Intro to Corporate Credit Facilities Flashcards
Anatomy of a Credit Agreement
- Mechanics of the Loan
- Payment Terms
- Condition Precedent
- Reps and Warranties and Covenants
- Events of Default and Remedies
- Lender Interaction
- Collateral Security Provisions
- Miscellaneous (amendments, assignments of loans, governing law and jurisdiction to enforce the credit documentations, lender expenses upfront and reimbursement by the Borrower for any amendment or enforcement the costs and indemnities, and the requirements for giving notices under the Credit Agreement.
What is the first thing in a Credit Agreement? (Preamble)
Name of the parties, and the date of the agreement. Followed by some “recitals” or “whereas” clauses that provide a short description of the loan transaction or intention, typically not a binding term of the agreement.
What typically comes after the Preamble?
Defined Terms (but can sometimes be at the back of a Credit Agreement)
Common Types of Loans
- Term Loans (including delayed draw loans)
- Revolving Loans (including letter of credit sub-facilities)
- Swing Line Loans
- Multi-currency Loans
- Secured Loans and Unsecured Loans
- Investment Grade Loans and Non-Investment Grade Loans
- Middle Market Loans
- Margin Loans
- Project Finance Loans
- Asset Based Loans
Amortization Schedule
A term loan may have an amortization schedule, which provides that the loan is repaid in scheduled installments over the life of the loan together with accrued interest.
“Bullet” maturity
Specifies repayment of the entire amount of the outstanding principal on a set maturity date.
Letters of Credit Subfacility to a Revolving Credit Facility
Some Credit Agreements permit the Borrower (also called the
“account party” for such purpose) to request the “Issuing Bank”, who also may be a lender, to issue letters of credit (“LCs”) to designated beneficiaries. This is
usually a subset of the revolving loan facility, but it can be a separate credit facility. A “letter of credit fee” is charged while the L/C is underdrawn, and for its
issuance, typically, but is lower than the interest rate that is charged for a revolving loan, given that the letter of credit is an “unfunded” obligation of the issuing
bank until it is funded. Fund of the L/C occurs only on a proper “drawing” under the letter of credit by the Beneficiary. Any unreimbursed drawing then requires
immediate reimbursement or it may be structured to have the flexibility for such reimbursement to be rolled into an advance, and interest be paid on the
unreimbursed letter of credit payment (to compensate the Issuer for the amount drawn and outstanding). Thus, the Borrower is typically obligated to reimburse
the Issuing Bank on demand for any drawing on the letter of credit either immediately or by “rolling” the reimbursement obligation into an advance under the
Credit Agreement. Only banks, not investment funds or other non-bank lenders, issue letters of credit. In short, a letter of credit is a payment commitment issued
by a bank, which provides, in effect, that the “beneficiary” of the letter of credit can “draw” on the letter of credit and be paid by the issuing bank if the drawing
conditions specified in the letter of credit are satisfied strictly within, and according to the terms of, the letter of credit. Letters of credit may be “Stand by” or
“Documentary” as discussed in a later chapter. Letters of credit are “four corners” documents (e.g., largely all of the undertakings and conditions are set forth in
the letter of credit document itself). There are almost no defenses to payment by the Issuing Bank if a drawing is properly made and the letter of credit terms are
complied with, absent fraud as discussed below in the chapter on Letters of Credit.
Asset Based Loans (ABL)
A type of Loan where the amount available to be advanced depends on the value of specific assets at the time.
Middle Market and Corporate Loans
Middle Market Loans are to entities thought to be smaller to mid-size enterprises. For example, some may range in annual revenue between $10 million and $1 billion for the borrower. Another example, a borrower could be considered middle market if its business revenues are between $25-$250 million, light on debt, and profitable. Loans to larger entities are often referred to as corporate loans, and these loans may be made by different divisions of a lender.
Margin Loans
These loans, sometimes called “Reg U lending”, are typically loans used to purchase securities (e.g. investment assets) and in the US are negotiated differently if the securities are listed on a public stock exchange. Margin loans may be provided by broker dealers or others and subject to certain regulations designed to protect the financial markets subsequent to the stock market crash in the the 1930s
Project Finance Loans
Commonly loans used to finance construction or completion of a specific project, largely infrastructure, industrial and public services. These rely on the project’s cash flow and are secured by the projects assets and are often non or limited recourse to the sponsor.
Cash Flow Loan
Primarily a loan analyzed for creditworthiness based on the Borrower’s cash flow and analyzed based on the Borrower’s past and projected future cash flow
Working Capital Loan
A loan taken to finance operational needs of a borrower, typically a revolving credit line, such as payroll.
LIBOR
London Interbank Offer Rate: Old benchmark offer rate for loans. Scandals happened because it was based off of quotes from various banks and now they switched to SOFR
SOFR
Secured Overnight Financing Rate: New benchmark offer rate based on actual transactions. So more immune to scandals compared to LIBOR.
