14 Aug Syndicated Loan Facility Agreement – A Lender’s Perspective (Part 1)
A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as lead arrangers.
Syndicated loans arise when a project requires too large a loan for a single lender or when a project needs a specialized lender with expertise in a specific asset class. The main purpose of syndicated lending is to spread the risk of a borrower default across the multiple lenders.
The purpose of this paper is to examine the key finance document (amongst others) for a syndicated lending which is the Facility Agreement. We will expatiate on 5 key provisions/clauses essential to protecting the group of lenders interests in Part 1 of this paper whilst we will discuss another 5 clauses in Part 2 to be published at a further date.
- Purpose of Facility
This clause sets out the purpose for which the loan is being disbursed and how the amounts borrowed are to be applied. This is a germane provision as it provides clarity to all parties on how the funds are to be utilized.
2. Conditions of Utilization (Initial Conditions Precedent& Further Conditions Precedent)
A Utilization request is a notice issued by the Borrower to the Agent or Lead Arranger requesting that an amount of the loan be disbursed to it for a particular purpose. Typically, under the Facility Agreement, there will be a provision that certain conditions are met prior to a Utilization Request being issued by the Borrower and subsequently funds being paid out. Such conditions are called Initial Conditions Precedent and must be met prior to the disbursement of any sums.
Such conditions precedents are habitually in the form of documentary evidence i.e. Constitutional Documents, Shareholder and Board Resolutions approving the terms of the transaction, Regulatory Licenses/Approvals, Commercial Contracts, Insurance Policies etc.
Further Conditions Precedent are also incorporated into the Facility Agreement to ensure that even after Initial Condition Precedents are met, certain safeguards are put in place to mitigate against default by the Borrower. For example, a key provision that is commonly utilized is that the lenders will not be obliged to disburseif at the date of the Utilization request, a default by the Borrower is continuing or an event triggering a mandatory prepayment of part or all of the facility has occurred.
3.Events of Default
A default is an occurrence of an event a lender seeks to mitigate against under a Facility Agreement. Upon the occurrence of such an event, the Borrower will typically be given a grace period in which to remedy the default. In the event that the default is continuing after the grace period, certain contractual rights arise in favour of the Lenders.
The following are typical examples of events of default:
- Non-Payment – a Borrower does not pay on the due date any amount payable to the lenders pursuantto the Facility Agreement at the place at and in the currency in which it is expressed to bepayable within a specified period of its due date;
- Non-satisfaction of financial covenants by the Borrower;
- Misrepresentation – a representation, warranty or statement made or deemed to be made by the Borrower under the Facility Agreement is incorrect or misleading;
- Cross Default –e.g. Any financial indebtedness of any member of the Borrower (if a Group) is not paid when it fallsdue;
- Insolvency & Insolvency Proceedings;
- Unlawfulness & Invalidity -the Facility Agreement (or any security document or guarantee) is void, voidable or otherwise unenforceable by the lender or is claimed to be so;
- Litigation -Any litigation, arbitration, administrative, governmental, regulatory or other investigations,proceedings or disputes are commenced or threatened in relation to the TransactionDocuments (including the Facility Agreement) or the transactions contemplated in the Transaction Documents;
- Authorizations & Licenses – Any authorization material to the business of the Borrower or any Licence ceases to be in full force and effect.
As stated above, the rights attached to the lenders at the occurrence of the event of default or if an event has occurred and is continuing include but are not limited to:
- Right not to disburse the unutilized portion of the facility to the Borrower;
- Right to make the facility and any other money owing by the Borrower to the lenders under the Facility Agreement (for example any unpaid accrued interest and fees) immediately due for repayment;
- Right to enforce the security used by the Borrower for the loan to ensure it is repaid all monies owed.
4. Negative Pledge
A negative pledge clause is a provision designed to prevent a Borrower from pledging the same collateral to multiple lenders or otherwise taking actions that might jeopardize the security of existing lenders.
Negative pledges are typically utulised to ensure that other creditors don’t claim priority rights over an asset used as security for a loan. It prohibits a Borrower from creating any security interests over an asset used as collateral.
5. Material Adverse Change
A Material Adverse Change (“MAC”) or Material Adverse Effect (“MAE”) provision is often incorporated into a Facility Agreement by a lender to mitigate against unforeseen changes to aBorrower’s financial condition, unexpected/radical market fluctuations, and any other factor which could be considered a “material” change to a Borrower’s capacity to repay a loan.
The MAC clause is intended to protect lenders by observing the overall financial condition of a Borrower and ensuring that lenders have an “exit plan” in the event a material change occurs with respect to aBorrower’s ability to repay the loan.
A MAC can be integrated into a Facility Agreement in two ways namely:
- A condition for disbursement or funding whereby a Borrower represents that there has been no MAC since the time of submission of its latest financial statements; and
- In the event that a MAC occurs and is categorized as an Event of Default (please see above), the lenders are permitted to terminate its obligations/commitmentsunder the Facility Agreement.
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