Mod 4 - Negotiating Debt Products

Question 1

Considerations in selecting debt financing

Answer 1

• Cost of the financing, including interest rates and fees;
• Flexibility of the financing, including payment terms, amortization, collateral required, and
covenants;
• Competition amongst lenders in the market;
• The type of relationship the firm holds with its existing bank;
• The type of specialization of the lender;
• Industries covered by the lender;
• Time required to secure financing / lender due diligence process;
• Capacity to answer multiple information requests and follow-ups required for each
lender; and
• Size of the loan.

Question 2

Senior debt Providers

Answer 2

”- Schedule one banks: TD, BNS, BMO. CIBC, TD, RBC

• Credit -union
• Schedule two- AMEX, Bochine, HSBC, ICICI
• Government bank
• Asset based lending: Can Fin& Leasing
• Equity Financing: Can Venture Capital
• Institutional investors:CPP, CDPQ”

Question 3

Arranging Debt Financing:

Answer 3

“• Execution of confidentiality agreement or non-disclosure agreement (NDA);
• Receipt of a discussion paper;
• Negotiation of terms;
• Lender due diligence requirements;
• Receipt and execution of a commitment letter (these are legally binding)
• Execution of a formal loan agreement - representations and warranties & events of default”

Question 4

Define Non disclosure agreement

Answer 4

“NDAs are legally binding documents, which help ensure lenders and
potential lenders will not misuse a company’s information or allow important information to be
disclosed to the market.
Key elements are:
• Identification of the parties.
• Definition of what is deemed to be confidential:
• The scope of the confidentiality obligation by the receiving party:
• The term of the agreement:
Description of damages that may be suffered by a company if confidential information is
disclosed:
• Record retention rules permitted by reviewing parties:
• Non-solicitation clauses relating to employees and stakeholders of the company:”

Question 5

Elements of discussion paper

Answer 5

“Discussion paper sets out terms and conditions lender is prepared to offer. It is non binding and contains:
• A summary of the lender’s experience lending to similar companies
• An indication of the total debt a lender is willing to provide, as well as an indication of the
total debt that a lender would feel comfortable permitting from other financiers as junior
or subordinated debt;
• Interest rate pricing and amortization schedule;
• A summary of critical financial covenants that a lender would expect;
• Collateral requirements, including personal guarantees; and
• Lender’s underwriting fees.
“

Question 6

Negotiation terms of debt

Answer 6

"- quantum of debt
- interest rate
- amortization schedule
- covenants
- security and collateral
- underwriting fees
- commitment fees
- drawdown fees
- standby fee
-work fee
"

Question 7

elements of due diligence

Answer 7

“• Review of audited or reviewed financial statements.
• Review of interim, internal financial statements.
• Review of budget to actual results, as well as forecasted financial results.
• Appraisal and inspection of select assets.
• Litigation search and review of corporate records and minute books.
• Meetings and discussions with management.
• Review of key customer and supplier contracts and purchase and sale history.
• Review of the company’s borrowing history and debt repayment abilities.”

Question 8

Define covenants and types

Answer 8

"Banks manage risk through use of covenants and collateral. Conditions of loan will provide basis for covenants. 
Types of covenants are:
- affirmative
- negative
- financial"

Question 9

“Affirmative covenants

“

Answer 9

“Affirmative covenants relate to actions the borrower must take to keep the loan in good standing, such as a promise to maintain a minimum level of
working capital.
These include:
- financial statements
- certificates : such as borrowing base certificate
- maintenance and existence: corporate structure
- maintenance and property insurance-: use and operate assets
- inspection of property , books and records
- notices - which impact lender
- environment laws
- ownership assets free of liens
“

Question 10

Negative covenants

Answer 10

“Negative covenants are promises made by the borrower that it will not take specific actions that
the lender believes are not in the best interests of the borrower, the lender, or both.
- financial covenants- meet financial tests
- indebtedness: limit
- Liens: limit
- Fundamental changes: restrictions on changes in structure business
- restricted payments
- capital expenditures”

Question 11

Financial covenants

Answer 11

“They are the financial parameters for each type of capital employed
in the business.
- tangible net worth
- fixed charge coverage/ debt service coverage
- debt to ebitda
- maximum capital expenditures”

Question 12

Rationale for covenants

Answer 12

“Covenants provide a framework that lenders can use to reach an understanding with a borrower
regarding how the borrower will conduct its business and financial affairs
- preserve of repayment capacity
-protection against restructuring
-protection in the event of bankruptcy or default
- signals and triggers”

Question 13

Drawback of covenants

Answer 13

“• Covenants do not address fundamental credit strength.
• Covenants do not and cannot improve the position of borrowers facing business
adversity or competitive pressures.
• Enforcement is dubious.”