BPP University College Of Professional Studies Limited (BPP)
Notes on Debt Finance for the (Accelerated) LPC at BPP University.
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Debt Finance
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Hafsah Nawaz
Debt Finance Consolidation
Overview of a Banking Transaction, Syndication and Term Sheet
Stages of a corporate loan transaction
Initial approach to relationship bank
When you negotiate docs, this is done with relationship bank because they know you
Benefit of relationship bank is that if things default under the loan agreement, they’re more likely
to be sweeter to you (refinance etc) instead of accelerating the loan
If a bank needs to get rid of a loan and sell it off due to over-exposure, relationship will influence
whether they get rid of your loan
Credit approval
Looking at the specific loan
Looking at the bank’s overall lending to avoid over-exposure
Term sheet
Term sheet is attached to the mandate letter (syndicated lending only)
Document (Loan Agreement)
This has the terms of the loan
Other docs which may have to be negotiated – legal opinion and debenture for any security being
taken
Signing and completion
Conditions precedent are to drawdown i.e. things that have to be satisfied before the money is
given to the borrower
Acceleration is the bank’s most drastic remedy when things go wrong with the borrower, because
that entire loan will be repaid plus any accrued interest. This will likely cause the downfall of the
borrower so banks will very rarely use acceleration. They’re more likely to threaten acceleration to
get the bank to re-negotiate again
Why are syndicated loans based on LMA standard documents?
To facilitate the development of the secondary market, the loan documents used in the initial
syndication needed to be standardised to enable banks to trade debt quickly and cheaply. This is
one of the goals achieved by the LMA syndicated facility agreement
From a borrower’s perspective, however, use of standardised documentation means they have less
scope for negotiation
Syndication
Majority Lenders
The Majority Lenders will usually be defined as those representing 66 2/3% of total syndicate
commitments
The facility agreement will provide which decisions must be taken by the Majority Lenders, and
that those decisions will bind the syndicate. This speeds the process and prevents one lender
effectively having a veto.
Most decisions can usually be taken by the Majority Lenders, for instance calling/waiving an event
of default, determining a material adverse change or considering amendments to the facility
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agreement.
However, key decisions will usually require unanimous lender consent, such as change of borrower,
reduction in any amount paid to the lenders, an extension of payment dates or an increase in the
total of the lenders’ commitments (LMA 35)
Importantly for the agent, it should be protected from liability if it acts according to the Majority
Lender instructions (LMA 26.2(a)).
Syndication v bilateral loan
Purpose Additional Information
Due diligence - flush out potential future Initial investigation (credit analysis)
problems to assess the overall -bank will put together a basic package with the
credit risk of the borrower borrower, including headline terms
- Initial DD is carried out by the Credit approval
bank -the bank’s Credit Dept will have the ultimate say
- the risk is too great, then DD will on whether to loan, looking at making sure initial
also extend to looking at assets limits on risk aren’t breached
over which security can be taken Legal due diligence
-solicitors will conduct detailed DD On borrower,
including searches
-will check there are no restrictions in AA on
borrowing/ability to grant security
-DD on any assets over which security can be given
over
Mandate - mandate letter is provided by Definition and legal effect of term sheet
letter and the lender and will set out the -sets out the principal terms
term sheet terms on which the borrower -non-binding except provisions relating to
appoints it and the basis on which confidentiality and costs, but deemed morally
the arranger has agreed to the binding
syndicated loan -structured transactions will usually have longer,
- term sheet is attached to the more detailed term sheet
mandate letter (SYNDICATED Function of term sheet
ONLY) -provides an overview of the deal before the
parties start working on the loan agreement
-initial summary of loan’s terms
-in syndicated loans, used with the IM to sell the
facility to potential lenders
Contents of the term sheet
-date/parties/amount/duration of loan
-repayment and pcan dates, and if payments are
allowed what minimum, terms of interest
-conditions precedent, representations, warranties,
undertakings, events of default
-confidentiality undertaking should state that it is
binding
-undertaking for borrower to pay bank’s costs
whether or not loan is completed; should state this
is binding
Loan - most terms of loan agreements Legal effect of a loan agreement
agreement are boilerplate -essentially a contract
- whom owes what to whom -need to ensure that all factors which make a
when where and why contract legally binding are in place
- allows the borrower to pay for Anatomy of a loan agreement
assets or goods for its business - bank objectives: ensure its fees, interest and loan
with borrowed money on the capital is repaid
basis that these funds will be - achieved by ensuring: funds can only be used for
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repaid specific purpose, monitor borrower’s financial
health, take security
-operating clauses about use and repayment
-info and monitoring clauses including conditions
precedent, representations, undertakings and
events of default
-boilerplate provisions for transferring loan, service
of notices, governing law
Legal - confirms the corporate capacity Where legal opinions are invariably required
opinions of the borrower and that the 1. secured lending – banks will want an opinion to
finance docs are legally valid, confirm the enforceability of the security and to
binding and enforcement outline any risks associated with the security
- in bilateral loan, opinion will be 2. overseas jurisdictions – bank will ned opinion
addressed to bank from local lawyers to confirm corporate capacity of
- in syndicated loan, opinion is the company in that jurisdiction and the
addressed to agent enforceability, legality and priority of the
- doesn’t give the bank any documents
assurance that the borrower will
be able to service the loan
Roles of different parties in a syndicated loan transaction
Duties/details Liabilities Protections from liability
Arranger ** Putting the syndicate Fraudulent/negligent At the start of the IM, the
together misrepresentation if the Important Notice states a clear
** Conducting DD on the borrower has given wrong disclaimed of any liability on the
borrower information that is put in Arranger’s part for the contents
** Draft IM the IM that is of the IM. This would state,
** Advise borrower on subsequently relied upon amongst other things:
structure i.e. term loan or by the syndicate 1. that the borrower is
RCF solely responsible for
** Organise roadshows Negligent misstatement the IM,
** Drafts loan (Hedley Byrne v Heller) 2. that the Arranger
documentation hasn’t verified the
** Could underwrite the loan Breach of fiduciary duty contents,
(whether this applies is made 3. that the lender will not
clear in the mandate letter) be able to rely on the
IM to make their
decision, and
4. That the Arranger isn’t
responsible for
verifying or updating
the information.
In the loan agreement, the
above statements should be
repeated. LMA 26.8 and 26.15–
above statements are repeated
in the loan agreement.
The borrower should also
ideally indemnify the Arranger
from and against any liability
arising from the IM. However,
the Arranger should bear in
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mind that it is only really likely
to face a claim in the event that
the borrower defaults under
the loan, and at this point any
indemnity may be worthless.
For negligent misstatement the
lenders would have to establish
the arranger owed a duty of
care in providing the
information which is difficult to
prove.
Arranger should make it clear in
the facility agreement, as
inspired by LMA 26.5 that it is
not a fiduciary and not
accountable to account for any
profit it makes in dealings with
the borrower in its own
account.
There should be specific
reference in the facility
agreement to the payment of
the arranger’s fees.
The facility agreement should
also contain a clear obligation
on each of the other lenders to
make its own credit appraisal of
the borrower before deciding to
lend to it.
Agent ** Act as paying agent and Worried about being sued Monitoring the borrower
thus ensuring that for going outside remit of The Agent is not obliged to
appropriate payments are role proactively monitor the
made between the parties, borrower throughout the life of
such as sums being made Breach of fiduciary duty the loan. Rather, it receives info
available by the lenders to and transmits it to relevant
the borrower, and interest parties e.g. regarding
and capital payments being breach/default. See LMA 26.9.
made by the borrower to the
lenders on a pro rata basis Acceleration
** Will determine the The Agent will have the
appropriate interest rate and discretion to accelerate the
notify this to the parties loan, and will be responsible for
** Will manage default taking action on default.
** Will deal with all However, given the fact the
documents and notices Agent gets low fees, the Agent
under the loan agreement, will be more risk-averse and
including administering therefore although it can take
transfers action itself (LMA 26.2(e)) it will
** General administrative not. The Agent will await
role of being a conduit/post instructions from the Majority
man for documentation Lenders. This is because LMA
** Will sign off on the initial 26.2(a) – if the agent acts in
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