Intro

Question 1

Financing

Answer 1

The Raising of capital, debt or equity.

Can take place in the public or private markets.

Question 2

Lenders in the “bank loan” market:

Answer 2

Traditionally banks. But now “non-bank” lenders: investment funds, BDCs (business development companies, private equity, hedge funds, insurance companies, collateralized loan obligations “CLOs”

Question 3

Collateral

Answer 3

Security for a loan, the Borrower may provide collateral, (assets pledged which may be “foreclosed” on if the Borrower defaults, or loan “guarantees” of third parties or affiliates may be provided.

Question 4

Covenants/Undertakings

Answer 4

The Borrower typically agrees in the Loan Agreement to various covenants and undertakings

Question 5

Events of Default

Answer 5

Failure by the debtor to make required payments on a loan or to fulfill its other obligations under the credit agreement.

Allow “acceleration” early termination of the credit facility, and as a result, afford remedies

Question 6

“Full recourse” Loans

Answer 6

there is no limit on the right to enforce the loan against the Borrower and any of its assets or assets subject to a security interest in favor of the Lender.

Question 7

“limited or non-recourse”

Answer 7

Enforcement of the loan is limited to the proceeds of certain assets pledged to secure the loan (so not the Borrower’s total resources) or, in the case of non-recourse loans, solely to the particular assets pledged or available as collateral, such as assets pledged or owned solely by special purpose Borrower set up by the corporate parent.

Question 8

“investment grade” Borrowers or to “non-investment grade” Borrowers.

Answer 8

distinction relates to Borrowers who have short or long-term debt or, the loan facility itself, rated by one of the recognized rating agencies, as “investment grade” or “below investment grade”. Many Borrowers or credit facilities are unrated. Typically, an investment grade-rated Borrower is expected to be charged a lower interest rate, and to have less onerous credit documentation, because the loan to it is perceive to entail less credit risk for the lender.

Question 9

Reasons a borrower may take on debt under a Credit Agreement

Answer 9

Working Capital/Capital Expenditures

Finance Leveraged Buy Outs/Acquisitions/ M&A Transactions

Dividends/Recapitalizations/Reorganizations

Other Lawful Purposes

Question 10

Senior secured lending

Answer 10

Bank loans are typically senior (top of the capital structure) and secured by collateral of Borrower

Question 11

Revolving Credit Facilities

Answer 11

Provide short term lines of credit that may be borrowed, repaid and reborrowed; an RCF may include a letter of credit facility and/or swing line facility

Question 12

Term Loan Facilities

Answer 12

One-time lump sum loan repaid over time and once repaid, cannot be reborrowed;

Term loans may be either “Term Loan A”/”TLA” or Term Loan B/”TLB”. Meaning the Loan is tranched based on its particular term (e.g., maturity and/or seniority in the right of payment or collateral, or both), or other rights, e.g., First Loss.

Term loans can be draw delayed/”delayed draw” loan: where the loan does not revolve but allows borrowing to be made in one or more draw downs over a specified time period (the “commitment period”), upon fulfilment of certain conditions or stages of completion and the like.

Question 13

Club Deals (as opposed to syndicated deals and single bank loans)

Answer 13

Where a small group of lenders make the loans, similar to a mini-syndicate, often having comparably sized loan commitments between the lenders in the “club”

Question 14

Syndicated Deals

Answer 14

Arrangers will arrange a syndicate of lenders and sell the loans into the “secondary” loan market, and other lenders who buy at closing. Loan syndications also typically involve an obligation of the Borrower to pay various fees such as an arrangement fee or upfront fees to the arranger and lenders who participate at closing.

Question 15

Underwriting/Committed Financing

Answer 15

Arrangers will guarantee (i.e. underwrite) the syndication of a loan. If the market is unwilling to purchase the debt, the arrangers will still lend the funds to the borrower (even at a loss)

Question 16

Big Clauses in a Credit Agreement

Answer 16

• Conditions to Closing/Borrowing
• Reps & Warranties
• Affirmative Covenants
• Negative Covenants
• Financial Covenants (maybe)
• Defaults and Remedies

Question 17

Commitment Letters

Answer 17

Lenders’ commitments to provide financing are memorialized in a commitment letter that typically sets forth major economic terms.

These may not be binding and may be subject to a host of conditions including due diligence and sometimes credit approval, satisfactory syndication, no material adverse change, etc. Thus, they can effectively be mere indications of interest that do not assure financing will be made available or alternatively tight commitments with few “outs” for the arranger, depending on the wording.

Question 18

Typical use of proceeds for a Borrower

Answer 18

Working Capital/CapEx: Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company.

Finance an LBO/Acquisition: A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.

Dividend/Recap

Question 19

Committed versus Uncommitted Financing

Answer 19

The arranging party may effectively guarantee/commit the syndication of a loan. in a committed fully, underwitted loan facility, if the agent or arranger tries to syndicate the loan, but fails because market participants are unwilling to join the syndication, the arranger bank would still be committed to lend the funds to the Borrower (even at a loss) if it has issued a binding commitment and the terms and conditions of such commitment are satisfied.

Uncommitted facilities are not fully committed/guaranteed to be made, and syndication may be on a “best efforts” or “reasonable commercial efforts” to syndicate basis, so the loan is not fully underwritten and syndication is not assured.

Question 20

Kirschner v. JP Morgan

Answer 20

Considered whether a syndicated institutional term loan was a loan or a security to which securities law would attach. The court dismissed all claims against JP Morgan and several other banks, holding that syndicated bank loans are not securities.

Question 21

Agent

Answer 21

The agent for a group of lenders in a syndicated loan (a group of lenders that agree to make a loan to the Borrower under the same loan agreements and typically appoint an agent to represent them for administrative purposes.

Question 22

Arranger

Answer 22

The party, sometimes also acting (or with an affiliate institution acting) as the Agent, that “arranges” the loan and puts together the syndicate of lenders. Typically, the arranger or its affiliates is also a lender.

Question 23

Assignee

Answer 23

A party who takes an assignment of all or part of a loan (or commitment to lend) pursuant to an assignment agreement, so that ownership of the loan transfers to the assignee who “steps in the shoes” of the transferor lender and becomes the lender to the extent of such assignment. Often loan agreements impose an eligibility test for “eligible assignees” and certain consents may be required for an effective assignment by a lender, such as from the Borrower prior to an event of default or the Agent, if a syndicated loan.

Question 24

Borrower

Answer 24

The party that borrows the loan and agrees to pay it back with interest and other compensation in accordance with the terms of the credit agreement.

Question 25

Collateral Agent

Answer 25

Some secured transactions have a special agent for purposes of holding and administrating the collateral for the loan on behalf of the secured parties.

Question 26

Collateral Agent

Answer 26

Some secured transactions have a special agent for purposes of holding and administrating the collateral for the loan on behalf of the secured parties.

Question 27

Grantor

Answer 27

A party that grants a security interest in collateral securing the loan. The grantor may be the Borrower or a third party, such as a parent company or affiliate

Question 28

Guarantor

Answer 28

A party that guarantees the Borrower’s obligations under the loan documents. The guarantor typically agrees to pay or perform in accordance with the credit agreement if the Borrower fails to do so. There are primary obligor guarantees (liability is primary like the Borrower’s not secondary, and guarantees of collection after enforcement against the Borrower and/or collateral is exhausted.

Guaranttes are often “joint and several”, meaning, in essence, the guarantee is enforceable against one guarantor or all guarantors alike. They may be drafted to state that they are irrevoable and unconditional, primary obligations of the guarantor, and they can be enforced against all of the guarantors or any of them individually.

Question 29

Issuing Bank

Answer 29

a bank that issues (the “issuing bank”) a letter of credit (“LC”) at the request of the Borrower (“account party”). In the context of bank loans, a Letter of Credit is an instrument that is similar in concept to a guarantee, but it is issued by a bank on behalf of the Borrower (account party). U.S. banks for a variety of reasons generally do not issue guarantees as such and, instead, issue LCs. Under such LC, the bank agrees to pay an obligation owed by such account party to the LC “beneficiary,” strictly in accordance with the terms of the LC issued. The Borrower is obligated to reimbursethe issuing bank for any “drawing” made by the beneficiary under the LC. In a syndicated facility, typically the issuing bank is sharing with the syndicate members the risk of the Borrower’s failure to satisfy its obligation to reimburse the issuing bank for any “drawings” by the Beneficiary under the LC made in accordance with its terms. The syndicate members act as “participants” in the LC risk, and if the Borrower (account party) fails to reimburse the Issuing Bank for a drawing by the Beneficiary unless the Letters of Credit when due, the “participants” are liable to do that. Letter of Credit are more fully discussed below in subchapter Letters of Credit.

Question 30

Lender

Answer 30

The party that makes and/or holds the loan either at closing or by taking an “assignment” (legal transfer of all rights and obligations as lender of the loan) from another lender.

Question 31

Participant

Answer 31

a party who buys an interest in the loan from a lender under a loan participation agreement. Typically, the Lender remains thelender of record under the loan documents but “sells” to the participant its rights and obligations thereunder. As a result, indirectly, the participant shares in (effectively owns) the credit risk and economics of the Lender’s position to the extent provided under the participation documentation, with respect to the loan.

Question 32

Rating Agency

Answer 32

Recognized statistical rating agencies the “rate” the credit worthiness of the Borrower or Guarantor or the credit facility among other potential ratings.

Question 33

Syndicate, Syndicate Member

Answer 33

A group of lenders in a syndicated (multi-lender) loan transaction, who join together to make a loan. They “severally” (individually) commit to lend to the Borrower under the same credit agreement. Because of the “several” nature of their lending commitments, one lender is not responsible if another lender does not fund the loan as required. The “syndication” allows the Lenders to collectively extend a larger facility and the Borrower then has only one facility with all the syndicate members, and not individual loan facilities with each lender. This should theoretically be administratively less cumbersome than multiple separate lending agreements, as all lenders are party to the same loan agreement with the Borrower.

Question 34

The Credit Agreement (or Loan Agreement) and Security Agreement

Answer 34

The main loan documents. They can be combined into one document or there can be a separate loan agreement and security agreement. These can be single “bank” or lender or syndicated, and can also have various different facilities, e.g., a term loan facility, a revolving credit facility, a letter of credit facility, subordinated tranche (Term Loan A/Term Loan B), etc.

Question 35

The Credit Agreement

Answer 35

Agreement between Borrower, Agent (if syndicated) and Lender(s) setting forth the Lender commitments, terms and conditions of the loan(s), including the Borrower’s payment and performance obligations, and remedies in the case of default.

Question 36

Conditions Precedent

Answer 36

Conditions required to be satisfied before lender(s) have an obligation to fund the loan. Sometimes “conditions precedent” need to be satisfied for the credit agreement to be effective.

Question 37

Representations and Warranties

Answer 37

Factual representations (legally binding statements confirming certain matters) of the Borrower and other loan parties contained in the Credit Agreement made at closing and made in the future when “deemed” made or renewed under the documentation, such as in a revolving credit, representations may be “brought down”, e.g. deemed repaid on each advance.

Question 38

Covenants

Answer 38

Obligations (promises that are legally binding with consequences if breached) of the Borrower and potentially other loan parties during term of the agreement to do or not do certain things.

Question 39

Exhibits to the Credit Agreement

Answer 39

Typically forms of documents set out usuallyat the back of the Agreements that are required to be delivered orare otherwise referred to in the main body of the loan agreement.

Question 40

Schedules to the Credit Agreement

Answer 40

Disclosures or items set out usually at the back of the Agreements that typically serve as exceptions or carve-outs to covenants or representations and warranties or provide specific information or methods of calculation referred to in the main body of the loan agreement.

Question 41

The Security Agreement

Answer 41

Agreement between the grantor(s) of the security interest and the Lender(s) or collateral agent containing a grant of a security interest in identified assets (collateral) setting forth the scope, terms and conditions of the grant.

Question 42

Collateral

Answer 42

As security for a loan, the Borrower or grantor may provide collateral in the form of assets, which are pledged or assigned to the Lender to secure payment of the loan obligations. In the event of non-payment when due, collateral may be enforced against, (e.g., “foreclosed” on) and the proceeds used to satisfy the debt. A “negative pledge” is a covenant (negative covenant) not to grant security interest in the subject assets, it is not collateral.

Question 43

Perfection Actions

Answer 43

Actions and documents required to “perfect” security interests in various types of property, e.g., real or personal, tangible or intangible, property “perfected” under state law such as the state’s uniform commercial code or mortgage law. For certain collateral, federal law applies, such as to “perfect” security interests in federally registered patents, trademarks and copyrights. The concept of “perfection” is to make the security interest granted good against third parties claiming an interest in the collateral (e.g., good against other creditors of the grantor). For example, in the case of personal property, the UCC financing statement filing puts the world on notice that a security interest has been granted in the property. Third parties are able to search the applicable state records for UCC filings (called “UCC lien searches) to see any creditors that have filed security interests against the same assets, and assess priority.

Question 44

Promissory Notes

Answer 44

In the loan agreement context, a relatively short document delivered under a loan agreement to evidence the amount of the loan, interest and repayment obligations, and certain other rights and obligations under the loan documents, typically viewed as additional evidence of the loan payment obligation and the terms thereof. Not all loan agreements require the delivery of promissory notes. Alternatively, a promissory note may serve as the loan document itself and provide all of the terms of the loan, without a separate loan agreement. Promissory Notes may be “negotiable” stand alone and transferable by endorsement, or “non-negotiable” and subject to, and delivered under, a loan agreement, with transfer by assignment.

Question 45

Interest

Answer 45

Compensation for the use of money borrowed based on the duration of the borrowing and adjusted for credit risk of the Borrower, collateral, etc. Interest rates can be fixed or floating rates.

Question 46

Principal Payments/Amortization

Answer 46

Amortization typically refers to a schedule for reduction of outstanding principal of a loan. Typically, the loan agreement provides for repayment of a portion of the original principal amount of the loan over time in installments with the balance repaid at maturity. Alternatively, it can be a “bullet” repayment, a single payment in full at maturity, or a combination of minimal installments with a large payment at maturity.

Question 47

Finance Covenants

Answer 47

Typically provisions that measure financial performance of the Credit Parties during the term of the loan. The failure to meet specified financial covenants can be an early warning sign of potential performance issues that affect credit quality, and test failures many trigger defaults, etc.

Question 48

Yield Protection

Answer 48

Provisions in a credit agreement designed to provide compensation to the Lender(s) if due to a change in law or similar circumstances it becomes illegal or more costly for the lender to the extent the crediton the terms agreed.

Question 49

Events of Default and Remedies

Answer 49

Provisions designed to protect the Lender(s) in the event of breaches of the loan documents by the Credit Parties or other events covered that could or would impair the Borrower’s ability or likelihood of payment and performance in accordance with the loan documents. Typically, “remedies” are provided to the Lender(s) if such events occur and/or continue, such as the right to “accelerate” the loan, e.g., demand immediate repayment, terminate the lending commitment and to foreclose on collateral.