Product Knowledge Flashcards
Typical Investment Grade Covenants
Negative pledge clauses
Cross-defaults
Event of Default on failure to pay interest or principal
Syndicated Loans
arranged by multiple banks that negotiate the terms with a lead arranger negotiating structure, pricing, terms. Structure is a critical element in the credit-granting process.
Corporations typically have revolvers and term loans to backstop commercial paper, provide liquidity for working capital needs, etc. Each can vary substantially depending on market conditions, credit quality of borrower, etc.
Tenor
Varies from 364-day to multi-year commitment
Banks may structure loans to achieve repayment prior to bond maturity
Conditions Precedent to Advances
Purpose: Get assurance that condition of borrower not materially changed since commitment made
Thus, a borrowers is typically required to restate before a drawing that it is in compliance with its covenants, representations and warranties including that it has no knowledge of breaches or that an event of default has not occurred or is not imminent
Representations and Warranties
Statements from the borrower that it has the requisite authority to execute, deliver and perform under the bank agreement.
Typically also includes statements as to compliance with laws, solvency, truth and completeness of financial statements
Covenants
Promise that something is either done, shall be done or is not to be done
Maintenance vs. Incurrence
Maintenance: company must maintain a certain financial benchmark (eg. EBITDA/Interest coverage of 3.0x)
Incurrence: prohibits company from taking action that would breech covenant. Typically limits ability to raise debt, increase leverage, increase dividends, stock repurchases (eg. “company shall not take such action that debt to cap exceeds 60%”)
Financial Covenants
Balance Sheet:
leverage: debt/cap, debt/ebitda
net worth
Cash Flow: company must maintain a certain financial benchmark (eg. EBITDA/Interest coverage of 3.0x
fixed charge coverage, capex cap
Limitation on restricted payments
dividends, intercompany loans, investments
Events of Default
Covenant defaults - typically 30 day cure period
Payment defaults - extremely bad event, 1-3 day cure period
Waiver/amendment mechanism critical
51% required unless payment or interest rate modification (100%)
consent fee
Default occurs when there is event that has not been waived or amended.
Sometimes if default imminent but banks and borrower can’t agree, enter into a standstill agreement. Only stops the clock.
Default Waiver:
covenant default 51% vote to waive
payment default 100% vote to waive
Acceleration
If event of default occurs, lenders may vote to “accelerate” the loan and declare all principal and interest immediately due
In some instances, acceleration is automatic
Acceleration may precipitate a bankruptcy filing
Collateral
Pledge of assets (property, stock, contracts
Creates priority claim in bankruptcy, can increase likelihood of recovery
Negative pledge - limits or prohibits ability to convey liens or security interests to third parties
Fallaway liens, springing liens
Pari-passu treatment for Bondholders
Bondholders typically will protect themselves with a permitted secured indebtedness test or something like it.
Provides security to bondholders if company gives collateral to a subsequent secured party
Carveouts for permitted secured indebtedness or other permitted baskets and exclusions can limit effectiveness
Bonds also can have negative pledge clause
Guarantees
Pledge to make payment on behalf of a third party
conditional (upon failure to pay)
continuing
Upstream - subsidiary guarantees obligation of holding company
Support agreement (parent pledge of equity or subordinated debt
Structural Subordination
Creditors of subsidiary have claim to repayment from the cash flow and assets of the subsidiary prior to creditors of the holding company
