence will be carried out at a later stage by the bank’s lawyers.
May reveal risk is too great for a bank to lend unless it is able to take security.
What assets are available for the bank to take security.
Higher chance of default, larger the fees and margin a bank will charge.
What happens:
- Solicitor might obtain copies of AOA, the charges register and company records of borrower.
- Companies House registered docs.
4.MANDATE LETTER/COMMITMENT LETTER (only for syndicated loans):
Letter that appoints the arranger and is legally binding
WHAT SHOULD A COMMITMENT LETTER COVER?
LEGALLY BINDING = key points covered are:
a. Whether the bank’s obligations to arrange the facility is ‘best efforts’ or ‘underwritten’
b. General conditions to the offer to arrange – time limit for executing facility doc, obtaining
credit committee approvals, due diligence.
c. Material adverse change provisions allowing bank to withdraw from offer if there is a
material adverse change to the market (MAC) or borrower’s situation (business MAC)
d. Clear market clause in which the borrower agrees not to raise other finance whilst the
facility is being arranged.
e. Market flex clause which allows bank to change aspects of the negotiated facility agreement
if it is necessary to attract other banks to participate.
f. Provisions for the bank to recover fees, costs and expenses if the deal does not go ahead.
5.TERM SHEET:
Document which records in writing the principal terms of the transaction and signed by the parties
to the transaction but is not intended to be contractually binding.
- These are usually attached to a Mandate Letter (Commitment Letter) which contains legally
binding terms.
- Drafted by the lender’s lawyers
WHY HAVE A TERM SHEET?
- Focus the minds of bank and borrower on the fundamental issues of the deal.
- If the proposed facility is to be syndicated, it will be helpful for the bank which is arranging
the loan to have an accurate summary of the main terms when trying to sell the deal to early
syndicate members before an info memorandum has been produced.
- Term sheet acts as the outline from which the bank’s solicitor can extract the key info to
prepare the first draft of the facility agreement.
- Assists solicitors in estimating fees for the transaction.
4
Table of Contents
SGS 1 – Overview of Loan Transaction, Syndication, Term Sheet ............................................................................................ 3
Stages of Corporate Loan Transaction .................................................................................................................................. 3
Types of Facility ............................................................................................................................................................... 9
Syndication and Parties to Syndicated LA……………………………………………………………………………13
Analyse & Amend Term Sheet Provisions (Exam Structure)………………………………………………19
Redrafted Term Sheet…………………………………………………………………………………………………….24
SGS 2 – Representations, Undertakings & Margin Protection ............................................................................................... 30
Purpose of Representations & Undertakings in LA ............................................................................................................. 30
Draft Amendments to Reps (Exam Structure) ............................................................................................................... 35
Draft Amendments to Undertakings (Exam Structure)………………………………………………………….38
Tax Gross Up Clause (Margin Protection)……………………………………………………………………………41
Increased Costs (Margin Protection)………………………………………………………………………………43
SGS 3 – Events of Default……………………………………………………………………………………………………………….45
Purpose of EOD Clause & Analyse concerns of Borrower & Lender…………………………………………….45
Cross Default…………………………………………………………………………………………………………………………….49
Lender’s Options following EOD……………………………………………………………………………………………..54
Advise Borrower & Lender on their Position following EOD & Waivers………………………………55
Role & Powers of Agent on EOD…………………………………………………………………………………..62
SGS 4 – Due diligence, Conditions Precedent, Legal Opinions & Transaction Structure (Subordination)
……………………………………………………………………………………………………………………………..66
Carry Out Legal Due Diligence…………………………………………………………………………………………………….66
Purpose of Conditions Precedent…………………………………………………………………………………………..67
Table Checklist of Conditions Precedent…………………………………………………………………………….68
Understand Purpose/Provisions Legal Opinion………………………………………………………………75
Redrafting a Legal Opinion………………………………………………………………………………………...78
Impact of another jurisdiction on Legal Opinion (MCQ)………………………………………….79
Subordination (Structural)…………………………………………………………………………………81
Subordination (Contractual) …………………………………………………………………………83
Exam Structure on Subordination …………………………………………………………….84
SGS 5 – Loan Transfers…………………………………………………………………………………………………………………87
Operation of Different Methods………………………………………………………………………………………………….87
Comparison Table for Exam………………………………………………………………………………………………………92
Pros + Cons – Novation…………………………………………………………………………………………………………100
1
, Pros+ Cons – LMA Assignment…………………………………………………………………………………………….102
Pros + Cons – Sub Participation…………………………………………………………………………………………103
Pros + Cons – Risk Participation……………………………………………………………………………………105
Exam Structure – Loan Transfers…………………………………………………………………………….106
SGS 6 – Bonds (Parties + Documentation)………………………………………………………………………………….117
Bonds Pros + Cons………………………………………………………………………………………………………………………..119
Syndicated Loan vs. Bond Issue…………………………………………………………………………………………………122
Principal Parties in Bond Issue…………………………………………………………………………………………….123
Fiscal Agent vs. Trustee……………………………………………………………………………………………………128
Content of some Key Bond Issue Docs…………………………………………………………………………132
SGS 7 – Issuing a Eurobond……………………………………………………………………………………………………….137
Timetable for Bond Issue……………………………………………………………………………………………………………137
Factors that could impact timing…………………………………………………………………………………………….140
Procedure for Issuing Listed Bond……………………………………………………………………………………….141
Content of a Prospectus……………………………………………………………………………………………………143
Demonstrating compliance to relevant authority…………………………………………………………..146
Potential liabilities arising from a bond issue……………………………………………………………..148
SGS 8 – Security – Assets + Priorities………………………………………………………………………………………..152
Comparing types of security (table)…………………………………………………………………………………………153
Identifying Assets + Method of Perfection……………………………………………………………………………157
Purpose + Method of Perfection……………………………………………………………………………………….161
Practical + Commercial Issues Raised by Security Package……………………………………………..166
Priority Rules for Security…………………………………………………………………………………………….167
SGS 9 – Security – Risks……………………………………………………………………………………………………………169
Form MR01 + Process of Registration at Companies House………………………………………………………169
Issues arising from Due Diligence + Solutions (Exam Structure)………………………………………………179
Financial Assistance………………………………………………………………………………………………………………184
Financial Assistance (Exam Structure)………………………………………………………………………………………..189
Common Law dealing with problems impacting security……………………………………………………………195
SGS 10 – Guarantees + Debentures……………………………………………………………………………………………197
Exam Structure + table for Key Clauses in Debenture………………………………………………………………….197
Enforcing Security using rights in debenture……………………………………………………………………………201
Comfort Letter, Guarantee, Security…………………………………………………………………………………….205
Key clauses in guarantee…………………………………………………………………………………………………..208
2
,SGS 1 – OVERVIEW OF A BANKING TRANSACTION, SYNDICATION
AND TERM SHEET
• describe the stages of a corporate loan transaction;
• understand the basic aspects of syndication and the roles of the different parties in a
syndicated loan transaction;
• analyse and amend a term sheet to reflect your client’s needs; and
• explain the meaning of some key banking terms featured in typical loan documentation.
Describe the stages of a corporate loan transaction
1.RELATIONSHIP MANAGER/ACCOUNT OFFICER:
Each borrower is assigned a particular individual within the bank who provides a consistent point of
contact and someone who the borrower’s officers can build a relationship.
- AO will put together a basic package for the terms of the proposed loan.
- Amount and term of loan, repayment dates, principal financial covenants.
2.CREDIT COMMITTEE:
Assesses the risk in light of all of the bank’s loans, decides whether to approve the loan or not.
Credit Department/Credit Committee of a Bank sees all credit requests and takes a view on the
overall lending of the bank.
- Ultimate say as to whether bank is prepared to lend funds.
- Credit approval is not automatic and will be viewed within context of what other risks the
bank is exposed to.
- Credit Committee will wish to see as a minimum the company’s annual audited accounts.
Credit Committee may approve, amend or reject the lending proposal.
3.DUE DILIGENCE:
PURPOSE
Fact finding exercise – aim to flush out potential future problems in order to assess the overall credit
risk of the borrower and any other entity giving security (carried out on behalf of bank)
Investigation will vary with the identity of the bank and the borrower as well as:
a. Size of the loan
b. Type of loan and its purpose
c. Whether the loan is secured
d. Whether the borrower is already known to the bank
e. Market liquidity (numerous or few lenders willing to lend)
f. Loan is integral part of a larger transaction such as floatation or acquisition.
3
, Legal due diligence will be carried out at a later stage by the bank’s lawyers.
May reveal risk is too great for a bank to lend unless it is able to take security.
What assets are available for the bank to take security.
Higher chance of default, larger the fees and margin a bank will charge.
What happens:
- Solicitor might obtain copies of AOA, the charges register and company records of borrower.
- Companies House registered docs.
4.MANDATE LETTER/COMMITMENT LETTER (only for syndicated loans):
Letter that appoints the arranger and is legally binding
WHAT SHOULD A COMMITMENT LETTER COVER?
LEGALLY BINDING = key points covered are:
a. Whether the bank’s obligations to arrange the facility is ‘best efforts’ or ‘underwritten’
b. General conditions to the offer to arrange – time limit for executing facility doc, obtaining
credit committee approvals, due diligence.
c. Material adverse change provisions allowing bank to withdraw from offer if there is a
material adverse change to the market (MAC) or borrower’s situation (business MAC)
d. Clear market clause in which the borrower agrees not to raise other finance whilst the
facility is being arranged.
e. Market flex clause which allows bank to change aspects of the negotiated facility agreement
if it is necessary to attract other banks to participate.
f. Provisions for the bank to recover fees, costs and expenses if the deal does not go ahead.
5.TERM SHEET:
Document which records in writing the principal terms of the transaction and signed by the parties
to the transaction but is not intended to be contractually binding.
- These are usually attached to a Mandate Letter (Commitment Letter) which contains legally
binding terms.
- Drafted by the lender’s lawyers
WHY HAVE A TERM SHEET?
- Focus the minds of bank and borrower on the fundamental issues of the deal.
- If the proposed facility is to be syndicated, it will be helpful for the bank which is arranging
the loan to have an accurate summary of the main terms when trying to sell the deal to early
syndicate members before an info memorandum has been produced.
- Term sheet acts as the outline from which the bank’s solicitor can extract the key info to
prepare the first draft of the facility agreement.
- Assists solicitors in estimating fees for the transaction.
4
