Loan Agreements Flashcards
(26 cards)
What is the purpose of the Purpose Clause in a loan agreement?
Shapes the transaction and restricts the borrower’s use of funds to agreed purposes only
A breach can lead to default and potential consequences for the borrower.
What happens if a lender knows a facility is for an unlawful purpose?
The agreement is treated as void and unenforceable under English law
Subsequent illegality can lead to a mandatory prepayment event.
What does the Facility Clause set out in a loan agreement?
The type of facility provided (e.g., term loan, revolving credit facility)
It may include multiple facilities with different terms.
In a syndicated facility, how is each lender’s obligation characterized?
Each lender’s obligation to lend is several, not joint
Failure by one lender does not excuse others.
What are Conditions Precedent (CPs) in a loan agreement?
Conditions a borrower must fulfill before a lender is obliged to lend
Funds cannot be drawn down until CPs are satisfied or waived.
What types of documents are typically required as CPs?
Constitutional documents, legal opinions, financial information, licenses, board resolutions, KYC, evidence of fee payment
Deal-specific CPs may also exist.
What is a Legal Opinion in the context of loan agreements?
A letter confirming borrower’s corporate capacity and validity/enforceability of finance documents
It does not assure borrower’s ability to service/repay the loan.
What fees are typically included in a loan agreement?
- Commitment fee
- Arrangement fee
- Agent’s fee
- Underwriting fee
- Security Trustee fee
Each fee serves a specific purpose in the loan process.
What are Representations in loan agreements?
Statements of fact about the borrower and its business at the time of signing
Breach can trigger an Event of Default.
What is the difference between Representations and Warranties?
Often used interchangeably; both can trigger an Event of Default upon breach
They form the contractual basis for the lender to continue the loan.
What are the three categories of Undertakings in a loan agreement?
- Information undertakings
- Financial covenants
- General undertakings
Each category serves to monitor and control borrower actions.
What is Default Interest in a loan agreement?
A higher rate charged on late or non-payment, compensating the lender for increased credit risk
Courts may deem excessive rates as unenforceable penalties.
What is the Margin in the context of interest rates?
The lender’s profit, usually a fixed percentage above the benchmark rate
Higher risk borrowers typically face higher margins.
What is Structural Subordination?
Occurs when a lender lends to a holding company, but key assets/income are in subsidiaries with their own creditors
Holding company lender ranks below subsidiary creditors.
What does the Events of Default (EoD) clause define?
Situations allowing the lender to exercise remedies, primarily acceleration
An EoD must usually be ‘continuing’ for the lender to take action.
What is a Cross Default in loan agreements?
Borrower/subsidiary defaults under other financial agreements
It can cause a ‘domino effect’ if covenants differ across loans.
What are Mandatory Prepayment Events?
Events outside borrower’s control that trigger prepayment but not an EoD
Common examples include illegality and change of control.
What is the purpose of the Acceleration clause?
To allow the lender to cancel future loans and declare amounts immediately due
It is often triggered by an Event of Default.
What is a Drawstop in a loan agreement?
A temporary suspension of further lending triggered by a Default
It applies to term loans and initial drawdowns of RCFs.
What is the role of the Agent in a Default situation?
Notify syndicate lenders of Default/non-payment and exercise Acceleration remedies
The Agent acts on the instructions of the Majority Lenders.
What does EoD stand for in the context of loans?
Event of Default
EoD can be actual or potential, affecting term loans and RCF initial drawdowns.
Who can enforce security in a loan agreement?
Lender or Security Agent/Trustee
These parties have the authority to take action on the security.
What is the Agent’s role in a ‘Default’ situation?
Notify syndicate lenders of Default/non-payment and exercise Acceleration remedies if instructed by Majority Lenders
The Agent is responsible for communication and action in case of default.
What constitutes a Potential Event of Default?
A situation that would be an EoD but for an unexpired grace period or required notice/determination
It indicates a looming default that has not yet occurred.
