Definitions Flashcards
Nature of Facility
type of facility e.g. term loan, revolving credit facility
Availability Period
Between signing the agreement to the time of draw down under a term loan.
Conditions Precedent
Conditions that need to be satisfied before the borrow can draw down the funds. Usually documentation such as security forms, valuations.
Covenants
Undertakings given by the borrower as to what it will or will not do in the future.
Governing Laws
Usually be a stipulation that the facility is governed by English law but may be subject to US, Scottish or other legal jurisdiction.
Events of Default
Determine at what stage the bank can call in the loan i.e. demand repayment. A breach of a covenant is likely to trigger an event of default.
Documentation
Certificate of Incorporation Trading Certificate Memorandum of Association Statement of Capital & Shareholdings or Statement of Guarantee Articles of Association
Positive Covenant
An undertaking to do something
Restrictive (or negative) Covenant
An undertaking not to do something
Quantitative Covenant
Financial undertakings that can be expressed numerically and can be measured against a numerical benchmark
Qualitative Covenant
Undertakings that cannot be expressed numerically. Such as assurance to not borrow until the present facility has been repaid.
Information Covenant
An information covenant is designed to ensure a smooth flow of info to the bank so that i can monitor the borrowers progress
Asset Protection Covenants
Designed to ensure that the value against which a bank is lending (or which provides security against default) is maintained.
Financial Covenants
Quantitative covenants and can be written to cover a wide range of ratios and calculations
Negative Pledge
A negative pledge is a promise by the borrower that it won’t carry out a particular action, most commonly that it will not grant security to a third party without consent of the lender
Pari Passu Covenants
The principle of pari passu covenants is that the lender is equal in all respects to other creditors.
Remedies for Breach of Negative Pledge
Injunction if the lender acquires advance knowledge of possible breach
Equivalent Security Negative Pledge - gives equal and rateable security in the assets over which the 3rd party has taken security.
Remedies for Breach of Financial Covenants
It may be insignificant enough to be waived by the lender
The lender may renegotiate the covenant
The company may have the ability to ‘cure’ the breach e.g. injecting new equity into the borrower
Failure by the lender to act on a breach
May constitute a waiver of the breach and may be treated as a variation of the agreement. In practice, this means that the lender won’t be able to enforce the covenant or clause should any later breach occur. A solution to this is to issue a letter of breach (reservation of rights letter) acknowledging the breach but stating acknowledgement does not constitute a waiver
Fixed Legal Charge
A charge over one or more specific assets of the borrower as a security for a debt. The borrower retains ownership, possession and use of the charged asset but cannot dispose of the asset without the lender’s permission.
Floating Charge
Can be created by a Ltd company or an LLP. It allows the borrowers to dispose of the assets that are subject to the charge without the need for the lender’s consent and giving the purchaser of any such assets good title to them. E.g. Inventory or Receivables
Contractual Lien
A right given to the lender by contract to retain goods or other assets of the debtor to secure payment or performance of an obligation, for some purpose other than security
Possessory Lien
Created by operation of law and entitles the creditor to retain goods in their possession until payment is received.
Pledge
A security created by contract - involves the actual or constructive delivery of possession of an asset to the lender by way of security.
