FI NANCI NG
T R ANSACT I ONS:
AN I NT RODUCT I ON TO
B A NK L E NDI NG AND
L OA N AG R E E MENTS
Large Group 1 — Week 2
January 18, 2023
Corporate and Commercial Practice
Jona L. Bautista
1
HOUSEKEEPING MATTERS
• Semester B weekly routine:
• Large group lectures
• 10 lectures: Jona, Oswald and guest lecturer
• Required readings
• Refer to revised course guide
• Supplementary notes, articles, ordinance sections…
• Small group sessions
• 9 SGs, attendance is required
• Assignment due at 10pm 2 days before class
• Format: 12-pt font, double-spaced, 1-inch margins
• Please put group number on e-mail subject, Word doc name
AND on assignment (also put your names on assignment)
2
Housekeeping
Review of Sole Mate Case
Study Status
TODAY’S
AGENDA
Introduction to Financing
Overview of Bank Lending
Overview of Loan
Agreement
3
3
Case Study Status
Connie
Bob
Arthur
30%
40%
30%
Shareholders’
Agreement
Merry Limited
(Korea)
50%
Sole Mate Limited
(Hong Kong)
Joint Venture
Agreement
50%
100%
Peeko Footwear
Limited
(Hong Kong)
SoleMerry Limited
(Korea)
4
• More than six years have passed since the
incorporation of “SOLE MATE LIMITED”.
• We have:
• set it up as a limited company
C ASE
STUDY
STATUS
• dealt with its articles of association
• hired employees and negotiated employment
contracts
• set up a joint venture with another company
• dealt with a shareholders’ agreement
• acquired another company (DD + SPA)
• Now we are doing well, but we are looking for
ways to expand, and we need more working
capital to do so, therefore …
5
Study 4 practice areas
STRUCTURE
OF
SEMESTER B
Loans and Secuity
Arrangements
in short, …
Capital Markets
in short, …
Understanding Financial
Statements
Financial Distress
in short, …
6
Financing is …
Depending on who we get it from, what we give
in return, and what we need it for, we give it
different fancy names
OVERVIEW –
WHAT IS
FINANCING?
Pros and cons – equity v. debt, private v. public
This module focuses on bank debt financing
7
Cast of
characters
(who)
B ANK
FI NANCI NG
T R ANSACT I ONS
Borrower’s
Motives and
objectives (why)
Lender’s
Process (how)
8
Bilateral
Syndicated
Term
Revolving (line of credit)
TYPES OF
LOANS /
FACILITIES
Overdraft facilities
Letter of credit, or L/C
9
Due Diligence
Credit Committee
Commitment Letter
Term Sheet
TYPIC AL
TIMELINE
• Interest rates – cost of lending
• Security
• Guarantee (corporate and/or individual)
• Pledge, charge, mortgage, assignment, etc.
Negotiation of Loan Agreement
• Signing
• Satisfaction of conditions precedent (CP)
• Drawdown
Registration of Charges
Ongoing Administration of the Loan
10
STRUCTURE OF A LOAN
AGREEMENT
(OR ARTICLES)
Parties
Interpretations / Definitions
Operative clause: type, amount (principal), interest, term (tenor)
Drawdown
Conditions precedent
Representations and warranties
Covenants
Events of Default
Boilerplate
11
THE PARTIES
Borrower
Correct entity?
Any co-borrower?
Guarantor?
Lender
bilateral v. syndicated loan
arranger, manager,
payment agent, collateral
agent…
12
BASIC TERMS OF LOAN
• Principal – the amount of the loan
• Term/tenor – how long is the loan for?
• Interest – next slide
• Repayment -- monthly or other periodic payment obligations or one
bullet/balloon payment?
• Manner of requesting draw and remittance
• Availability period / commitment period
• Prepayment allowed? with penalty?
• Fees (loan application fees, commitment fees, placement fees, legal counsel
fees, agency fees, letter of credit fees, lead arranger fees, establishment fees,
front end fees, revolving credit facility fees, any points payable upfront? any
ongoing fees/charges during the life of the loan?)
13
INTEREST
• What is the interest payable?
• BEFORE: why is it always LIBOR/SIBOR/TIBOR/HIBOR PLUS?
• NOW: moving away from LIBOR
• Is the interest rate fixed or variable?
• How is the interest calculated?
• Why is it often based on a 360-day year?
• How frequently is interest paid?
• What is the default interest rate?
14
Reality check:
Loan Agreement vs. SPA
Contractual
Provision
Share Purchase
Agreement
Loan Agreement
Conditions
Precedent
Generally bilateral,
more requirements
for Seller to comply
Borrower only
Representations
and warranties
Generally bilateral,
more from Seller
Borrower only
Covenants
Generally bilateral,
more from Seller
Borrower only
Events of Default
Bilateral
Borrower only
15
Conditions Precedent
Things that must be done or exist prior to drawdown
 Required evidence of satisfaction should be clear
 Example: CP is that “all corporate approvals for the loan have been
obtained by Borrower”
 Deliverable: certified copies of the board and/or members’
resolutions
 Tracking CP satisfaction: Closing checklist managed by lender’s solicitor
 If lender’s solicitor happy: CP Satisfaction Letter issued
Typical CPs:
– Constitutional Documents
– Board and/or members’ resolutions
16
Conditions Precedent
Officer certificates (incumbency, signature sample)
Reps and warranties true and correct (in all materials respects?)
No MAC
No event of default
Legal opinion
• In UK-style deals
• In US-style deals
Drawdown notice / promissory note (pre-agreed forms)
Consents, approvals, filings, registrations
Execution (and registration, if required) of guaranty and/or other security documents
17
Representations and Warranties
Due organization of
the borrower
Validly existing and
duly qualified to do
business
Authorization to
enter into the loan
agreement
Enforceability of
the loan agreement
Accuracy of the
borrower’s
financial
statements
No (material)
litigation
Compliance with
laws
18
Payment of all taxes and timely filings
No MAC
Representations
and Warranties –
cont’d
Valid corporate existence of subsidiaries
Good and marketable title to properties
Obtained all required consents
Environmental, IPR related reps…
Others
19
Covenants
The undertakings that borrower commits to do as long as the loan is
outstanding
Furnishing periodic financial information
Affirmative covenants
Negative covenants – refrain from
doing certain things
Maintaining financial health (e.g., meeting certain net
asset test or debt coverage ratio)
Negative pledge clause
•Borrower promises not to create new debt with a priority
or equal claim on its assets
•Protects against dilution of security
Important carve-out: ordinary course of business
It is NOT in Lender’s interest to interfere with Borrower’s ordinary course
of business
20
Events of Default
What constitutes a default
and what are the
consequences?
Most common events of defaults
• Failure to repay
• Breach of covenants
• Breach of Reps and Warranties
• Cross default provision (default in another loan
agreement)
• MAC
• Change of Control
• Others?
Consequences (after grace period /
cure)
• Entire loan amount becomes due
• No further obligation to lend
• Lender can call the guarantee
• Lender can enforce security
• Domino effect on other loans: cross-default
provision
21
Boilerplate
No different from many other agreements
Non-waiver
Notice
Taxation (most times its own section)
Gross up
Expenses (more often seen in termsheet)
Choice of law
Choice of forum (generally no ADR)
Assignability (Lender can assign, Borrower cannot)
22
Severance
FACTOID OF THE
WEEK
• What is the biggest bank loan ever?
• 2015 - USD75 billion loan facility provided
to Anheuser-Busch InBev for its takeover SAB
Miller (lending banks included: Banco
Santander, Bank of America Merrill Lynch,
Bank of Tokyo-Mitsubishi, Barclays, BNP
Paribas and Deutsche Bank)
23
Tips for your Financing Seat
Do
• Make sure you are working on the
latest version of the document
Do
• Make sure to use track changes or
run a blackline before you send out
the document
Do not
• Do not pick a precedent/template
on your own unless expressly
directed. Always ask the senior
which template to use
24