SGS 2 (Draft Amendments) Flashcards
What is a representation and what is its purpose?
Sets out factual basis on which loan is being made.
Elicits disclosure of facts from borrower
Drawstop
Allow for remedies if untrusted (amounts to an event of default)
four common ways to qualify a representation?
materiality
reasonableness
De minimis threshold amount
Reference to as to accuracy of information provided (limiting scope to written information only).
Why repeat representations?
When are they repeated?
They are DEEMED repeated and protect L from changes B which occur during lifetime of loan.
Statements of fact at date made, so those made at signing of loan agreement don’t protect against circumstances arising post-signing.
First day of each interest period and date of each utilisation request.
Which representation need not be repeated?
Legal (unlikely to change, although Lender will want to keep them in to preserve the option of accelerating the loan if incorrect rather than suing lawyers)
Subject already covered by undertaking or indemnity
subject only relevant at date of loan agreement.
What is a draw stop?
suspension of further advances until the representation concerned is correct or lender agrees to waive.
What is an undertaking?
A promise by B to do or refrain from doing something.
What is the solution to an overly restrictive non-disposal of assets clause?
Carve out ‘Permitted Disposals’ = assets sold in ordinary course of business, assets sold if they are replaced, de minimis amount.
What is the issue with an Event of Default clause stating merely ‘Default’?
If Default includes a potential event of default
At date of utilisation request, representation that there is no Default will deemed to include potential.
If untrue, misrepresentation is an event of default and B loses grace period.
What is withholding tax?
Amount paid to L is net as B will be required to deduct tax at source.
What is the effect of a tax gross-up clause?
If withholding tax is payable, B must pay out of own pick and ensure L receives the interest payments gross.
Only operates where requirement to withhold tax arises out of CHANGE in law.
When would a tax gross up clause NOT operate?
What is a Tax Costs?
If a QL transferred its loan participation to a NQLB (as requirement to withhold did not operate due to change in the law).
Where withholding has occurred, bank will receive gross up payment + tax credit (latter in respect of the amount withheld by borrower). Lender overcompensated and therefore excess should be returned to borrower.
When does tax not need to be withheld?
a QL - UK resident banks and those who have benefit of double taxation treaty.
Why is it necessary to have a tax gross-up clause?
Lender has matched funding costs on LIM and needs gross INTEREST PAYMENTS to meet obligations.
Need to protect L’s profit margin.
What are typical increased costs?
Regulatory costs (e.g. capital adequacy, bank reserve requirements, bank levy, liquidity)
Why are increases costs clauses difficult to use?
Practically tricky to allocate an increased cost to an individual loan.
Note, clause only protects lender if costs are increased due to LEGISLATION.
