Due Diligence, Conditions Precedent and Transaction Structure

Question 1

What are conditions precedent?

Answer 1

Conditions that the Borrower must fulfil before a Lender is obliged to lend

Borrower cannot draw down any funds until CPs are satisfied.

Question 2

Who determines whether CPs are satisfied?

Answer 2

Agent

Question 3

What are the 2 types of CPs

Answer 3

1. CPs to the first utilisation (documentary)

2. CPs to each subsequent utilisation

Question 4

Who provides the legal opinion and who is it addressed to?

Answer 4

Bank’s solicitor gives legal opinion

Given to agent + syndicate lenders

Question 5

What is the purpose of a legal opinion?

Answer 5

Reassures borrower/guarantor/anyone providing security that the finance documents are enforceable

Opinions are a MATTER OF LAW, not fact

Question 6

Explain structural subordination

Answer 6

Bank A lends to HoldCo (no assets)
Bank B lends to Subsidiary

Problem = Bank A is structurally subordinated to Bank B

• on WU, HoldCo can only claim assets as a SH (last to be paid on WU)
• Bank A ranks as a creditor of HoldCo - will not be much left after Bank B is paid out

Question 7

How to solve structural subordination

Answer 7

1. Subordinated bank can insist on HoldCo giving no financial indebtedness, negative pledge and no disposals undertakings
2. Guarantee + security from Subsidiary so has direct claim to its assets
3. Subordination agreement between Bank A and Bank B

Question 8

Explain contractual subordination

Answer 8

Management and Syndicate both lending money to Company - Management may get paid before Syndicate on WU

Question 9

How to solve contractual subordination

Answer 9

Management and Syndicate enter into a subordination agreement
- Management agrees will not demand debt from Company until Syndicate has been paid in full