Bank Lending

Question 1

Types of Facility for bank lending?

Answer 1

• Overdraft
• Term loan
• Revolving credit facility (‘RCF’)

Question 2

What does an overdraft do?

Answer 2

• An overdraft permits the borrower to borrow (or literally overdraw from its account) up to a specified limit and interest is charged on the daily overdrawn balance.
• The borrower can repay the loan (or repay part of it) and then redraw the money – again up to the specified limit.

Question 3

How is an overdraft usually granted?

Answer 3

on the bank’s standard terms and conditions, so there is little room for negotiation of these

Question 4

What is an ‘uncommitted’ facility for overdrafts?

Answer 4

i.e., the bank is not committed by any contract to continue lending the money and may decide to withdraw the facility at any time and for any reason

Question 5

When is an overdrawn amount payable?

Answer 5

• Any overdrawn amount is legally repayable on demand. This means a bank does not have to wait for a breach of the overdraft agreement by the borrower, to require repayment of an on-demand facility.

Question 6

What documentation is usually needed for overdrafts?

Answer 6

• Little formal documentation is required – often merely a ‘facility’ letter.

Question 7

Why are overdrafts used?

Answer 7

• An overdraft is a tool to assist cash flow, i.e., to keep the business liquid.
• It provides a reserve of easily accessible money to meet any shortfalls in working capital. An overdraft is sometimes known as a working capital facility.
• Whilst most companies will have access to an overdraft facility, it is not intended to be a core source of funding but rather a means of dealing with short term funding requirements (e.g., resulting from irregular cash flow due to seasonal fluctuations of the business). Companies which have specific reasons for raising further finance will do so through one, or a combination, of the types of debt facility described below (term loan and revolving credit facility).

Question 8

What is a term loan?

Answer 8

• This is the most inflexible facility of the three we are looking at.
• A term loan provides a fixed sum for a fixed period.
• The borrowed amount may be fully drawn down in one lump sum or in several ‘tranches’, depending on the terms of the loan agreement.
• It is usually a ‘committed’ facility, i.e., the bank is bound (subject to the terms of the loan agreement) to lend the money and can only demand repayment before the agreed repayment date(s) if there is an event of default under the loan agreement (events of default will be considered in Workshop 3).
• It is repayable by the end of the term according to an agreed repayment schedule set out in the loan agreement.
• Any prepayments (repayments made earlier than due) are usually final (i.e., they cannot be redrawn by the borrower).
• A term loan is most suitable where the borrower needs a specific sum of money for a medium to long period, i.e., for the purchase of property, acquisition of a company, start-up costs.

Question 9

• Repayments can be structured in a variety of ways including:

Answer 9

· ‘Amortisation’ – repayment of amounts at regular intervals;
· ‘Balloon repayment’ – repayment in several instalments where the final payment is bigger than the rest; and
· ‘Bullet repayment’ – repayment in one instalment at the end of the term.

Question 10

What is a revolving credit facility?

Answer 10

• A revolving credit facility (‘RCF’) is a commitment by a lender to lend on a recurring basis on predefined terms.
• The bank makes a specific amount of capital available over a specific period, typically three to five years.
• Unlike a term loan, the RCF allows a borrower to draw down and repay (and draw again) amounts of capital during the availability period (see below), subject to the terms of the loan agreement.
  · Draw down is the borrower getting money under the facility agreement
  **

Question 11

revolving credit facility

How long is the capital avaiible and should be repaid by?

Answer 11

• The capital is made available for a set availability period (e.g., 5 years) and, within that period, individual loans (subject to a minimum size (e.g., £500,000)) are borrowed for an ‘Interest Period’ (generally 1, 3 or 6 months at a time) and repaid at the end of that Interest Period.

Question 12

Can a borrower have outstanding loans for a revolving credit facility?

Answer 12

• Typically, a loan agreement would specify that a borrower can have no more than a certain amount of loans outstanding (e.g., 5 loans) at any one time. The borrower usually has to give a number of days’ notice to draw down (this depends on the currency).

Question 13

How do multiple interest periods work together?

Answer 13

• Each loan will have its own Interest Period, so it is common for more than one loan, perhaps with differing Interest Periods, to run concurrently. Different loans under a facility can be drawn down at different times.
• • It is usually a committed facility so, provided there is no default, the bank is bound to lend the money and cannot demand early repayment.

Question 14

What happens at the end of the avilibility period?

Answer 14

• The RCF will cease to be available, and any outstanding drawings will be repayable in full

Question 15

How does RCF keep interest costs to a minimum?

Answer 15

• The RCF allows a borrower to draw down loans only when it needs the capital and only for the period it needs the capital, thereby keeping interest costs to a minimum.

Question 16

What is a committment fee?

Answer 16

• A bank will charge a fee called a ‘commitment fee’, which is a percentage of the undrawn amounts of the facility from time to time. A bank charges a commitment fee because it has had to put aside a certain amount of capital based on the total committed facility available to the borrower in order to comply with capital adequacy rules.

Question 17

What happens when funds are drawn down?

Answer 17

• Each time funds are drawn down (or ‘rolled over’, which means the same amount is deemed repaid and re-borrowed on the same day), the borrower is deemed to repeat certain representations (‘Repeating Representations’) which it originally gave to the lender in the loan agreement.

Question 18

Why shpuld borrowers under RCF check when repeating representations can be given?

Answer 18

• Consequently, borrowers under an RCF need to check that the Repeating Representations can be given immediately prior to any further drawdown, or they run the risk of triggering an Event of Default. This would apply equally to a multi-tranche term loan. Also, a bank will have the right to temporarily suspend any further lending (‘drawstop’), if the borrower is in default.

Question 19

Clean down provision?

Answer 19

• A Clean Down provision is often included in an RCF to ensure that the RCF is used to manage cash flow and does not become long term core debt. The lender may achieve this, for example, by requiring the borrower to repay the whole of the facility and retain a ‘nil’ balance for at least five business days in any 12-month period (i.e. ‘cleaning down’).

Question 20

• RCF’s are often used for working capital (i.e. to provide liquidity for a company’s day to day operations). An RCF combines the:

Answer 20

· flexibility of an overdraft facility (allowing the borrower to withdraw capital only when it is required); and
· certainty of a term loan (an RCF is usually a committed facility).

Question 21

Capital market instruments?

Answer 21

• Instead of taking out a loan, a borrower may decide to raise finance by issuing a capital markets instrument. The term ‘capital markets’ here refers not to a physical or even a single electronic marketplace, but to the whole global market in which investors provide finance to corporations, governments and other types of issuer in the hope of making a profit on the investment.
• Bonds are the form of capital markets instrument which we will consider on this knowledge stream.

Question 22

stages of a loan transaction?

Answer 22

• Commonly a borrower will approach its relationship bank with a need to raise finance.
• The arranger bank will commence an initial due diligence process (investigation and credit analysis) with the relationship manager putting together an initial package of terms for the loan.
• The lender’s credit committee will then be consulted for approval of the lending terms.
• A term sheet will be agreed between the lender and the borrower. Solicitors will be instructed by both parties. (NB: in some circumstances a formal term sheet will not be used).
• Solicitors commence due diligence & drafting / negotiation of documentation.
• Signing and completion. Provided any conditions precedent are satisfied, the borrower can draw down funds.

Question 23

• What is the purpose of due diligence?

Answer 23

• Due diligence by the lender is simply a fact-finding exercise. The purpose of collecting information is to ensure the company’s financial information is as accurate as possible and to focus attention on factors in the business that will be critical to its future success. The lender will want to ensure that the company will be able to pay the principal amount requested and the interest payments payable under the loan. Due diligence is an exercise carried out by or on behalf of the lender.
• The aim is to assess the overall risk of the borrower and any other entity providing security or giving a guarantee for the payment of the loan. Together we call the borrower any such security/guarantee provider the ‘Obligors’. This will be a defined term in the loan agreement.
• Legal due diligence will be carried out at a later stage by the lender’s solicitors. This will involve carrying out a number of searches on the obligors and, if the loan is to be secured, searches on the assets that will be subject to security.
• At some point, the information may reveal that the risk is too great for a bank to lend unless it is able to take security.
• In such cases, due diligence would extend to ascertaining what assets are available for the lender to take as security and the value of those assets.
• The higher the chance of default, the larger the fees and margin a lender will charge to compensate for this risk and the more stringent the documentary provisions it will seek.

Question 24

• Credit analysis?

Answer 24

· There is no ‘standard’ due diligence procedure. The format and extent of due diligence will vary with the identity of the lender and other factors including:
- Size of the loan;
- Type of loan (committed / uncommitted);
- Whether the loan is to be secured;
- Identity of the borrower (credit rating, jurisdictions involved, whether the borrower is known to the lender) ; and
- Whether the loan is part of a larger transaction.
· The lender will then put together a ‘basic package’ with the borrower, including the headline terms of the deal such as amount and term, repayment dates and main covenants to be given by the borrower in the loan agreement.
· For the purposes of this knowledge stream , this ‘basic package’ will be set out in a term sheet, but other formats could be used by lenders in practice.

Question 25

Credit approval?

Answer 25

· The Credit Department or Credit Committee of a lender sees all credit requests and takes a view on the overall lending outstanding. It will have the ultimate say as to whether or not the lender is prepared to lend funds on the proposed terms. Credit approval is not automatic and will be viewed within the context of other risks the lender is exposed to in its lending, for example:
- industry sectors;
- geographical / political risks; and
- types of corporate borrowers
· The lender’s internal limits and policies on exposure must not be breached.
· The Credit Committee will wish to see as a minimum the company’s annual audited accounts. It may also request to see interim figures, management accounts (i.e. unaudited accounts prepared for internal purposes) and possibly any future business plan.
· The Credit Committee may approve, amend or reject the lending proposal.

Question 26

Legal due diligence?

Answer 26

· Once the lender has instructed solicitors, they will start to carry out detailed due diligence on the borrower (and any other company granting security / giving guarantees).
· This will involve carrying out searches (including at Companies House) on all of the companies involved in the transaction (like pre-exchange searches).
· As a minimum, the lender will want to ensure that there are no restrictions in the relevant company’s constitution on its ability to borrow or give guarantees/grant security (as applicable).
· It will be necessary to ensure that a company can grant security over shares in its subsidiaries.
· Crucially, if the legal due diligence does reveal any restrictions in the constitutional documents of any relevant company on borrowing and/or giving security/guarantees, the lender will want to ensure such restrictions are removed prior to the lender agreeing to lend (i.e., by the relevant company amending its articles). The lender ensures a borrower does this by requiring that evidence of such steps are listed as ‘conditions precedent’ in a schedule to the loan agreement. See Workshop 2, where the importance of conditions precedent is discussed further.

Question 27

• What is a syndicated loan?

Answer 27

• A bilateral loan is a loan made available by a single lender.
• A syndicated loan is a loan made by two or more lenders (together called the syndicate) on the same terms and governed by a single loan agreement.

Question 28

• Why syndicate?

Answer 28

• When a lender lends money, it makes a profit made up of fees paid by the borrower and the margin (the difference between its cost of lending and the interest paid by the borrower to it).
• So why would a lender that has been approached by a borrower want to form a lending syndicate and be forced to share its profit?
  · This is due to a number of limitations which impact upon a lender’s lending, including the size of the loan, internal risk policy and large exposure regulations.
• Banks have a number of restrictions on how much they can loan based on different factors

Can make larger loans!!!!!!

• Syndication allows large amounts to be lent to a single entity with large financing needs. Often it would not be feasible for one lender to make available such sums.
• Therefore, a borrower will appoint a lender to put together or ‘arrange’ a syndicate of lenders and each member of the syndicate will commit to contributing towards the total facility on signing of the loan agreement.

Question 29

Synidcated loans

Internal risk policy?

Answer 29

• Even if it had the cash to do so, one lender would have a considerable credit risk if it were to lend large sums to any one borrower or concentrate its lending in specific sectors or countries.
• This is something which the lender’s internal credit committee will look at when the proposed loan is first put forward.

Question 30

• Large exposure regulations?

Answer 30

• Irrespective of a lender’s internal risk policy, it may be prohibited by large exposure regulations (for example, those stemming from the Capital Requirements Directive) from taking so much risk with a single borrower.
• Lenders gain fees and prestige from participating in high profile syndicated loans and this could lead to follow on business with the borrower. So even for lenders with small participations in a syndicate, it is a good way of entering the market and being introduced to the borrower.
• From a borrower’s point of view, the more lenders, the bigger the potential amount to be borrowed but also the more unwieldy the syndicate becomes to manage. This is somewhat mitigated by the syndicate appointing an ‘agent’. As mentioned below, one of the Agent’s roles is to act as a conduit between the borrower and the syndicate lenders.

Question 31

Post-signing synidcation?

Answer 31

• N.B. the borrower may need funds for a specific project and by a specific time (e.g. to fund a property acquisition). It may not be feasible to form a syndicate prior to the signing of the loan agreement in time for completion. A solution is to enter into a loan agreement with either the Arranger or, more likely, a small group of syndicate lenders so that the borrower has its funds on time. The initial lender(s), post signing of the loan agreement, will then syndicate the loan by transferring ‘portions’ of it to other lenders, thereby reducing their overall exposure to the borrower.
• This is called post signing syndication.

Question 32

Parties to a syndicated loan?

Answer 32

• Arranger
• Agent
• security trustee (sometimes labelled a ‘Security Agent’)

Question 33

Who is the arranger?

Answer 33

· The starting point of syndication will be for the borrower to appoint a lender to put a syndicate together. This is known as ‘arranging’ the syndicated loan and the name generally given to the lender taking on this role is that of ‘Arranger’.

Question 34

How is the arranger appointed?

Answer 34

· The Arranger (also known as the ‘lead arranger’ or ‘mandated lead arranger’) is appointed (i.e. ‘mandated’) by the borrower to arrange the raising of the required amount of debt, by organising a syndicate of lenders which is able to provide those funds. Such an appointment or mandate will be confirmed and documented by the mandate letter (see element 3). The borrower will usually expect the Arranger to provide a substantial proportion of the total facility.
* The Arranger will charge an arrangement fee for its role as arranger of the loan This is usually documented in a fee letter so that the exact amount is confidential as between the borrower and the Arranger.

Question 35

What does the arranger do?

Answer 35

• The Arranger will advise as to the most appropriate loan structure, key terms and the cost taking into account the borrower’s creditworthiness, the purpose of the loan and prevailing market conditions. The Arranger will advise the borrower generally (if it is not familiar with the syndicated loan market) on how the syndication procedure will move forward.
• The Arranger will prepare an information memorandum from information provided by the borrower. This is the document used by the Arranger to market the loan to potential syndicate lenders. It will contain, amongst other things, a description of the borrower’s business and financial details.
• The role of the Arranger ceases on the signing of the loan agreement (clause 33.4). However, the loan agreement should still contain some clauses which are designed to protect the Arranger, e.g., providing for the ability to enter into other future business with the borrower (see clauses 33.5 & 33.6).
• The Arranger will appoint solicitors to draw up the first draft of the loan agreement and then will negotiate this and any other documentation, such as security documents, with the borrower on behalf of all syndicate members. If there is more than one arranger, they may agree that one of them assumes this role, in which case they may be referred to as the documentation bank when acting in this capacity.
• It has become common for larger borrowers to agree with the Arranger that the borrower’s solicitors will draft the loan agreement as the borrower will want the loan agreement to be borrower friendly. Usually, the Arranger’s lawyers will prepare the other finance and security documents.

Question 36

Types of synidcation?

Answer 36

• The mandate letter will make it clear whether the Arranger has been appointed on a best efforts or underwritten basis.

Question 37

Best efforts basis?

Answer 37

• When a loan is mandated on a best efforts basis, the Arranger will promise to use its ‘best efforts’ to assemble a syndicate of lenders willing to lend the required amount. This does not amount to a guarantee that the full amount will be raised. If the Arranger does not succeed, the borrower will not have access to the full funds required.

Question 38

underwritten basis?

Answer 38

· The borrower can ask the Arranger to underwrite the entire loan or arrange for a small group of lenders to underwrite the loan. This means that if the full syndicate of lenders cannot be put together in time, the Arranger (and any fellow co-arrangers) will be obliged to make up any shortfall in the requested amount. The borrower will have to pay an underwriting fee for this as well as the usual arrangement fee. Acquisition finance transactions will usually be underwritten by the Arranger as the borrower needs to be certain that it will have funds available to complete the acquisition.

Question 39

Who is the agent?

Answer 39

• The Agent is typically a bank, usually part of the lending syndicate, appointed by the syndicate lenders under the loan agreement, upon the advice of the Arranger, to administer the facility. The Agent is agent of the lenders and not of the borrower. Note non-bank Agents are becoming increasingly common.

Question 40

How is an agent appointed?

Answer 40

• This is an important role. The Arranger and the syndicate lenders formally appoint the Agent under the terms of the loan agreement (clause 33.1).

Question 41

Agent relationships with the other parties?

Answer 41

The Agent administers the mechanics of the loan and will be the main point of contact between the syndicate and the borrower throughout the life of the loan, as far as the mechanics of the loan are concerned.
* The Agent will be unwilling to assume any discretionary powers to manage the loan on behalf of the syndicate, as this may lead to liability in the event any of their decisions have unfortunate consequences. Agency fees are low and do not reflect risk.
* In addition, the syndicate lenders are generally unwilling to delegate management functions to the Agent and deprive themselves of influence in decision-making.
* The result is that the Agent’s duties are precisely defined and documented and are mainly restricted to administrative tasks (clause 33.3 (a)). The Agent will protect itself by seeking instructions from all or the requisite group of syndicate lenders, e.g.’ the ‘Majority Lenders’. The Agent will not be liable for any actions it takes in accordance with those instructions (clause 33.2 (a)(i) (A) and (D)).

Question 42

Agent’s main functions?

Answer 42

Paying agency (cl. 36.1)
Postman (cl. 33.3(b) and (d))
Determining interest rate
Limited monitoring (e.g. cl. 33.3(d)
Pro rata sharing (cl. 35)
Interpretation of loan agreement (see also cl. 33.7(c) to (e))
Action on default (cl. 29.20, cl. 33.3 (e) and (f))
Checking conditions precedent (cl. 4.1)
Administering loan transfers (cl. 30 and Sch 4 and 5)

Question 43

Who are majority lenders?

Answer 43

• A democracy exists within the syndicate. Most decisions tend to be delegated to majority control, usually set at 66 2/3% of total syndicate commitments (referred to as the ‘Majority Lenders’ – see definitions clause to check the majority threshold). Once a decision is made it is binding on all syndicate members.

Question 44

Why have majority lenders?

Answer 44

• This style of decision making by Majority Lenders speeds up the process and prevents one minor lender effectively having a veto. A drawback of syndicated loans is the potential divergence of interests of the syndicate members. It is important both for lenders and the borrower that amendments and waivers can be made relatively easily, without one minor lender being able to block the process.

Question 45

Why majority lenders instead of unanimouse consent?

Answer 45

• Matters which usually require a Majority Lender decision include waiving certain defaults, amending the loan agreement (cl. 42.2(a)), replacement of Screen Rate (from LIBOR to a risk-free rate), determining whether a material adverse change has occurred regarding the borrower and directing the Agent to accelerate the facility (cl. 29.20).
• However, a few matters are considered so important that they require unanimous consent. These will be specified in the loan agreement but usually include a change of borrower, a reduction in any amount paid to the lenders, an extension of payment dates or an increase in the total of the lenders’ commitments (see clause 42.3).

Question 46

When is a security trustee appointed?

Answer 46

• Where a syndicated loan is secured, a security trustee (sometimes labelled a ‘Security Agent’) will be appointed to hold the security effectively for the benefit of all the syndicate lenders.

Question 47

Advanatage of have a security trustee?

Answer 47

• One major advantage of this arrangement is that when a syndicate lender transfers its participation, the benefit of the security can be also transferred without the need for a separate formal arrangement. To achieve this the security must be created in favour of the security trustee for the benefit of the ‘Lenders’, defined as the lenders from time to time lending under the loan agreement.
• This is sufficiently precise under English law for the creation of security for the benefit of the syndicate as a whole, notwithstanding that the identity of the lenders may change during the life of the loan. Local legal advice should be taken if security is being created other than under English law. Loan transfers will be considered in Workshop 7.

Question 48

Why may a mandate letter be used?

Answer 48

• Where a syndicated loan is used, additional provisions relating to the arranging of the loan may be included in a separate letter known as a mandate letter (also known as a commitment letter). There is an LMA standard form mandate letter which is widely accepted in the market.

Question 49

Who will provide the mandate letter and what would it set out?

Answer 49

• The mandate letter will be provided by the Arranger and will set out the terms on which the borrower appoints it and on the basis of which the Arranger has agreed to arrange the syndicated loan (either on a best efforts or underwritten basis).

Question 50

What would a mandate letter set out?

Answer 50

will set out the terms on which the borrower appoints it and on the basis of which the Arranger has agreed to arrange the syndicated loan (either on a best efforts or underwritten basis).
* It will also include provisions designed to assist the Arranger in marketing the loan/setting up the syndicate. The term sheet will usually be attached to the mandate letter, with any legally binding provisions set out in the mandate letter rather than in the term sheet.
* the mandate letter will make it clear whether the Arranger has been appointed on a best efforts or underwritten basis. It is important for the Arranger that the syndication is successful, so the mandate letter will contain a number of provisions to facilitate syndication, including:

Question 51

What is a clear market clause?

Answer 51

• A ‘clear market’ clause in which the borrower is restricted from issuing any other finance whilst this facility is being arranged. This is to ensure the Arranger is not competing with other attempted financing by the same borrower.

Question 52

What is a market flex clause?

Answer 52

• A ‘market flex’ clause in which the Arranger can change terms of the facility to attract other banks to participate. This could include increasing the pricing and/or fees of the loan (and sometimes changing provisions such as the structure of the facility) to enhance the prospects of successful syndication. These clauses are unpopular amongst borrowers but have become more accepted and widespread. It is in a borrower’s interest to try to limit the changes the Arranger can make to pricing only (with a cap on any rise in pricing); and

Question 53

What is a material adverse change clause?

Answer 53

• A ‘material adverse change’ provision (not to be confused with a ‘MAC’ event of default). A material adverse change provision in a mandate letter effectively enables the Arranger to terminate its mandate and walk away from the deal if either:
  · there has been an event in the syndicated loan markets which has materially and adversely impacted the primary syndicate; or
  · something happens which has an adverse impact on the business or financial condition of the borrower.

Question 54

What is an information memorandum?

Answer 54

• The information memorandum is the main marketing document prepared by the borrower and the Arranger and sent by the Arranger to potential syndicate members. The Arranger will assist the borrower in writing the information memorandum on the basis of information provided by the borrower during the due diligence process.

Question 55

Why use an information memorandum?

Answer 55

• As the lenders are lending to a particular business for a particular purpose, they need to assess the risk of doing so. To do this they need to know all they can about the business. The information memorandum sets out the details of the borrower’s business, management and accounts, as well as the details of the proposed loan facility and any security and inter-creditor arrangements. It is not a public document and all potential lenders (whether pre- or post-signing of the loan agreement) who wish to receive it must sign a confidentiality undertaking.
• The confidentiality undertaking tends to be drafted by the Arranger, although the LMA has produced forms of confidentiality letters which are common in the market.

Question 56

• Potential liabilities of Arranger and Protections

Answer 56

• Misinformation about the borrower to the syndicate lenders:
  · If the Arranger has provided inaccurate information to the lenders, it is likely that there will also be a misrepresentation event of default by the borrower (to be considered in Workshop 3). The facility could therefore be accelerated, and any funds advanced to the borrower immediately reclaimed.
  · However, it may be that the borrower is insolvent or in serious financial difficulties by then. Hence the syndicate lenders’ attention will turn to the Arranger, to see if it is liable to pay compensation for misrepresenting the borrower’s financial condition in the information memorandum, claiming fraudulent/negligent misrepresentation or negligent misstatement.

Question 57

How to exclude liability in a syndicated loan?

Answer 57

• The Arranger’s mandate is to organise the syndicate, and not to take responsibility for the information in the information memorandum or for syndicate lenders’ investment decisions. The Arranger will therefore attempt to exclude liability. At the start of the info memo is a disclaimer entitled ‘Important Notice’, stating that:
  · the borrower is solely responsible for the information memorandum, and the Arranger is not responsible for the information contained in it;
  · the Arranger has not independently verified the contents;
  · the syndicate lenders will not rely on the memorandum to make their investment decision, and each bank should undertake its own assessment in deciding whether to participate in the loan; and
  · the Arranger is not responsible for updating the information.

Question 58

• Protections under the loan agreement

Answer 58

• Indemnity: 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.
• Exclusion of fiduciary duties: The Arranger is not a fiduciary of the syndicate lenders. Therefore, the Arranger’s only duty is not to withhold any information from the syndicate.
• Waiver of conflict of interests: This enables the Arranger to pursue other business with the borrower.
• Waiver of any requirement to account for any profit made: This enables the Arranger to avoid any allegations of secret profit.

Question 59

• The agent has the following potential liabilities to the syndicate lenders:

Answer 59

· Breach of fiduciary duties including:
- No conflict of interest – the agent should not put itself in a position where its duty conflicts with its own self-interest or the interest of a syndicate member;
- Not to make a secret profit; and
· Due diligence in the exercise of its powers.
· Breach of terms of the loan agreement.
· Negligence – breach of duty to act with reasonable skill and care.

Question 60

• Agency fees are low and do not reflect the risks involved. The agent will therefore seek to protect itself by limiting the scope of its duties and its potential liabilities in the facility agreement, as follows:

Answer 60

· Duties narrowly defined: and are expressed to be solely mechanical and administrative in nature (clause 33.3(a)).
· Fiduciary duties excluded: (clause 33.5(a)), so that, for instance, the agent does not have to account to the lenders for any profit (clause 33.5(b)) and can carry on other business with the borrower (clause 33.6).
· Majority Lender instructions: the loan agreement expressly provides that the agent is protected if it acts in accordance with these instructions (clause 33.2(a)).
· Conditions precedent (‘CPs’): the agent will want the advice of lawyers (clause 26.8(c)) and the instructions of the lenders as to any commercial CPs before confirming the CPs are satisfactory.
· Professional advisers: in all matters the agent will want the right to appoint professional advisers if it considers this necessary to carry out its duties (and be compensated for the legal expenses) (clause 37.8(c) to (e)).
· No responsibility for checking accuracy/adequacy of documents: the agent is simply acting as a postman in relation to any documents it forwards or information it supplies to other parties (clauses 33.3(d) & 33.8).
· Exclusion of liability: (subject to the reasonableness test) for all liability except gross negligence or wilful misconduct (clause 33.10(a)(i)).
· Indemnity from lenders: for all liability, costs and expenses incurred in the carrying out of its duties (clause 33.11).
· Indemnity from borrower: e.g. for investigating Defaults (clause 21.3).

Question 61

• What is a term sheet?

Answer 61

• A term sheet is a document setting out the principal terms of the agreement between the parties – it can be referred to as ‘heads of terms’.
• It will be attached to the mandate letter, which will be signed by both lender (Arranger if the loan is syndicated) and borrower.
  · Relationship letter between the bank and borrower – there can be more than one bank that acts as arranger
• Term sheets can be anything between 2 and 80 pages long (and in some very complex transactions, even longer than this). Broadly speaking, the lender’s in-house counsel (for less complex deals) or the lender’s external lawyers (for more complex transactions) will usually draft the term sheet (as well as the mandate letter and fee letter). It is also common for the borrower’s counsel to draft these documents, so the loan documents reflect a more borrower friendly position from the beginning. In general, a straightforward bilateral or syndicated loan (‘plain vanilla’) will have a short-term sheet and structured transactions (such as those involving acquisitions or project finance) will have a longer, more detailed term sheet. The more non-specific the terms of the term sheet and the simpler the structure, the less important it is that lawyers be involved at this stage. However, borrowers will usually want their external lawyers to review the term sheet before it is agreed.

Question 62

• What is the legal effect of a term sheet?

Answer 62

• A term sheet is non-binding save for the provisions relating to confidentiality and costs and should therefore contain the wording ‘subject to contract’ clearly at the top of it.
• However, it is normally considered to be morally binding.
• This enables the term sheet to be able to adapt to change
• Where there is a mandate letter, provisions relating to confidentiality and costs are usually included in the mandate letter, which is legally binding.

Question 63

• Function of the term sheet?

Answer 63

• The term sheet provides an overview of the deal before the parties start working on the loan agreement itself.
• It is unlikely to contain detailed drafting. It serves as the initial summary of the fundamental terms of the loan.
• It assists the solicitors in estimating their fees for the transaction.
• The lender’s lawyers will use it to draft the loan agreement, and the borrower’s lawyers will use it when reviewing the draft to check that it reflects the terms agreed between the parties. Alternatively, the borrower’s lawyers may draft the loan agreement in which case the loan agreement will be considerably more borrower friendly. Note that in some deals, e.g. where the documentation from a previous deal is agreed to be used as a precedent, a formal term sheet may not be prepared. However, on this knowledge stream, you will be encountering a term sheet prepared by the lender.

Question 64

• The term sheet comprises clauses which are both deal specific and boilerplate, including the following:

Answer 64

· Date, parties (including any guarantor(s)), type, amount, availability period and termination of the facility;
· Repayment and prepayment of principal and payment of interest including:
- dates or schedule for repayment as applicable;
- voluntary prepayments (when, notice period and minimum amounts);
- any mandatory prepayment requirements in certain situations, e.g. change of control of the borrower normally gives rise to a prepayment obligation; and
- terms of interest payments; and
· Conditions precedent, representations and warranties, undertakings, events of default.
* The term sheet will typically only explicitly state any unusual / deal-specific provisions, referring to all others as those “usually included in this type of facility”.
* The main exceptions or carve-outs to undertakings may be stated “to be agreed” or a borrower may try to get these agreed at the term sheet stage, if they feel strongly about a particular exception or carve-out.
* It is important that where a list of provisions is not exhaustive, a clear phrase such as “…including but not limited to” is used as a preface.

Question 65

Confidentiality agreements in term sheets?

Answer 65

• Deed so the confidentiality letter is legally effective (so it is binding without consideration)
• The borrower will be subject to an obligation not to disclose the contents of the term sheet other than to their legal and financial advisers for the purposes of the transaction. If there is no mandate letter, this should be included in the term sheet and be expressed as legally binding.
• In addition, the borrower will be keen to ensure the lender treats all information gathered about the borrower during the due diligence process as confidential. Accordingly, a separate confidentiality agreement (also known as a non-disclosure agreement or NDA) will be entered into containing an undertaking given by the lender not to disclose confidential information about the borrower other than in restricted circumstances to aid syndication. Any lender considering participating in the syndicate will be required to sign a ‘back-to-back’ confidentiality agreement before receiving any information about the borrower.

Question 66

Costs in term sheets?

Answer 66

• If the loan does not go ahead, substantial costs may already have been incurred (e.g. legal fees). The term sheet should, therefore, include an obligation on the borrower to pay the lender’s costs whether or not the loan is completed, together with any fees charged by the bank (e.g. a cancellation fee).
• Again, this obligation on the part of the borrower should be expressly stated to be legally binding, which is why it is usually set out in the mandate letter instead of the term sheet.

Question 67

Boilerplate clauses in term sheets?

Answer 67

• These are clauses that are standard terms and which appear in some form or other in all loan agreements. They are provisions which govern the relationship between the parties and enforcement of the agreement including fees, governing law and jurisdiction etc.
• The term sheet will state at the top that it is subject to contract

Question 68

Facility’ or ‘Facilities’?

Answer 68

This can, depending on the context, mean the overall facility under which monies will be lent and, at the same time, the individual RCF or term loan facility comprised within the overall facility / facilities.

Question 69

Utilisation’ or ‘Drawdown’?

Answer 69

the borrowing of money under a loan facility.

Question 70

• ‘General corporate purposes’?

Answer 70

Usually seen in the ‘Purpose’ clause of a facility agreement in relation to an RCF.

Question 71

• ‘Availability Period’ or ‘Commitment Period’?

Answer 71

Usually seen near the beginning of the term sheet.- The period in which the loan may be drawn down by the borrower, e.g. for a term loan, say three months after execution. For an RCF, the availability should be until shortly prior to termination of the facility because the borrower can draw down, repay and later re-draw part or all of the facility throughout the life of the loan. This is the nature of an RCF.

Question 72

• ‘Acceptance’ / ‘Available’?

Answer 72

usually seen near the end of the term sheet. The period for which the terms of the loan contained in the term sheet will be available to the borrower to accept. After this time the term sheet may need to be renegotiated.

Question 73

• ‘Repayments’ As opposed to….?

Answer 73

The scheduled repayments set out in the repayment schedule, i.e., principal repaid to the lender.

Question 74

What are prepayments and how can they be paid?

Answer 74

• ‘Prepayments’- The borrower repaying the loan early:
  · Voluntary: sums repaid to the lender voluntarily in order to reduce the loan. Voluntary prepayments are generally subject to a minimum amount. Prepayment fees may also be charged.
  · Mandatory: payable on the occurrence of certain events, e.g., change of control of the borrower

Question 75

‘Fees’?

Answer 75

The lender’s fees, e.g. arrangement fee, commitment fee etc. The exact amounts may appear in a separate fee letter in order to preserve confidentiality.

Question 76

• ‘Costs’?

Answer 76

The expense of setting up the deal e.g. advisers’ fees. If loan negotiations break down and the deal does not go ahead the borrower will be obliged to pay the costs that the lender has incurred. This term will be expressed to be binding whether it is in the term sheet or the mandate letter or indeed a separate fees letter.

Question 77

A company has plans for expansion and is expecting to acquire all of the issued share capital of another company, to become its subsidiary (the ‘Acquisition’). The purchase price for the Acquisition has already been agreed between the parties at £15,000,000. In order to fund the Acquisition, the company will require a loan. Following discussions with its relationship bank, it has been agreed that the loan will be syndicated and that the bank will act as the arranger.
Which of the following best describes the appointment of the arranger?
* The arranger should be appointed on a best efforts basis due to the high level of fees involved in underwriting.
* The arranger should be appointed on an underwritten basis to provide the company as borrower with certainty that it will receive the funds it requires.
* The arranger should be appointed on an underwritten basis since this will allow it to syndicate the loan and ensure sufficient syndicate lenders are involved.
* The arranger should be appointed on a best efforts basis as it will require the flexibility to reduce the amount of the loan if it fails to find sufficient syndicate lenders.

Answer 77

• The arranger should be appointed on an underwritten basis since this will allow it to syndicate the loan and ensure sufficient syndicate lenders are involved.

Correct.
Appointing the arranger on an underwritten basis will provide the company with the certainty required for such things as acquisition finance.
Whilst the arranger will charge a fee for underwriting the loan, the certainty of funds is more of a concern on the facts.
Given the fact pattern indicates that the funds will be required for an acquisition, appointment of the arranger on a best efforts basis would not be appropriate.

Question 78

A bank is arranging a £75,000,000 syndicated term loan to be provided to a company in order to fund the research and development of a new product. The arranger has already marketed the loan and put together a syndicate of ten banks. Each of the ten lending banks is expected to provide a different amount towards the total commitments. The bank has agreed to act as both arranger and agent. The mandate letter includes the usual provisions to facilitate syndication and the loan agreement is to be drafted on the LMA form.
Which of the following statements in relation to the roles of arranger and agent is correct?
* The arranger can make use of the market flex provision in the mandate letter to facilitate successful syndication, by changing the pricing and/or fees of the loan.
* The agent will, for most decisions, seek instructions from the Majority Lenders (being seven of the banks as a minimum) and act in line with those instructions in order to protect itself from liability.
* The agent will be an agent of the syndicate lenders and will be appointed under the loan agreement, which will contain a number of protections, including a clause stating that its duties are solely mechanical and administrative.
* The arranger will ensure that the mandate letter contains an ‘Important Notice’ disclaimer, which will, among other things, state that it has not, as arranger, independently verified the information provided by the borrower.

Answer 78

• The agent will be an agent of the syndicate lenders and will be appointed under the loan agreement, which will contain a number of protections, including a clause stating that its duties are solely mechanical and administrative.

Correct.
The loan agreement is stated to be on the LMA form and therefore the usual protections will be present in the loan agreement. These will include defining the agent’s duties very carefully to state that they are solely mechanical and administrative in nature.
The Important Notice will be included in the information memorandum, not in the mandate letter but it will state that the arranger has not independently verified the borrower’s information (among other things).
Seeking Majority Lender instructions will assist the agent in absolving itself of liability, but Majority Lenders will be 66 2/3% of the total syndicate commitments, not in number of the lenders.
Since the arranger has already assembled a syndicate of lenders, the inclusion of the market flex provision in the mandate letter would not be required to facilitate successful syndication on the facts.

Question 79

A company has approached a bank to arrange a £5,000,000 syndicated revolving credit facility.
The draft term sheet is currently being prepared and the parties are in discussion about the key provisions to be documented in the term sheet.
Which of the following correctly describes the period of time for the Availability Period?
* The Availability Period should be expressed to be a period of three months from signing of the loan agreement.
* The Availability Period should run from the date of signing the loan agreement to a time shortly before termination of the loan.
* The Availability Period should begin when the term sheet is signed until around three months after signing of the loan agreement.
* The Availability Period should start when the term sheet is signed and will run until the signing of the loan agreement.

Answer 79

• The Availability Period should run from the date of signing the loan agreement to a time shortly before termination of the loan.
• Correct.
• Since the facts indicate that the facility will be a revolving credit facility, the Availability Period will need to be much longer than the typical three months for a term loan. Availability Periods should run from the signing of the loan agreement (regardless of whether it is a term loan or an RCF) since otherwise the term of the loan is being cut short by the period of time between the signing of the term sheet and the signing of the loan agreement. An Acceptance provision in the term sheet will usually deal with the period between signing of the term sheet and signing of the loan agreement, giving the parties an agreed amount of time to first of all accept the terms of the term sheet and then an amount of time to draft, negotiate and sign the loan agreement.

Question 80

What is a carve out?

Answer 80

A specific exception to a negative covenant or other provision in a loan agreement