Chapter 4 - Negotiating Debt Products Flashcards
What are key considerations when selecting a lender? (9)
1 - Cost of financing 2 - Flexibility (ie. covenants) 3 - Competition amongst lenders 4 - Relationship with existing bank 5 - Specialization of lender 6 - Industries covered by lender 7 - Time required to secure financing 8 - Administrative capacity to go through due diligence with multiple lenders 9 - size of loan
What are the groupings of the major senior debt providers? (7)
1 - schedule 1 2 - schedule 2 3 - ABL 4 - credit unions 5 - gov't banks 6 - equity financing / private debt 7 - institutional investors (ie. CPP)
what are the overarching steps in soliciting debt financing? (6)
1 - execution of a NDA
2 - receipt of discussion paper / term sheet
3 - negotiation of terms
4 - lender due diligence requirements
5 - receipt and execution of commitment letter
6 - execution of formal loan agreement
what are the key elements of an NDA? (7)
1 - identification of parties
2 - what is deemed to be confidential
3 - scope of confidentiality and how info may be used/shared with
4 - term of agreement
5 - description of damages if confidential info is disclosed
6 - record retention rules (ie. proof destroyed later)
7 - non-solicitation clauses for underlying employees or other key stakeholders - or also poaching human talent from company
what are the core elements of a discussion paper or term sheet? (6)
1 - summary of lender experience (marketing angle)
2 - total debt lender is willing to extend
3 - interest rate pricing and amortization schedule
4 - financial covenants
5 - collateral and security requirements
6 - lender underwriting fees
What are some examples of different types of fees that can be applicable to debt financing? (4)
1 - commitment fees - funds paid for committed facilities
2- drawdown fee - per draw on a term or EG facility
3 - standby fee - on unutilized revolving lines of credit
4 - work fee - for labour involved in structuring and underwriting
what are key areas of due diligence for a lender to request? (8)
1 - historical audited FS 2 - interim FS 3 - budget to actual and forecast 4 - appraisal if appropriate 5 - litigation search 6 - meeting with management 7 - key customer and supplier contracts 8 - borrowing history and debt repayment ability
What is the key distinction between a commitment letter and a credit agreement?
A commitment letter is still a binding agreement for the lender, but usually has conditions precedent that must be met, in order for a full loan agreement to be in place. loan agreement is the full, legal, binding document that sets out all terms and conditions of the agreement
what are representations and warranties?
reps and warranties are essentially statements that are made by a company and/or its owners that formally confirm that certain assumptions or facts are true
what are some events of default? (5)
failure to pay
breach of any covenants
making or furnishing to lender of any rep/warranty which is untrue
loss of collateral without paydown or related insurance proceeds covering loss
appointment of receiver or trustee
what are the three types of covenants?
positive covenants (affirmative) - things borrower must do negative covenants - things borrower can not do financial covenants - financial ratios that must be complied to
what are some examples of affirmative / positive covenants? (8)
financial statement reporting delivery of compliance certificates maintenance of company certification maintenance of property and insurance inspection of property notices that may impact lender environmental laws ownership of assets
what are examples of negative covenants? (5)
cannot incur additional indebtedness
liens may not be put into effect if they impair the lender
fundamental changes like capital markets, change in control, liquidation, etc
restricted payments ie removal of cash or dividends
capex - limits unfinanced capex or requires permission of lender
what are some examples of financial covenants? (4)
tangible net worth
fixed charge coverage / debt service coverage
debt to ebitda
max capital expenditure
what is the overlying rationale for covenants? (4)
preservation of repayment capacity
protection against financial restructuring
protection in event of bankruptcy or default
signals and triggers
