Debt Finance Flashcards
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 an underwritten basis to provide the company as borrower with certainty that it will receive the funds it requires.
(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.)
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 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 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.)
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 run from the date of signing the loan agreement to a time shortly before termination of the loan.
(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.)
A borrower intends on entering into a loan agreement for a £35,000,000 syndicated five-year term loan which is to be secured over the assets of the borrower. The loan is to be used by the borrower for working capital purposes and the arranger has agreed to arrange the loan on a best efforts basis. The parties have agreed that the loan will follow the LMA form. The fees to be paid by the borrower in connection with the loan will be set out in separate fee letters.
In addition to the commitment fee, arrangement fee and agency fee, which of the following fees will be payable by the borrower?
Security trustee fee.
(The facts indicate that the loan will be syndicated and will be secured, which will therefore require a fee to be paid to the security trustee.
Participation and arrangement fees are interchangeable terms and therefore no separate participation fee will be required in addition to the arrangement fee.
No underwriting fee will be payable, since the facts indicate that the agent will not be underwriting the loan; it is being arranged on a best efforts basis.)
A company is seeking a £4,000,000 syndicate secured term loan to be arranged by its relationship bank. The arranger and the borrower are currently negotiating the representations clause.
The company currently owns 3 subsidiaries, all of which contribute to the turnover of the group. Subsidiary A accounts for 63% of the group’s turnover and has some key supply contracts which benefit the group. Subsidiary B accounts for 36% of the group’s turnover and holds some of the group’s key assets which are required for production of its products. Subsidiary C is a minor subsidiary which holds few assets and currently contributes 1% to the group’s turnover. The borrower does not anticipate any significant change in the structure of its business.
Which of the following is the most likely conclusion when negotiating the representations clause?
The borrower will be required to provide representations on behalf of itself and its ‘Material Subsidiaries’, with such a definition covering subsidiaries A and B.
(This appears to be the most likely compromise position. Borrowers will typically be required to not only represent in respect of themselves, but also in respect of any ‘Material Subsidiaries’, since any key subsidiaries contributing to the group’s turnover or asset pool are likely to be relevant in the eyes of the syndicate. The threshold at which this is set will usually be commercially agreed, but the facts indicate that subsidiaries A and B not only contribute significantly to the group’s turnover but hold some key assets too. Less significant subsidiaries, such as subsidiary C, will likely be carved out of the definition to avoid overly burdensome requirements on the borrower. Whether the representations repeat or not will be a separate discussion, but the categorisation of subsidiaries as ‘Material Subsidiaries’ will not automatically carve them out of the repeating representations.)
A company (the ‘Company’) is seeking a six-year syndicated term loan in order to incorporate a new subsidiary to specifically operate the consultancy part of its business. The company already wholly owns three subsidiaries which are operating companies within the group and generate the majority of the group’s profits. The Company does not have significant assets of its own, except for the shares it owns in its subsidiaries. One of the Company’s subsidiaries entered into an unsecured four-year term loan six months ago with another lender.
Which of the following is correct in relation to addressing any concerns the syndicate might have?
A subordination agreement between the syndicate and the existing subsidiary lender will help to protect the syndicate’s position.
(The syndicate lenders will be structurally subordinated to the lender at subsidiary level. The fact that this loan is unsecured is irrelevant, since the existence of the lending is the cause of the problem. Whilst obtaining a guarantee and/or security can improve the syndicate’s position, it would need to take any such guarantee and/or security from the subsidiary, not from the Company. By including protective drafting in the Company’s loan agreement (not the subsidiary’s loan agreement), the syndicate can also mitigate the risks)
A borrower has a £2 million term loan agreement with a bank, the second tranche of which is due to be drawn down in a few days’ time. The loan agreement is based on the LMA and contains a repeating representation that there is no litigation over £200,000. The borrower has just been served with a claim form indicating it is being sued for £1 million for patent infringement.
Which event of default will be triggered under the borrower’s loan agreement and when?
The misrepresentation event of default will be triggered when the no litigation over £200,000 representation is repeated in a few days’ time.
(The repeating representation that there is no litigation over £200,000 will be repeated when the second tranche of the loan is drawn down. As the representation will be incorrect, a misrepresentation event of default will be triggered on its repetition.
The non-payment event of default will not be triggered because the borrower, on the facts, has not missed a payment to the bank. The £1 million being claimed is not money due to the bank under the loan agreement.
The cross-default event of default will not be triggered because, on the facts, the borrower had not got an event of default under another of its loan agreements. The £1 million claim is in relation to patent infringement, it has nothing to do with the borrower breaching another of its loan agreements.
The creditors’ process event of default will not be triggered because, on the facts, no remedy is being exercised by a creditor over an asset of the borrower (e.g. there is no execution of a judgment debt here). The serving of a claim form does not fall within creditors’ process.)
A borrower has a fully drawn term loan with a bank, the terms of which are based on the LMA. There are grace periods in the non-payment, insolvency proceedings and creditors’ process events of default only. The loan agreement has an undertaking not to dispose of assets and there is a de minimis exception to this of £10,000 in aggregate. The borrower has received an offer to buy one of its warehouses for £500,000 which the borrower is considering accepting.
What action is the bank entitled to take under the loan agreement if the borrower sells the warehouse?
The bank will be entitled to call an event of default for breach of other obligations.
(The breach of the no disposals undertaking, if the borrower sells the warehouse, would trigger the other obligations event of default.
The bank will not be entitled to exercise drawstop because, on the facts, the loan is a fully drawn term loan and there are no outstanding drawdowns to temporarily suspend.
The bank will not be entitled to call for mandatory prepayment on these facts – mandatory prepayment events are things such as change of control of the borrower or illegality of the lender to lend and they are not relevant on these facts.
The bank will not be entitled to call a potential event of default. A potential event of default is where an event of default has been triggered but it contains a grace period which is running. On the facts, the relevant event of default does not contain a grace period (even if it did, arguably this breach would not be capable of remedy) so a potential event of default is not relevant on these facts.)
A borrower has an RCF loan agreement with a bank, the terms of which are based on the LMA. The borrower sent its latest interest payment to the bank on the due date yesterday but, unknown to the borrower, the payment failed to go through due to a computer glitch.
What action can the bank take today?
The bank can call a potential event of default and exercise drawstop.
(The non-payment event of default usually has a 2 or 3 day grace period for non-payments caused by technical errors such as on these facts. Whilst the grace period is running the borrower is in a potential event of default and the only remedy available to the bank is drawstop (relevant on these facts as the loan is an RCF).
The bank cannot call an event of default as this situation would only be a potential event of default. The bank is also limited, in the options available to it, in a potential event of default situation.)
A company is finalising a loan agreement with Bank A based on the LMA and including both a negative pledge and a no further financial indebtedness covenant, both of which apply to both the borrower and its wholly-owned subsidiary. The borrower also intends to enter into a later loan agreement with Bank B and the loan with Bank B requires security from the borrower and a guarantee from its subsidiary.
Without relevant exceptions being included in Bank A’s loan agreement, which issues would arise with Bank A’s loan agreement when the borrower enters into the proposed loan with Bank B?
The borrower’s security would breach the negative pledge in Bank A’s loan agreement and both the loan with Bank B and the subsidiary’s guarantee would breach the no further financial indebtedness covenant.
(The negative pledge is a general undertaking prohibiting the creation of further security. The no further financial indebtedness covenant restricts further financial indebtedness, which includes borrowing and guarantees.)
A private company borrower is entering into a loan agreement with a bank to fund its acquisition of 100% of the shares in a PLC. The PLC has a wholly-owned private company subsidiary. The bank requires security from the borrower, a guarantee from the PLC and security from the PLC’s subsidiary.
Which elements of the bank’s security package would constitute unlawful financial assistance?
The guarantee from the PLC and the security from the PLC’s subsidiary.
(The financial assistance legislation prohibits a PLC target company and any of its subsidiaries (public or private) from giving financial assistance (which includes security and guarantees) to the bank. The security from the borrower is not caught by the financial assistance legislation as it does not prohibit the borrower from giving financial assistance.)
A chargor grants the following security interests to a chargee:
A legal mortgage over their shares in their subsidiary;
A fixed charge over shares the chargor owns in an unrelated UK company; and
A fixed charge over the chargor’s patents.
Which registers, in addition to the Companies House register of charges, would these security interests need registering in to be perfected?
The subsidiary’s register of members and the Intellectual Property Office’s register of patents
(In addition to registration at Companies House, the legal mortgage over shares in the chargor’s subsidiary needs registering in the subsidiary’s register of members (as the chargee is now the legal owner of the shares in the subsidiary, subject to the equity of redemption) and the fixed charge over the chargor’s patents needs registering at the Intellectual Property Office in the register of patents there. Remember, as a legal mortgage transfers legal title to the shares to the mortgagee (i.e. the chargee), this transfer must be registered in the register of members of the company whose shares have been mortgaged (N.B. NOT the register of shareholders of the company creating the security over those shares (the chargor)). The fixed charge over shares the chargor owns in an unrelated UK company is a beneficial/ equitable interest and so cannot be noted on the register of members of the UK company (that would only happen if the chargee was the owner of the legal title to the shares).)
