DEBT FINANCE REVISION NOTES LOAN PROVISIONS

1. Purpose and illegality?

Usual for purpose clause to state that funds must be used "towards the borrower's working capital requirements", with lender relying on specific representations and undertakings to exercise control Subsequent illegality of an initially lawful agreement is usually dealt with as a mandatory prepayment event

2. Facility?

Drawdown and demand: In general, a term loan can be drawn down during a relatively short period of time after the loan agreement is signed ('Availability Period')
- under a RCF, the Availability Period will be the entire term of the loan. Loan may be available in different tranches. Lenders' obligation to lend [syndicated loans only]: Each lender's obligation to lend under a syndicated loan is several, not joint - syndicate members are responsible for their commitment only.

3. Conditions Precedent???

The borrower must fulfill these conditions before a lender is obliged to lend [see above]. o CPs to the first utilization [generally documentary in nature]
o CPs to each subsequent utilization [representations made on the original signing date are true and correct and no actual or potential EoD outstanding
- drawstop.]
CPs intended to ensure that all legal matters are in order and that a lender is not obliged to lend if the borrower has become a greater credit risk Common CPs: o Constitutional documents (articles of association, memorandum of association, SH agreements) o Legal opinions o Insurance policies [in place]
o Security documents (Share charges, debentures, Guarantees) o Financial information and auditors' reports (financial projections may be appropriate where company has no financial history) o Licenses/consents o Board resolutions/corporate authorisations (board resolutions and minutes authorizing transaction, specimen signatures of signatories) o Propertyspecific CPs (e.g. valuation report, report on title) Lender's perspective: o CPs protect the lender and reduce its risk Borrower's perspective: o Borrower needs to exercise caution when agreeing to CP and ensure that it is able to fulfill the CPs before drawdown
? Time limits feasible?
? Who decides if CPs are met? 'Reasonable' satisfaction of agent
? Who can fulfill the CP? Ensure that third parties will deliver CPs on time
*In the exam, think about the transaction structure and any issues arising from due diligence. What CPs will be appropriate in the particular circumstances?

4. Interest

1 DEBT FINANCE REVISION NOTES?Floating rate (most common)/fixed rate/variable rate Default rate of interest: a specific rate which aims to protect lenders against late/non
payment of interest or capital [which is also an EoD] - borrower has become a higher credit risk Interest periods: Interest is recalculated on a regular basis, by reference to interest periods. The borrower selects the interval at which it wishes to pay interest, and the lender will fund the loan on the interbank market to match whatever Interest Period the borrower has chosen.

5. Fees??

Commitment fee: Reflects the cost to the lenders of having set aside money to lend during the Availability Period [based on committed but undrawn amounts]
Arrangement fee and participation fee: Arrangement fee will be kept confidential from syndicate members; arranger can decide how much of the fee to share with the other lenders Agent's fee: Paid to the agent for administrative services [again, will be set out in a separate fee letter]
Underwriting fee

6. Withholding tax and tax gross up??

Lenders are liable for corporation tax on interest it receives. Borrowers are required to withhold tax (deduct at source) - i.e. collect the tax on HMRC's behalf. This mean that the lender will receive less interest if withholding tax is payable.
**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. Borrowers paying interest to a lender in a jurisdiction which has a double tax treaty with the UK would also be exempt from withholding tax. o See definition of "Qualifying Lender" Tax grossup clauses ensure that if withholding tax is deducted at source, the lender will receive whatever sum of interest it would have received if the deduction had not been made. o Contractual protection against a change in the law, or the involvement of an overseas lender [which is in a jurisdiction with no double tax treaty] - if a change in tax law takes place, a grossup clause provides that the borrower must grossup their payment so that the lender receives an amount equal to the original sum due o Standard for the borrower to take the risk of a change in law Protections for the borrower: o Tax credit: Entitlement to the additional amount paid if lender receives an equivalent amount in the form of a tax credit o Right to prepay: Right to prepay the affected lender if withholding tax would be required to be paid in respect of that lender o Grossup only applies on change in law: Specific circumstances where loans are transferred where the tax grossup clause will not be triggered
? Only has to gross up [under the LMA] if there is a change in law whereby the lender ceases to be a Qualifying Lender. So for example if the loan was transferred to a Lender who is not a Qualifying Lender, the Borrower would have to withhold tax but would not have to grossup as the Lender not being a Qualifying Lender was not due to a change in law.

7. Increased costs

2 DEBT FINANCE REVISION NOTES?If legislation increases the lender's underlying costs [e.g. capital adequacy costs, liquidity requirements, bank reserve requirements], the borrower will compensate the lender, excluding: o Changes in tax law o Something caused by the lender's own breach of the arrangement o Where the additional charge is already passed on to the borrower [mandatory costs]
However, Lenders may face problems in allocating an increased cost imposed on it to individual loans. Protections for the borrower are the same as those under the tax grossup clause.

8. Representations and warranties???

Statements of fact about the borrower's business made on the day of signing; a contractual remedy for what would be a misrepresentation at common law o Misrepresentation is treated as an EoD Two categories of representation: o Legal matters [borrower's legal capacity to enter into agreement, validity of agreement]
o Commercial matters [credit standing and financial condition of borrower]
Some or all representations and warranties will be deemed to be repeated at intervals during the term of the loan [always check!]
o Usually repeated on each date of a Utilisation Request, and the first day of each Interest Period. Lender's perspective: o Borrower's inability to repeat a representation will trigger a drawstop, and breach of representation is an EoD Borrower's perspective: o Should be wary of making absolute statements ('materiality') o Should ensure that it is able to make the same representations about its subsidiaries ('Material Subsidiaries' - definition) o Knowledge qualification ('to the best of its knowledge and belief') - but lender will require borrower to accept risk and monitor itself How to qualify representations: o Materiality [be careful as to where the element comes in; it should be the effect that is material]
o Reasonableness o De minimis o Disclosure letter o Qualifications in legal opinions o Knowledge qualification o Reference to certain companies only

9. Undertakings?Promises by the borrower to the lender to do or not to do something. o Promises to provide information o Promises to protect borrower's assets [negative pledges, no financial indebtedness, nondisposal]
Lender's perspective: o Control over the way the borrower is run + enables it to monitor the borrower o EoD if undertaking is breached Borrower's perspective: o Should ensure that undertakings are realistic and consistent across its various loans

3 DEBT FINANCE REVISION NOTES o o

Should ensure it is able to make the same covenants with regards to its subsidiaries ('Material Subsidiaries') Should be drafted to exclude breaches with an immaterial effect on borrower's ability to repay the loan or comply with its other obligations

PURPOSE OF CLAUSE Status - Borrower and each of its Subsidiaries has the power to own its assets and carry on its business Ensures that Group has capacity

No default - No default is continuing or might result from the making of any Utilisation Ensures that borrower is the same entity [in creditworthy terms]
before Lenders have to lend No misleading information [in Information Memorandum]
No proceedings pending or threatened Ensures that claims will not affect Borrower's ability to service the loan

BORROWER AMENDMENTS 'Material Subsidiaries' - means any Subsidiary of the Borrower whose NAV exceeds 5% of the Group's NAV or whose turnover exceeds 5% of the Group's turnover Would not be appropriate for this representation to extend to all subsidiaries - Lenders should only be concerned with significant members of the group 'Default' > 'Event of Default'
otherwise, Borower would be deprived of the benefit of any agreed grace periods.

LENDER'S RESPONSE/
COMPROMISE?
Acceptable to Lenders.

Acceptable to Lenders.

'Might reasonably be expected to'
- incorporation of objective element

'Untrue or misleading in any material respect' - avoiding technical breaches of an absolute obligation 'No proceedings pending against Borrower or any Material Subsidiary...that if adversely determined, might reasonably be expected to have a Material Adverse Effect', to the best of its knowledge and belief having made due enquiry'

Acceptable to Lenders.

Acceptable to Lenders

'Threatened' litigation too wide If claims brought against insignificant members of group or for insignificant amounts, will have no impact on Borrower's ability to service loan Litigation relates to actions of third parties, Borrower must be aware of litigation, having made due enquiry

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