Debt Finance Flashcards
What is the difference between a term loan and a revolving credit facility (‘RCF’)?
Term loans are usually uncommitted facilities and RCFs are usually committed.
A term loan requires repayment in a single payment at the end of the term, whereas repayment of the RCF will usually be structured in one of three ways: (i) amorisation, (ii) balloon repayment; or (iii) bullet repayment.
Term loans are repayable at the end of the term and RCFs allow borrowers to repay and reborrow throughout the term of the loan.
Correct
Term loans are repayable at the end of the term and RCFs allow borrowers to repay and reborrow throughout the term of the loan.
Correct
Correct. Whilst RCFs will have a term of typically three to five years (much like a term loan), the obligation to lend is on an ongoing basis, allowing the borrower to draw money, repay and re-draw (according to the terms of the loan agreement) throughout the term of the loan. Both are usually committed facilities and there can be a number of ways that the repayment of a term loan is structured.
What is the purpose of the credit committee?
The credit committee drafts the documentation required for the lending and will take the lead with negotiations.
The credit committee will usually consist of a panel of different lenders, overseeing lending within a certain industry sector.
The credit committee is an internal function of the lender and will decide whether the lending can be approved on the proposed terms.
The credit committee is an internal function of the lender and will decide whether the lending can be approved on the proposed terms.
Correct
Correct. The credit committee will have oversight of the lending at the lender as a whole and will ultimately be able to decide whether the proposed lending is suitable. It will not usually be directly involved in drafting and negotiation of the documentation, but will be approached throughout these stages to approve certain changes to the terms. Each lender will have its own internal credit committee.
Who will carry out due diligence and why?
It will be carried out by the lender to find out information about the borrower once the loan agreement has been agreed between the parties and is ready for signature.
It will be carried out by the lender and its solicitors to find out information about the borrower, including (among other things) financial information and information about any assets to be secured.
It will be carried out by the lender’s solicitors and will be a fact-finding exercise in relation to the lender and its ability to lend.
It will be carried out by the borrower in advance of approaching the proposed lender and will involve the borrower finding out about the financial position of the lender, to ensure it has sufficient funds to lend.
It will be carried out by the lender and its solicitors to find out information about the borrower, including (among other things) financial information and information about any assets to be secured.
Correct. This is a fact-finding mission and will be carried out by the lender (or on its behalf) in the early stages to ensure that the company will be able to repay. The legal due diligence will then be carried out, investigating the borrower and its assets in more detail.
What might syndication be preferable?
It involves multiple lenders and therefore there is more risk involved.
It can allow for loans to be larger, due to the risk being spread more widely.
It will allow the borrower to borrow money with a longer term for repayment.
It can allow multiple borrowers to borrow from the same lender at the same time with only a single loan agreement signed.
It can allow for loans to be larger, due to the risk being spread more widely.
Correct
Correct. Syndicated loans enable many lenders to be brought together, allowing the risk to be split between more lenders and thereby usually allowing a borrower access to a greater sum of money. It will result in a single loan agreement being signed between the borrower and the multiple lenders. A syndicated loan doesn’t automatically result in a longer term for the borrowing.
Which of the following statements is correct in relation to the role of the Agent?
The Agent will be appointed by the borrower as its agent and will deal with the mechanics of the loan, whilst also acting as a key contact between the borrower and the syndicate.
The Agent’s duties will usually be described as being solely mechanical and administrative in nature and it will be formally appointed under the loan agreement.
Key duties of the Agent, once appointed, will be to assemble the syndicate of lenders, advise about loan structure and prepare an information memorandum.
The Agent will typically take instructions from the ‘Majority Lenders’ being those with more than 50% of the total syndicate commitments and any decisions taken will be binding on all syndicate lenders.
The Agent’s duties will usually be described as being solely mechanical and administrative in nature and it will be formally appointed under the loan agreement.
Correct. The Agent is an agent of the syndicate lenders and the appointment will be effective under the loan agreement. The ‘Majority Lenders’ will typically be those lenders representing 66 2/3% of the total syndicate commitments and decisions will be binding on all syndicate lenders. The Agent will not be involved in the assembly of the syndicate, preparation of the information memorandum and advice in relation to the loan structure – those are key duties of the Arranger.
Which of the following correctly describes the appointment of the Arranger?
If the Arranger is appointed on an underwritten basis, the risk involved for the Arranger will result in the borrower having to pay an underwriting fee in addition to the arrangement fee.
Whether the Arranger has been appointed on a best efforts or underwritten basis will be confirmed in the term sheet.
If the Arranger is appointed on a best efforts basis, it will use its ‘best efforts’ to assemble the syndicate lenders for the full amount and if it fails to do so, it will be required to make up the shortfall.
If the Arranger is appointed on an underwritten basis, the risk involved for the Arranger will result in the borrower having to pay an underwriting fee in addition to the arrangement fee.
Correct. This is a risky position for the Arranger, since it will be obliged to provide the shortfall if it cannot gather a full syndicate of lenders and as a result, there will be an additional fee involved. ‘Best efforts’ means that the risk stays with the borrower instead. The basis on which the Arranger has been appointed will be confirmed in the mandate letter, not the term sheet.
How can the Arranger use the mandate letter to ensure that syndication is successful?
By including a market flex clause which will provide the Arrange with flexibility to change certain terms of the deal, such as pricing of the loan.
By including a material adverse change provision which will allow the Arranger to terminate the arrangement if the circumstances of the borrower change in any way.
By including a clear market clause which will prevent the borrower from obtaining any other financing during the life of the loan.
By including a market flex clause which will provide the Arrange with flexibility to change certain terms of the deal, such as pricing of the loan.
Correct. A market flex clause can help to ensure successful syndication, but can be unpopular with borrowers, so often such changes are restricted to the pricing only. The clear market clause is also helpful, but would apply to the arrangement period only. The material adverse change provision would only be effective in certain circumstances.
How can the Arranger protect itself from liability?
The Arranger will take an indemnity from the syndicate lenders for any liability it might incur as a result of arranging the syndicate.
By entering into confidentiality undertakings when sharing the information memorandum with potential syndicate lenders.
The information memorandum will include an ‘Important Notice’ which will state that the borrower is responsible for the information and that the syndicate lenders should carry out their own assessments.
The information memorandum will include an ‘Important Notice’ which will state that the borrower is responsible for the information and that the syndicate lenders should carry out their own assessments.
Correct
Correct. These are just some examples of the ways in which the ‘Important Notice’ will help to limit the Arranger’s liability. Have a look back at this element for further examples. The confidentiality undertakings will help to protect the borrower’s confidential information. Additionally, if the Arranger were to take an indemnity, it would be from the borrower, not the syndicate lenders.
How can the Agent protect itself from liability?
Duties of the Agent should be narrowly defined to be solely mechanical and administrative in nature.
Ensuring that it checks the accuracy and adequacy of documentation.
The inclusion of conditions precedent (‘CPs’) in the mandate letter.
Duties of the Agent should be narrowly defined to be solely mechanical and administrative in nature.
Correct. This is an example of a protection for the Agent – have a look back at this element for further examples. Another example is that the Agent will specifically state that it has no responsibility for checking the accuracy or adequacy of documents. CPs would be documented in the loan agreement, not the mandate letter.
What is an Availability Period?
The period during which the borrower will be allowed to make prepayments.
The period during which the term sheet will be available for acceptance by the borrower.
The period during which the borrower will be allowed to make changes to the loan agreement if it requires additional flexibility.
The period during which the borrower may draw down the loan.
The period during which the borrower may draw down the loan.
Correct
Correct. For a term loan, this will usually be around three months following signing of the loan agreement. For an RCF, this will run to a time shortly before termination of the facility to allow the borrower to continually have funds ‘available’ to it, since it will be allowed to draw down, repay and then re-draw.
What is a term sheet?
A document which sets out the terms of the fees the borrower will be required to pay.
A document which sets out the main terms of the loan agreement.
The same as a mandate letter and the terms can be used interchangeably.
The first draft of the loan agreement.
A document which sets out the main terms of the loan agreement.
Correct. It will simply be an overview of the expected deal and will not usually contain any particularly complex drafting. It will then be used to prepare the loan agreement. The mandate letter is a separate document and the fees will be documented in fee letters.
Which of the following is incorrect in respect of term sheets?
A term sheet will usually be used to help solicitors to estimate their fees in respect of the transaction and will be the starting point when drafting the loan agreement.
A term sheet will usually only set out the detail of any terms which are very specific to the transaction, with others referred to as those which are “usually included in this type of facility”.
A term sheet will be non-binding except for certain provisions relating to costs and confidentiality.
A term sheet will not usually contain clauses which deal with repayment of principal and interest and prepayment of principal as these are commercially sensitive and will need to be kept confidential.
A term sheet will not usually contain clauses which deal with repayment of principal and interest and prepayment of principal as these are commercially sensitive and will need to be kept confidential.
Correct
Correct. This statement is untrue. The term sheet will document these provisions as these are some of the key terms of the facility. Whilst a term sheet will be non-binding, there will be binding confidentiality provisions. The term sheet will be helpful to solicitors in both preparing the first draft of the loan agreement and estimating fees.
Which of the following clauses would you not expect to see in a loan agreement?
Events of Default
Conditions Precedent
Representations
Fixed and floating charges
Fixed and floating charges
Correct
Correct. You are likely to find fixed and floating charges in a security document entered into by a borrower in favour of a lender. Whilst the loan agreement may reference the fact that the lender will require security from the borrower it will not include the security itself.
Which of the following statements is correct in relation to conditions precedent found in a loan agreement?
The conditions precedent must be satisfied or waived before the lender is obliged to lend money to the borrower
The conditions precedent must be satisfied or waived before the loan agreement is entered into as once the loan agreement is entered into the lender is obliged to lend money to the borrower
The conditions precedent must be satisfied before the lender is obliged to lend money to the borrower
The conditions precedent must be satisfied or waived before the lender is obliged to lend money to the borrower
Correct. A lender is only obliged to advance money to a borrower once all conditions precedent have been satisfied by the borrower or the lender has agreed to waive the need to satisfy a particular condition(s) precedent.
What is an underwriting fee?
A fee paid to the arranger, which may be shared in part amongst the lenders.
A fee paid to the security trustee on a secured transaction.
A fee paid to the agent for its own account for its administrative services.
A fee paid to the arranger if the arranger guarantees to provide the loan to the borrower if the arranger is unable to fully syndicate the loan.
A fee paid to the arranger if the arranger guarantees to provide the loan to the borrower if the arranger is unable to fully syndicate the loan.
Correct. If a loan is underwritten by the arranger (which means that the arranger guarantees to provide the total loan amount to the borrower if it is unable to fully syndicate the loan) they will be paid an underwriting fee.
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 as it will require the flexibility to reduce the amount of the loan if it fails to find sufficient syndicate lenders.
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 an underwritten basis to provide the company as borrower with certainty that it will receive the funds it requires.
Correct
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.
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 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.
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 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 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 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
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.
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 start when the term sheet is signed and will run until the 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 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.
Which of the following statements is true in relation to representations that you would find in a loan agreement?
A borrower will want the representations to be absolute with no qualification such as materiality as this will lead to ambiguity.
A borrower will want the representations to be as wide as possible.
It is common for a borrower to disclose against the representations in a disclosure letter.
Representations are statements of fact that can cover legal and commercial matters.
Representations are statements of fact that can cover legal and commercial matters.
Correct
Which of the following statements is true in relation to representations that you would find in a loan agreement?
Representations are generally not negotiated as all loan agreements contain the same representations.
Representations are based on the day of signing the loan agreement.
If a representation made by a borrower is untrue, a lender’s remedy will be for misrepresentation under common law.
A lender will not allow a buyer to amend the representations during negotiations of the loan agreement.
Representations are based on the day of signing the loan agreement.
Correct
Which of the following is a borrower least likely to resist in relation to representations that it gives in a loan agreement?
That the representations are absolute and contain, for example, no materiality qualifications.
That a representation that ‘there is ‘no potential event of default’’ be a repeating representation.
Inclusion of representations given by the borrower on behalf of any ‘Material Subsidiaries’
Inclusion of representations given by the borrower on behalf of any ‘Material Subsidiaries’
Correct
Correct. Whilst the borrower may still resist these representations and argue that it should only give representations on its own behalf, the borrower is less likely to resist this than the other options especially given that the drafting has been mitigated by the inclusion of the word ‘Material’.
What is an undertaking?
A promise by a borrower to either do something or not do something.
A statement of fact.
A promise by the borrower to do something.
A promise by the borrower not to do something.
A promise by a borrower to either do something or not do something.
Correct
Which of the following is not a category of undertaking that you would normally expect to see in a loan agreement?
Financial covenants
Information undertakings
Indemnity undertakings
General undertakings
Indemnity undertakings
Correct. Indemnity undertakings are not a category of undertakings that you would expect to see in a loan agreement.
Which of the following statements is untrue in respect of undertakings from a lender’s perspective?
Breach of an undertaking will allow a lender to take steps to call an event of default under a loan agreement.
A lender will use due diligence that is has conducted to determine the undertakings it requires from a borrower.
Undertakings allow a lender to monitor the borrower through regular information supplied to it by the borrower.
A lender should ensure that it is involved in the business of the borrower including being an active part if its decision making to ensure it is complying with the undertakings
A lender should ensure that it is involved in the business of the borrower including being an active part if its decision making to ensure it is complying with the undertakings
Correct
Correct. This statement is untrue. A lender should not become too involved in the business of the borrower such as being an active part of its decision making as it risks being deemed as a shadow director.
Which of the following is not a component of the interest rate usually paid by a corporate borrower on a loan?
Fixed rate
Relevant risk-free rate
Margin
Fixed rate
Correct
Correct. A fixed rate of interest is rare in corporate lending as the rate of interest tends to be higher than the floating rate available to a borrower and so is less attractive.
When is interest paid by a borrower under a term loan?
On the first day of each interest period
On the last day of each interest period
At the end of the term loan
On the last day of each interest period
Correct
Which of the following is not considered a ‘main threat’ to the lender’s margin?
The relevant risk-free rate
Increased costs
Withholding tax
The relevant risk-free rate
Correct
Correct. The relevant risk-free rate is what is added to the margin to make up the overall floating interest rate payable by a borrower.
Which one of the following forms of wording, in the cross default event of default, is pure cross default wording, triggered in the event of any event of default occurring under a loan agreement the borrower has with another creditor?
Any creditor of the borrower or any of its subsidiaries becomes entitled to declare any financial indebtedness due and payable before the date originally agreed because of an event of default under the agreement creating financial indebtedness between the creditor and the borrower (or any of its subsidiaries)
Any financial indebtedness of the borrower or any of its subsidiaries is not paid when due nor within any originally applicable grace period.
Any financial indebtedness of the borrower or any of its subsidiaries is declared to be or otherwise becomes due and payable prior to the date originally agreed as a result of an event of default under the agreement creating financial indebtedness between the creditor and the borrower (or any of its subsidiaries).
Any creditor of the borrower or any of its subsidiaries becomes entitled to declare any financial indebtedness due and payable before the date originally agreed because of an event of default under the agreement creating financial indebtedness between the creditor and the borrower (or any of its subsidiaries)
Correct. This is pure cross default wording where the cross default event of default is triggered if the borrower defaults under an agreement it has with another creditor, irrespective of whether that other creditor takes any action in relation to that default. The “any financial indebtedness of the borrower or any of its subsidiaries is declared to be or otherwise becomes due and payable prior to the date originally agreed as a result of an event of default under the agreement creating financial indebtedness between the creditor and the borrower (or any of its subsidiaries)” wording is cross acceleration wording as it requires a further step to be taken by that other creditor before the cross default event of default is triggered - the other lender has to accelerate or place their loan on demand. The “any financial indebtedness of the borrower or any of its subsidiaries is not paid when due nor within any originally applicable grace period” wording is cross default wording but is not pure cross default wording as it is limited to a non-payment event of default and doesn’t apply to any other event of default that may occur under the other creditor’s loan agreement. It is much narrower in scope than pure cross default wording.
Which one of the following is usually a mandatory prepayment event instead of an event of default within a loan agreement based on the LMA?
Breach of financial covenants
Material Adverse Change
Illegality
Unlawfulness
Illegality
Correct. Illegality of the lender lending is usually a mandatory prepayment event rather than an event of default because the borrower has no control over it and it would not be fair for the bank to expect the borrower to take the risk of it, especially as an event of default could trigger cross-default in the borrower’s other loan agreements (if any). Unlawfulness, where it is unlawful for the borrower/guarantor to perform its obligations, however, is an event of default because, whilst it may be outside the borrower/guarantor’s control, it is an issue of risk allocation – the lender will insist the risk stay with the borrower in such a situation. Breach of financial covenants is an event of default because it would indicate possible creditworthiness issues with the borrower and the borrower should be able to operate within these pre-agreed financial parameters. Material Adverse Change is a catch-all event of default and a requirement of most lenders’ internal credit committees.
incorrect
Breach of financial covenants
Incorrect. Breach of financial covenants is an event of default because it would indicate possible creditworthiness issues with the borrower and the borrower should be able to operate within these pre-agreed financial parameters. Please revisit this element, in particular the pages on mandatory prepayment events.
Material Adverse Change
Incorrect. Material Adverse Change is a catch-all event of default and a requirement of most lenders’ internal credit committees. Please revisit this element, in particular the pages on mandatory prepayment events.
Which one of the following events of default would you NOT find a grace period in?
Breach of Other Obligations.
Non-Payment (of principal and/or interest)
Insolvency.
Creditors Process.
Insolvency.
Correct. Insolvency is where an entity cannot pay its debts as they fall due. There is no availability for any grace period if insolvency is declared. A short grace period of 2-3 days is usually accepted in the non-payment event of default but only for non-payment due to technical or administrative reasons. A catch-all grace period is usually drafted into the breach of other obligations event of default for breaches of obligations which are capable of remedy. A grace period is given in the creditors’ process event of default to discharge the creditor’s process.
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?
Underwriting fee.
Participation fee, underwriting fee and security trustee fee.
Underwriting fee and security trustee fee.
Security trustee fee.
Security trustee fee.
Correct
Correct.
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.
The borrower will be required to provide representations on behalf of itself which should be repeated, but representations on behalf of its ‘Material Subsidiaries’ (to cover subsidiaries A and B) should not repeat.
The borrower will be required to provide representations on behalf of itself and all of its subsidiaries
The borrower will be required to provide representations, but the representations should not cover the subsidiaries as they are not borrowing and are therefore less of a concern to the syndicate.
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.
Correct.
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.
Obtaining a guarantee or security from the Company will give syndicate direct recourse against the Company and improve the syndicate’s position with regards to the subsidiary lender.
Including protective drafting, such as a no financial indebtedness undertaking and negative pledge in the subsidiary’s loan will protect the syndicate’s position.
The syndicate should not be concerned, since the subsidiary’s loan is unsecured.
A subordination agreement between the syndicate and the existing subsidiary lender will help to protect the syndicate’s position.
Correct.
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
Which one of the following is NOT a defined term in the LMA?
Default.
Potential Event of Default
Event of Default.
Potential Event of Default
Correct
Correct. There is no separate definition of a potential event of default in the LMA. Event of Default and Default are both defined in the LMA. Default is defined as being wider than an actual Event of Default – it includes an actual Event of Default but also includes an event or circumstance (specified in the events of default clause) which would (with the expiry of a grace period, giving of notice or the making of any determination under the Finance Documents) be an Event of Default – this is what we call a potential event of default although it is not separately defined as such in the LMA. So a potential event of default (although it is not separately defined) is a situation which would be an Event of Default but for the fact that the Event of Default has a grace period which the borrower is currently in, or, the Event of Default requires the giving of a notice or making of a determination which hasn’t happened yet.
A borrower has a fully drawn-down unsecured term loan with a bank. The borrower has triggered an event of default, which is continuing, under the loan agreement, which is based on the LMA. Which one of the following options would you recommend to the bank in this situation?
Drawstop.
Cancellation.
Enforcing security.
Acceleration.
Acceleration.
Correct
Correct. The acceleration clause gives the bank the option to demand immediate repayment of the loan and any outstanding interest and fees and this is known as acceleration. Cancellation of further lending obligations and drawstop (temporary suspension of further draw downs) are only relevant as options to the bank if the loan is an RCF or a term loan with undrawn tranches (not the case here as this is a fully drawn term loan). Enforcing security is only an option where the loan is secured (on the facts this loan is unsecured).
Incorrect
Enforcing security.
Incorrect. Enforcing security is only an option where the loan is secured (on the facts this loan is unsecured). Please revisit this element, in particular the pages on a lender’s options following an event of default.
Drawstop.
Incorrect. Drawstop (temporary suspension of further draw downs) is only relevant as an option to the bank if the loan is an RCF or a term loan with undrawn tranches (not the case here as this is a fully drawn term loan). Please revisit this element, in particular the pages on a lender’s options following an event of default.
Cancellation.
Incorrect
Incorrect. Cancellation of further lending obligations is only relevant as an option to the bank if the loan is an RCF or a term loan with undrawn tranches (not the case here as this is a fully drawn term loan). Please revisit this element, in particular the pages on a lender’s options following an event of default.
Which one of the following is one of the Agent’s roles (as set out in the LMA) in a syndicated loan?
The obligation to exercise any of the remedies under the Acceleration provisions of the events of default clause if any syndicate lender instructs it to do so.
The power to exercise any of the remedies under the Acceleration provisions of the events of default clause if instructed to do so by the Majority Lenders.
The duty to notify the syndicate lenders promptly if the Agent receives notice of an Event of Default under the loan.
The duty to notify the syndicate lenders promptly if the Agent receives notice of a Default under the loan.
The duty to notify the syndicate lenders promptly if the Agent receives notice of a Default under the loan.
Correct. This is wider than simply notifying the syndicate lenders if the Agent receives notice of an Event of Default as Default is defined more widely than Event of Default (see this element) to include an Event of Default and also what we refer to as potential events of default. The Agent also has the power to exercise any of the remedies under the Acceleration provisions of the events of default clause and the obligation to do so if instructed by the Majority Lenders.
A borrower in entering into a secured loan with a bank. Both parties anticipate additional future secured lending arrangements between themselves. Which one of the following would be the most suitable form of wording for the definition of Secured Liabilities in the security document?
All present and future monies, obligations and liabilities from time to time owed or incurred by the Borrower to the Lender under or in connection with the Finance Documents.
All present and future liabilities and obligations of the Borrower to the Lender which are, or may become, due owing or payable under or in connection to the Loan Agreement
All monies, debts and liabilities from time to time due, owing or incurred by the Borrower to the Lender.
All monies, debts and liabilities from time to time due, owing or incurred by the Borrower to the Lender.
Correct. This is ‘all monies’ security where the secured liabilities are not limited to the amounts owed under the current loan agreement but are defined so as to cover future financing obligations between the parties as well. The advantage of ‘all monies’ security is efficiency in that, when secured lending takes place between the same parties in the future, the security document is already in place, as the original security document will cover the future lending (saving time and costs drafting another security document).
The wording “all present and future liabilities and obligations of the Borrower to the Lender which are, or may become, due owing or payable under or in connection to the Loan Agreement” limits the secured liabilities to the amounts owed under this current loan agreement so this security document will not cover future lending between the parties.
The wording “all present and future monies, obligations and liabilities from time to time owed or incurred by the Borrower to the Lender under or in connection with the Finance Documents” limits the secured liabilities to the amounts owed under this current loan. Finance Documents covers the loan agreement, any security documents, any guarantees and any separate fee letters i.e. all of the documentation relating to this loan only (not any future loan) so this security document will not cover future lending between the parties.
incorrect
All present and future monies, obligations and liabilities from time to time owed or incurred by the Borrower to the Lender under or in connection with the Finance Documents.
Incorrect. The wording “all present and future monies, obligations and liabilities from time to time owed or incurred by the Borrower to the Lender under or in connection with the Finance Documents” limits the secured liabilities to the amounts owed under this current loan. Finance Documents covers the loan agreement, any security documents, any guarantees and any separate fee letters i.e. all of the documentation relating to this loan only (not any future loan) so this security document will not cover future lending between the parties. Please revisit this element, in particular the pages on secured liabilities.
All present and future liabilities and obligations of the Borrower to the Lender which are, or may become, due owing or payable under or in connection to the Loan Agreement
Incorrect
Incorrect. The wording “all present and future liabilities and obligations of the Borrower to the Lender which are, or may become, due owing or payable under or in connection to the Loan Agreement” limits the secured liabilities to the amounts owed under this current loan agreement so this security document will not cover future lending between the parties.
Please revisit this element, in particular the pages on secured liabilities.
Which one of the following is quasi-security?
A legal assignment by way of security over the borrower’s intellectual property (trade marks etc).
A floating charge over the borrower’s stock.
A guarantee from a parent company.
A legal mortgage over the borrower’s shares in its subsidiary.
A guarantee from a parent company.
Correct
Correct. A guarantee is quasi-security in that it only provides the lender with a contractual claim against the guarantor. Unlike security, quasi-security does not give the lender proprietary rights over the borrower’s assets.
A legal mortgage over the borrower’s shares in its subsidiary is security rather than quasi-security because it gives the lender proprietary rights over the borrower’s asset – the shares – giving the lender rights in certain circumstances to take possession of or sell the asset.
A floating charge over the borrower’s stock subsidiary is security rather than quasi-security because it gives the lender proprietary rights over the borrower’s asset – the stock – giving the lender rights in certain circumstances to take possession of or sell the asset.
A legal assignment by way of security over the borrower’s contractual rights is security rather than quasi-security because it gives the lender proprietary rights over the borrower’s asset – the intellectual property – giving the lender rights in certain circumstances to take possession of or sell the asset.
A borrower has a secured and guaranteed (by its parent company) loan with a bank.
Which one of the following is the best explanation of when the lender can enforce its security?
The borrower defaults under the loan agreement.
The guarantor fails to pay when the bank pursues it directly for repayment after the borrower’s default.
The bank becomes concerned that the borrower is no longer as creditworthy as when they entered into the loan.
The borrower defaults under the loan agreement.
Correct
Correct. The lender is able to enforce its security once the borrower defaults under the associated loan agreement. The lender can step in and take possession of the secured asset or sell the secured asset to repay any outstanding amount due on the loan.
If the loan is guaranteed as well as secured, the bank does not have to pursue the guarantor for repayment first before it can enforce its security. The guarantee and the security are separate ways for the bank to try and get its money back if the borrower defaults under the loan agreement.
The bank takes the security to protect itself and increase its chances of getting its money back if the borrower defaults under the loan agreement. The less creditworthy the borrower, the more likely the bank is to want to take security. However, the right to enforce the security is not triggered by the bank being concerned about the borrower’s creditworthiness.
Which one of the following statements regarding the nature of a charge is correct?
A charge gives a proprietary interest in the asset.
A charge transfers title to the asset.
A charge is a legal right.
A charge gives a proprietary interest in the asset.
Correct. A charge is an equitable right which gives a proprietary interest in the asset, giving the lender the right to appropriate the charged asset and sell it to discharge the secured debt. There is no transfer of title to the asset.
Which one of the following is the strongest form of security interest which can be taken over future property?
A legal mortgage.
A floating charge.
A fixed charge.
A fixed charge.
Correct
Correct. A legal mortgage can’t be taken over future property – the asset must be owned by the charger when the security is created. A floating charge is a weaker form of security interest than a fixed charge as it allows the charger to deal with the asset freely as part of their business until the floating charge crystallises and it ranks behind a fixed charge on insolvency.
Which one of the following is NOT a requirement to perfect a legal mortgage over shares a borrower holds in its subsidiary?
Registration of the chargee in the subsidiary’s register of members.
Execution of a stock transfer form in favour of the chargee.
Registration of the chargee in the borrower’s register of members.
New share certificates in the chargee’s name.
Registration of the chargee in the borrower’s register of members.
Correct. To perfect a legal mortgage over shares a borrower holds in its subsidiary, the chargee needs an executed stock transfer form, registration of the charge in the register of members of the subsidiary (i.e. the company the shares are in, to show the chargee is now the owner of those shares) and new share certificates in its name, all of which make the chargee the legal owner of those shares, subject to the equity of redemption.
A borrower grants a fixed charge on 1 January and it is registered at Companies House on 31 January. The borrower then grants a second fixed charge over the same asset to another lender on 5 January and it is registered at Companies House on 20 January. Which of the two fixed charges has priority and why?
The second has priority because priority between competing fixed charges is determined by the date of registration.
The first has priority because priority between competing fixed charges is determined by the date of creation.
The second has priority because the first was not registered at Companies House within the time limit and so is void against other creditors.
The first has priority because priority between competing fixed charges is determined by the date of creation if the charges have been registered.
The second has priority because the first was not registered at Companies House within the time limit and so is void against other creditors.
Correct. Priority between competing fixed charges is determined by the date of creation, subject to correct registration within the 21 day (from the day after the date the charge was created) time period. Here, the first fixed charge was not registered within the time limit and so is void against other creditors.
