LPC Law Notes Debt Finance Notes
A collection of the best LPC Debt Finance notes the director of Oxbridge Notes (an Oxford law graduate) could find after combing through dozens of LPC samples from outstanding students with the highest results in England and carefully evaluating each on accuracy, formatting, logical structure, spelling/grammar, conciseness and "wow-factor". In short these are what we believe to be the strongest set of Debt Finance notes available in the UK this year. This collection of notes is fully updated f...
The following is a more accessible plain text extract of the PDF sample above, taken from our Debt Finance Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:
Loan Provisions
Purpose clause and illegality
Restricts borrower to agreed and legal purposes only.
Violation = default of contract --> monies subject to a resulting trust in favour of lender (advantage on winding up).
If lender aware of illegality --> English law sees loan as void and unenforceable and will disallow action to recover funds.
Cf. subsequent illegality of initially lawful agreement = lender can recover the funds.
The Facility
Term loan = short period for drawdown ('availability period') - cf. RCF
Or may be available in separate facilities/tranches with different characteristics.
Lender's obligation to lend (only in syndicated facilities)
Several obligations as between lenders in the syndicate (members responsible for their own commitment only)
Separate loans ('proportion' = ratio of commitment against total syndicate commitments)
E.g. total syndicate loan of 25m. 5 banks agree to lend 5m each. If borrower draws down 20m, each lender will have a participation of 4m.
Conditions precedent
CPs required will be determined by the due diligence (will be set out in a schedule to the agreement)
CPs to the first utilisation (documentary in nature)
CPs to each subsequent utilisation (representations repeated as still being true - exact representations to be repeated will be negotiated)
Function
Lender's obligation to advance funds will be subject to CPs.
CPs will be checked before completions - e.g:
Constitutional documents
Legal opinion(s)
Insurance policies
Financial information and auditors reports
Licences/consents relevant to borrower
Board resolutions and corporate authorisations
Compliance with 'know your client' requirements (usually lender's compliance team do this)
Evidence that all fees have been paid
Unique CPs for each transaction
Can waive CPs or create 'conditions subsequent' which must be met within a certain time following completion.
When acting for borrower, check:
Time limits
Approvals
Control
Interest and Interest Periods
Term loans = interest during Availability Period until Maturity Date (successive interest periods)
RCFs = each advance has its own interest period --> at the end of which the advance is either repaid or rolled over
Floating rate
Cost of funds (LIBOR) - costs will form part of overall interest rate.
"Floating rate" since interest will fluctuate as LIBOR fluctuates
LIBOR rate fixed on the first day of each interest period until the end of that period
To avoid mandatory costs, a bank can set interest according to its own base rate (tracking the Bank of England BR)
Margin = actual profit made by the bank
Fixed on top of LIBOR or the base rate
Mandatory costs
Costs of compliance with regulators - lenders can:
Use existing mandatory costs schedule
Require each syndicate lender to calculate its own costs
Remove mandatory costs as separate calculation and incorporate into margin
Fixed rate
Provides certainty but also risky since the market may fluctuate above fixed rate
Fixed rate tends to be higher than floating rate
Variable rate
Variation on the fixed rate - according to pre-assigned schedule rather than the market.
E.g. 8% for the first year, then 6% for the next 3 years and 5% thereafter until the end of the term of the loan.
Default interest
Expressed as a fixed rate above the normal contractual rate.
Deterrent
Cover administrative costs of pursuing borrower
Reflect change in credit risk
Cover additional borrowing costs of lender & compensate
If challenged - default interest clause may be deemed unenforceable as a penalty
Must be proportionate to legitimate interest of the lender (cannot be too high)
Fees (paid by the borrower)
Commitment fee
Arrangement fee/participation fee (arranger's front end fee) - % of overall amount
Arranger decided how much each lender in syndicate is to receive as a participation fee.
Agent's fee (for administrative services)
Normally paid annually but can be paid quarterly
Underwriting fee (paid to arranger if loan underwritten)
Security Trustee fee
Withholding Tax and Tax Gross up
Interest = lender's income on which it is liable to pay CT.
Tax must be deducted at source by borrower and paid to HMRC (withholding tax - 20%)
s.879 Income Tax Act 2007: any borrower paying interest to a UK bank within the scope of corporation tax will not have to withhold tax and can pay interest to that bank gross.
NB. International transactions & impact of double taxation treaties which may also allow lenders to receive interest gross.
Tax gross up clause: ensures that if withholding tax has to be paid, lender will still receive interest as if no withholding tax was paid (extra cost for borrower).
But at present, this clause is only a contractual protection against a change in law.
Under a syndicated loan, the agent will calculate the amount of interest due to each syndicate member separately.
Some lenders may be subject to withholding tax.
Protections for borrower
Borrower may be entitled to receive the amount paid to HMRC if the lender receives an equivalent amount in the form of a tax credit.
Borrower may also have the right to prepay the affected lender if withholding tax would be required in future.
Increased costs
Needed in case legislation increases lender's underlying costs.
Included any change excluding:
Change in tax law
Change caused by lender's own breach of loan agreement
Where charge is already passed onto borrower as part of mandatory costs
May include Basel III changes
Representations
"Representations" and "warranties" used interchangeably for loan agreements.
Statements of fact about the borrower and their business.
Misrepresentation under a loan agreement = event of default
Borrower discloses any representations it...
Buy the full version of these notes or essay plans and more in our Debt Finance Notes.
A collection of the best LPC Debt Finance notes the director of Oxbridge Notes (an Oxford law graduate) could find after combing through dozens of LPC samples from outstanding students with the highest results in England and carefully evaluating each on accuracy, formatting, logical structure, spelling/grammar, conciseness and "wow-factor". In short these are what we believe to be the strongest set of Debt Finance notes available in the UK this year. This collection of notes is fully updated f...
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