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The facility agreement
Overview of a Facility Agreement
What is it? v A contract. Therefore acceptance, consideration, intention to create legal relations and agreement
on all material terms needed.
v In common with most commercial contracts, the detailed provisions of a facility agreement will be
tailored to the specific requirements of the parties.
v Will always be the lender’s lawyers who draft the facility agreement.
Most ü Overdraft facility
common ü Term loan
types of ü Revolving credit facility
facility
Terminology Þ Straightforward facilities known as ‘plain vanilla’ loans.
Þ Additional features known as ‘bells and whistles’.
Committed Þ Bank obliged to advance money at borrower’s request (subject to the borrower complying with
certain pre-agreed conditions).
Uncommitted Þ Bank has some discretion before advancing any loan monies.
On Demand Þ Can be withdrawn at any time after drawn (hence, current liability for B’s balance sheet).
Key Provisions in a loan facility agreement
ü Type of facility (could be combination
ü Amount of loan + margin
ü Repayment method and schedule
Þ If the borrower has a lot of expenses at the beginning of the loan, they will not want to use the
amortisation method. Instead balloon repayment would be ideal. The bullet repayment method
could be problematic as it could cause cash flow problems when the repayment is due (because it
will be due as a single instalment)
ü Securities and guarantees
Þ Floating charge over assets of borrower or assets of other co’s in the group (debts, property, IP
rights, stock etc)
Þ If borrower is making an acquisition, will take a floating charge over the target’s assets also
Þ If borrower is part of a group, parent co. will need to guarantee the loan
Þ Directors may be asked to give personal guarantee
ü Change of control clause
Þ The bank only want to rely on existing management of the borrower • Bank may want to insert a
change of control clause so that if the borrower is taken over, the change of control will constitute
an event of default and the loan will become repayable
ü General undertakings
ü Negative pledge clause
ü Information covenants
ü Financial covenants
ü Personal guarantees
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Funding Clauses Amount
How much money is available, what is the process the borrower has to go through to
draw down that money, how and when is interest payable, when is principal repayable, in
Concerned with use and what circumstances can unutilised amounts be cancelled
flow of money What type of facility is available and currency it can be drawn?
Remember that the rights and obligations of the lenders are several, not joint and
several, so if one lender does not lend the amount it is obliged to lend, the other
lenders don’t have to make up the shortfall.
Purpose - Should be specifically set out e.g. to purchase real estate
Loan repayment provisions - See notes
Margin protection clauses – Aimed at protecting bank’s margin
Boilerplate Clauses >
Execution and Schedules >
Conditions Precedent - Purpose - Provide evidence to support the reps and warranties, and they are used
to resolve any issues that are found during the due diligence process
- Important to remember that the conditions precedent are conditions precedent to
the borrower drawing any money, they are not conditions precedent to the
agreement coming into force. So, your facility agreement is signed and dated, it
becomes an operable binding document, but unless and until the borrower satisfies
the conditions precedent, it can’t borrow any money.
- Borrowers POV: Will want to ensure that the CPs are satisfied, so would want them
to be specific as possible
- Lenders POV: Absolute discretion so would want them to be generic as possible
Common CPs:
Corporate docs & authorisations Finance and security docs
Consents, approvals and licenses Legal opinions
Payment of fees Reps, warranties and no defaults
Financial statement & accounts
ALWAYS NEED TO AMEND THE FACILITY AGREEMENT TO ACCORD WITH THE TERM SHEET AS THIS HAS BEEN SIGNED
ALREADY.
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Types of Facility Agreement Clauses
BOILER PLATE CLAUSES
Common Most facility agreements will contain “boiler plate” clauses along the following line:
Examples:
“the rights and remedies of the Bank under this agreement:
i. Shall not be waived by any failure, or delay, in their exercise
ii. Are cumulative, and shall not exclude or restrict its rights and remedies under any other agreement or
the general law; and
iii. May be exercised in whole, in part, and as often as necessary
Purpose Þ The first part of the clause attempts to preclude certain common law doctrines (e.g. “laches” – an
unreasonable delay in exercising a right can lead into the right being withdrawn)
Þ The second clause provides that if the bank has more than one right or remedy under the agreement, it is
NOT confined to using only one of them. It also ensures that that the rights under the agreement preclude
any general rights under law.
Þ The third clause tries to avoid any “one bite at the cherry” arguments.
Amendments IS IT POSSIBLE TO AMEND / WAIVE ANY OF THESE CLAUSES IN A SYNDICATED AGREEMENT ONCE EXECUTED?
and Waivers
General Rule:
Þ Under English contract law, no alterations to the provisions of an executed document will be effective
without the agreement of all the parties.
However:
§ Most agreements will allow for amendments to be agreed by majority
§ Majority will usually be defined as banks with more than 66%of either:
- Commitments to lend (of the facility is unutilised); OR
- Actual money borrowed (once utilisation has occurred)
LAW AND JURISDICTION CLAUSES
Overview It is important to recognize two separate issues:
§ The governing law of a document is different from the jurisdiction where disputed document will be
judged
Example:
If English courts have jurisdiction, they will rule on an agreement governed by Icelandic Law if this is the governing
law of the contract.
Jurisdiction This clause will specify the jurisdiction in which the facility agreement may be enforced in court. The MAIN two
Clause reasons for stipulating this are:
§ Avoid litigation in unfavourable jurisdictions
§ Enable the contract to be enforced as expected
MISCILLANEOUS PROVISIONS:
Inter-Bank These will govern the relationship between the banks in a syndicate and contain provisions on matters such
Provisions as:
§ Monitoring defaults
§ Liability for actions and information
§ Resignation of agent banks
§ Indemnities
Set-Off The FA will usually contain a specific authority from the borrower giving the bank right to set off credit
balances in favour of the borrower against ANY amounts due but unpaid.
Meaning:
