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Commercial Law and Practice WS10 D1
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Commercial Law and Practice WS10 D1
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LEGAL PRACTICE COURSECommercial Law and Practice
Workshop 10
Topic(s):
Bank Lending – Commercial Considerations
Term Sheets and Facility Agreements
Interest Calculation
Learning Outcomes:
By the end of this session you will be able to:
Identify some of the key concerns for a bank in relation to a proposed facility agreement
Explain the purpose of a term sheet and how its terms will be reflected in a related facility
agreement
Explain how interest is calculated in a typical facility agreement
Session Activities:
Review the Pre-session Task, in which you are asked to identify potential concerns for a
client acting as lender
Review a draft facility agreement to ensure consistency with the term sheet
Explain the calculation of interest under a facility agreement
Materials Attached:
Pre-session Task
In-session Task
Preparation for Session:
Review your notes from Large Group 5 and Chapter 4 of the Banking and Capital
Markets manual
Read Chapter 2 of the Banking and Capital Markets manual
Read the attached Pre-session Task carefully and prepare a written response. Bring
your written response to the session
Please look through the Facilities Agreement (second attachment to In-session Task)
Post-Session:
Review your notes of the session
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, LEGAL PRACTICE COURSE
Commercial Law and Practice
Workshop 10: Pre-Session Task
To: Trainee
From: Supervisor
Date: [Date of Workshop]
Subject: Borli Bank
We have a meeting tomorrow with Susan James, the contact at our client, Borli Bank plc
(“Borli”). Borli are hoping to lend Pegasus Dreams plc (“Pegasus”) £500,000 for general
working capital purposes and £5,000,000 for the purchase and development of some new
properties. Pegasus operates in the theme park and entertainment sector.
The amount isn’t really sufficient to justify an issue of debt securities and the board of
Pegasus has already decided that it isn’t an appropriate time to issue shares, so Pegasus
needs a bank loan. Borli is comfortable lending the full amount on its own so syndication is
not anticipated.
Please read the information below and identify any commercial or legal issues which
may be of particular concern to Borli. Please consider how these could be dealt with
in the facility agreement.
Kind Regards
Supervisor
***
Note of telephone conversation with Susan James
Facility Request
Pegasus Dreams plc (“Dreams”), together with its two wholly owned subsidiaries, Pegasus
Services Limited (“Services”) and Pegasus Promotions Limited (“Promotions”) is worth
roughly £400 million.
The Pegasus group has asked Borli Bank plc for a loan facility in order to fund the purchase
and development of several major new sites and for general working capital purposes. The
group wants to be able to repay and reborrow the funds borrowed for working capital
purposes, depending on its particular needs at any given time.
Background Information on the Dreams, Services and Promotions
Pegasus Dreams Limited was founded by Louisa Reedman and Aneeka Pasha. The
company listed on the London Stock Exchange and became Pegasus Dreams plc five years
ago. Louisa and Anneka each own 30% of the shares in the company. The remaining 40%
is owned by institutional investors. Aneeka is the chair of Dreams, but Louisa is no longer a
director. However, Louisa’s husband, Leonard Reedman, sits on the board of Dreams.
Leonard is also the chair and managing director of Services.
Dreams purchases land for development as theme parks and then appoints builders and
advisors to construct the buildings and attractions required for the park. Dreams’ employees
oversee each project. Once a project is completed, Dreams grants a lease to Services,
which will then run the site on a day to day basis, promoting the site, carrying out day to day
management of the site and generating revenue from ticket sales.
Once a particular theme park is well established, Dreams may seek to sell that particular site
and associated theme park business to an interested buyer. However, a new pattern seems
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to be emerging of Dreams retaining sites for longer, extending the lease to Services. This is
perhaps due to what the financial press recently described as the “saturation” of the theme
park sector, with investors recognising that there is little room left for expansion in the
market.
Promotions was established recently and reflects Aneeka’s strategy of diversification.
Aneeka is the chair and managing director. It offers an advertising consultancy service to a
diverse range of other companies, assisting them with management of their online
advertising strategy. This draws on the knowledge developed within the group, which is well
known for its high impact advertising and strong online presence.
■ Who is the Lender?
■ Who is the Borrower/s?
■ What is a Guarantor?
■ What type of debt finance would be appropriate on the facts provided?
Overdrafts, Term loan i.e a loan, revolving credit facility identify from a set of facts what is
the most appropriate
Pegasus Dreams, Pegasus services and Pegasus promotions are group of companies.
Pegasus dream is a parent/holding company. The other 2 are wholly owned subsidiaries.
Louisa owns 30%, Aneeka 30% and 40% institutional investors. Anneka is a director and a
chairperson. Leonard is not a shareholder but a director of subsidiaries services. The 3
companies together are borrowers. If you look at the facility agreement Pegasus Dreams is
defined as the company ie Pegasus Dreams and services and promotions.
Pegasus Dreams owns properties (has real propertie) Pegasus services generate ticket
sales (generating revenue) Pegasus promotions is generating advertising revenue.
A bank would be interested to know where the companies are getting their revenues from
because that will determine who is suitable to give some security or guarantee regrading
borrow.
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1 agreement, 2 different facilities agreement talks about facility A and facility B. Facility A is
the term loan facility. Facility B is a revolving credit facility.
Facts suggest there will not be syndication If its not syndicated then it’s a bilateral
transaction.
1 lender Borli Bank (can be multiple borrower) it’s a bilateral transaction.
■ Importance of Louisa, Aneeka and Leonard to the success of the business…
What roles do they have?
What if they leave/die?
Key Man Insurance
Change of Control provision
If acting for the lender how important is these key individuals are to the success of the
business. Think about their role. Louisa owns 30%, Aneeka 30%. There is a relationship
between Leonard and Louisa. He is the chair and managing director of services. Directors
have the power to carry on the business. From the banks perspective, directors and their
involvement is crucial. And from the banks perspective who the shareholders are and what
they choose to do with the company as shareholders is crucial. From lenders perspective
what if those key people die/leave. Its standard for lender to consider key man insurance.
That insurance is taken out of in respect of key individuals to cover the risk primarily death or
serious incapacity because it would cost those companies to replace those individuals and
find someone with suitable qualifications and experience. That would be a way of mitigating
that risk. That’s something lender will require taken out.
Lender might also consider change of control provision in the facility agreement and that
would mean immediate repayment would be required if key shareholders cease to control the
company. Aneeka and Louise together own 60% of the company. 60% is significant because
it gives them control can pass together ordinary resolutions and lots of things can be
changed by ordinary resolution. What they don’t have is at least 75% of the shares to pass a
special resolution. Nevertheless they have control in terms of owning more than 50% of the
company. Change of control provision could mean that immediate repayment would be
required if those individuals cease to control the company together.
In the 7.2 facility agreement there is a change of control provision. The change of control
talks about Louisa and Aneeka. It doesn’t talk about Leonard because change of control talks
about ownership of shares and Leonard doesn’t own the shares. He’s an important individual
in terms of being a director but he doesn’t own shares. So that’s what the change of control
was talking about. That’s one of the concerns we would have acting for the lender
■ What is the source of the £400m valuation?
■ Lender will want to:
•check the latest audited group (consolidated) accounts;
•ask the Borrower/s for representations about the financial information provided; and
•assess their risk
Another thing to consider is the valuation source of £400m valuation? lender would want to
check the latest audited accounts and there will be group or sometimes called consolidated
accounts because these companies are part of a group. And they would want to ask those
companies who are borrowers for representations about financial information that they are
being required to provide to the lender.
Lender would want to do is they would want to take into account that valuation in assessing
their risk and their exposure. So is this company worth as much as what we are being told
and what is the source of that info, can it be verified?
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