24 Sep Syndicated Loan Facility Agreement – A Lender’s Perspective (Part 2)
This paper is a continuation of a previously published article setting out five key provisions of a Facility Agreement from a lender’s perspective. We have examined below five more clauses which are germane in protecting the interests of lenders in a syndicated loan facility agreement.
- Voluntary Prepayment and Cancellation
Voluntary Prepayment permits the Borrower to prepay the whole or any part of a facility prior to a repayment date as agreed often as a result of optional refinancing to take advantage of lower interest rates.
It is common practice for lenders to state a fee where a sum is repaid earlier than its due date. The fee is designed to compensate the lenders for the loss of anticipated income from voluntary prepayment and is typically expressed as a percentage of the principal amount prepaid. Customarily, the Facility Agreement would state the circumstances in which a prepayment fee is to be paid.
In addition, Voluntary Cancellation allows (upon giving prior notice) the Borrower to cancel the whole or any part of an available/non-utilized facility thereby reducing the commitments of the Lenders.
- Mandatory Prepayment and Cancellation
The lenders would generally want to specify incidents and occurrences whereby the loan disbursed will be immediately repayable on demand and the rest of the loan cancelled. An example of such an incident is where there is a change of control of a Borrower i.e. where the founding shareholder group ceases to control the borrowing entity or any other person or group of persons acting in concert gains direct or indirect control of the borrowing entity.
Other scenarios in which the lenders can demand mandatory prepayment include inter alia disposal of certain assets, insurance payments, receipt of payment under warranties in sale and purchase agreements and excess cash flow.
Unlike Voluntary Prepayment above, no prepayment fee is prescribed for Mandatory Prepayment.
This is one of the most important clauses in a Facility Agreement. The parties to the agreement have to decide whether or not interest will be payable on the loan and in most cases, it will. If interest is payable:
- It will be payable on the amount of the Principal yet to be repaid to date until it becomes due;
- Payable at an agreed interest rate as provided in the Facility Agreement; and
- Payable on agreed interest payment dates as stipulated in the Facility Agreement.
Default Interest is payable when the Borrower does not make an interest payment on or before the agreed interest payment date. A default rate is normally agreed between the parties and stated in the Facility Agreement, typically 1-2% per annum higher than the rate which would have been payable if the overdue amount had been paid.
The Facility Agreement should set out how interest is to be calculated. A typical calculation of interest provision may read:
“The rate of interest on each Loan for each Interest Period is the percentage rate per annum which is the aggregate of the applicable:
(a) Margin; and(b) LIBOR.”
- Increased Costs
Typically, a facility agreement will include an increased costs clause which permits a lender to claim against the borrower any increase in the lenders cost of funding the loan. Such increase could be as a result of (i) the introduction of or any change in (or in the interpretation, administration or application of) any law or regulation or (ii) compliance with any law or regulation made after the date of the facility agreement.
An increased costs clause is usually defined as follows:
(i) a reduction in the rate of return from a Facility or on a Finance Party’s (or
its Affiliate’s) overall capital;
(ii) an additional or increased cost; or
(iii) a reduction of any amount due and payable under any Finance Document,
which is incurred or suffered by a Finance Party or any of its Affiliates to the extent that it is attributable to that Finance Party having entered into its Commitment
Undertakings also to referred to as covenants are assurances/promises given by a borrower or sometimes obligors (e.g. guarantors) to the lenders to discharge or not to discharge certain actions. On occasions, the borrower may also instruct its subsidiaries to adhere to the undertakings.
There are three main types of undertakings namely:
- Information Undertakings – the borrower agrees to provide the lender with certain types of information (g. financial statements and management accounts) periodically throughout the term of the loan;
- Financial covenants – Financial covenants are used to monitor the borrower’s business, and evaluate the ability of the borrower to repay debt. i.e. cash flow, leverage, liquidity and net worth.
- General undertakings – These are divided into positive and negative undertakings. Positive being promises to do something and negative, promises not to take certain actions. Categories of general undertakings include inter alia Authorisations, Licenses, Compliance with laws, Environmental Compliance, Taxations, Change of Business.
It is pertinent to note that the above clauses are often negotiated between the Lenders and the Borrowers to ensure each party is adequately protected. Berkeley Legal is conversant with all aspects of financing and is able to advise on all Financing and Security Documentation including but not limited to Common Terms Agreements, All Assets Debenture, Intercreditor Agreement, Account Charge, Deed of Share Charge and Subordination Deed.
The information provided in this article is for general informational purposes only and does not constitute legal advice. If you require specific legal advice on any of the matters covered in this article please contact firstname.lastname@example.org