CORPORATE FINANCE:

LOAN FACILITIES
 CORPORATE FINANCE

DEBT EQUITY
(external resources) (own resources)

DEBT PREFERRED ORDINARY

BANK LOANS INSTRUMENTS SHARES SHARES

PERPETUAL
BONDS PREFERRED
REDEEMABLE
&
SHARES
HYBRIDS

SWAPS, FUTURES, OPTIONS & OTHER DERIVATIVES

 Debt vs Equity

• Debt

– No share in property of corporation

– Ahead of shares in case of liquidation

– Income by way of interest (not dividends)

– Right to devolution of principal

– Value varies depending on the interest rate fluctuations

 Debt vs Equity

• Equity

– Share in property

– Voting rights

– Income by way of dividends

– Devolution of capital in case of liquidation

– Market volatility
 Financing mechanisms

• Own resources (equity)

– Capital contributions (e.g. capital increase)

– Benefits of the business activity

 Financing mechanisms

• External resources (debt instruments)

– Loans

– Instruments of title (e.g. bill of Exchange)

– Documentary credits / performance bonds

– Bond issues / Securitisations

 Financing mechanisms

• Hybrids

– Preferred shares

– Participatory loans
 Financing mechanisms
DEBT

BANKING LOANS DEBT INSTRUMENTS

SINGLE SEVERAL SHORT MEDIUM LONG

BANK BANKS TERM TERM TERM

INSTRUMENTS MID-TERM
OVERDRAFTS & REVOLVING OF TITLE
INSTRUMENTS BONDS
CREDITS, TERM LOANS
 Financing Structures

• Loans and revolving credits

• Project finance

• Asset finance

• Bond issues

• Securitisation
 Factors influencing the choice of debt type
SINGLE BANK SEVERAL BANKS DEBT
INSTRUMENTS

• Distributed risk (broad base of lenders/investors)

• Interest rate (decreases)

• Complexity of documentation (increases)

• Compliance requisites (increases: publicity, regulatory, etc)

• Underwriting (posibility increases: one more cost)

 Factors influencing the choice of debt type
SINGLE BANK SEVERAL BANKS DEBT
INSTRUMENTS

• Market liquidity

• Standarisation of documentation (less impositions of lender,

less taylormade)

• Guarantee requirements (decreases)

• Requisite of deserve credit (increases)

 Loan Agreements

• Credit ranking

– Subordinated

– Ordinary

– Privileged

– Guaranteed
 Loan Agreements

• One lender – one borrower

• One lender – several borrowers

• Several lenders – one/several borrowers

(syndicated loan facility)
 Types of loan agreements

• Term facility: loan to be returned in the agreed term(s)

• Uncomitted facility (ej: overdraft facility): loan that can be

cancelled at any time

• Fixed facility: devolution of funds is definitive

• Revolving facility: funds can be drawn and return as long as a

certain limit is not returned (e.g. revolving credit)

• Multi-currency facility
 Loan agreements: withdrawal of funds

• Only once / several times

• Availability / committment period

• Revolving credit (until limit is reached)

 Loan agreements

• Heads of terms

– Summary of further subsequent clauses

– Non binding (if it is said so)

– Binding if…

• Parties behave as if they are bound

• Document is sufficiently precise

 Loan facility: structure
• Description of parties: lender, borrower,
guarantor…

• Agreeement of the parties is subject to…

– …Clauses (R & W)

– …Conditions precedent
 Loan facility: structure

• Documentary procedures for…

– Loan transfer

– Adition and withdrawal of borrowers

– Notifications

• Signing / Execution (notarial deed)

 Loan facility: structure
• Amount / Limit of withdrawal

• Term

• Interests

• Early repayment

• Obligations of borrower

• Guarantees
 Loan agreements: types of clauses

• Interpretative (definitions…)

• Description and goal of funds

• Contractual relationship of members of the syndicate

• Fund withdrawal mechanisms, repayment, interest

• Amounts the lender must receive

• Representations & warranties of the borrower

 Loan agreements: types of clauses
• Covenants & undertakings of borrower

• Events of default and acceleration trigger events

• Guarantees

• Loan transfer

• Addition and withdrawal of borrowers

• Boilerplate provisions: notifications, effect of an illegal clause,

effect of waivers

• Applicable law and jurisdiction

 Loan agreements: conditions precedent /
subsequent

• C. precedent: events that must have taken

place before parties are bound by contract

• C. subsequent: events that may occur…

– After the agreement is binding

– They discharge the duty to perform the contract

 Loan agreements: conditions precedent /
subsequent

• Lender has discretion about fulfillment of conditions

(good faith)

• Lender can excuse them

• Lender can turn C. precedent into a C. subsequent

• Lender must not prevent conditions

 Loan agreements: conditions precedent

• To be satisfied before withdrawing funds

• Examples and documentation borrower must show:

– Resolutions of Board of Directors and Shareholders’

Meeting

– Guarantees of the obligations of the borrower

– Information for regulatory purposes (e.g. money

laundering)

– Legal opinions
 Loan agreements: repayment obligation

• All borrowed funds

• Sometimes obligation is limited or conditioned

• Whenever lender requests repayment (e.g.

overdraft)

• Whenever funds have been borrowed (if no

date was agreed upon)
 Loan agreement: repayment obligation

• Without delay

• Term facility

• Bullet repayment

• Anticipatory repayment (agreed / not agreed)

 Loan agreements: interests

• Due for each day that loan is pending

• Payable if agreed upon

• Periodically payable

• Borrower chooses length of each payment

period
 Loan agreements: interests

• Types of interest: fixed / floating

• Hedging with swaps

• Interest as participation in benefits

• Court may order payment of interest as

compensation for late payment

• Compound interest may be payable in case of

agreement or customary rule
 Loan agreement: penalties

• Default rate: Additional interest rate to be paid

over any unpaid amount

• Liquidated damages clause (¿penalty?)

• No penalty if appraisal of future loss

 Loan agreements: payments

• Issues

– Mechanism

– Goal

– Set-off rights
 Loan agreements: payment mechanisms

• In cash unless agreement provides for another

mechanism

• Agreement may provide that lender pays…

– In a different currency…

– In a different place…

– …If it is impossible or illegal to do it in accordance with the

agreement
 Loan agreements: payments

• Agreement may provide for…

– Termination of contract and…

– Return of funds already paid if…

– … Contract becomes illegal

 Loan agreements: payments

• Lender´s certificate on amount due is evidence

• Set-off

– Obligatory in case of insolvency (English law)

– Agreement may provide that lender has set-off

rigths vs borrower but not the other way round
 Loan agreements: payments

• Payments by mistake

– Payer has the right to be returned the payment

 Loan agreements: protecting the lender´s
position

• Bank´s costs may increase due to….

– Regulatory costs

– Witholding tax on interest payments

– Breach of the borrower

– Losses in enforcement vs borrower

• Borrower must compensate bank

 Loan agreements: protecting the lender´s
position

• Increased costs clause may be used by bank to

which the loan is transferred

• Grossing up clause

– If borrower must withold on amount to be paid to bank,

borrower must paid the difference

– Borrower may negotiate that amount paid due to the

grossing up clause may be compensated with the bank’s
tax credits
 Loan agreements: protecting the lender´s
position

• Indemnity provisions

– Breach by borrower

– Losses in enforcement vs borrower

– Borrower must pay for the bank’s losses

 Loan agreement: monitorization

• Clauses regarding the status and activities

of…

– Borrower

– Borrower’s group entities

– Clauses operate as “events of default”

 Loan agreements: representations and
warranties

• Representations

– Statement of a fact

– Made before entering into a contract

– Conveyed by one party to the other party

– To induce the other party to enter into the contract

 Loan agreements: representations and
warranties

• Warranty:

– Statement similar to representation

– Must be given conteporaneously with and as part

of the contract

– Different consequences if breach of R or of W

 Loan agreement: representations and
warranties

• Effects of breach of R & W (or possible breach)

– Right to refuse any more funds to borrower

– Right to suspend or terminate agreement

– Right to request repayment of the amounts already

borrowed

* Statements are understood to be repetead during the whole

life of the agreement
 Loan agreement: representations and
warranties

• Concerning the borrower and group entities

• Existence, status, powers of attorney, capacity

to enter into contract…
 Loan agreement: representations and
warranties

• Legality of transaction and documentation

• Rank of rights of lender as creditor

• Tax treatment of the transaction

 Loan agreement: representations and
warranties

• The transaction does not contravene third party rights

• The borrower has all licenses and permits for his

business

• The borrower will make use of the funds for legal

purposes
 Loan agreement: representations and warranties

• Commercial and factual issues

– Absence of disputes

– Absence of events of default in the loan agreement or in other

agreements

– True and fair view (accountancy)

– No material adverse change

– Information provided to lender is true

– Opinions held about borrower are reasonable

– Other issues concerning the borrower´s business

 Loan agreement: covenants and
undertakings

• Restriction on a borrower imposed by a lender

• Obligations of borrower in favor of lender….

– … Concerning what the borrower will or will not do…

– …In order to preserve his business during the loan…

– … And guarantee the flow of information for the lender

 Loan agreement: covenants and
undertakings

• Effects of breach or probable breach

– Refusal to grant more funds

– Suspend or terminate the agreement

– Request devolution of funds

 Loan agreement: covenants and
undertakings

• Shadow directors

– Lender is sometimes very involved in the business

of the borrower

– Borrower may have to ask the lender permission to

do something
 Loan agreement: covenants and
undertakings

• Obligations to provide information

– Accounting

– The same information provided to other creditors and shareholders

– For regulatory purposes concerning the lender

– Concerning an event of default that already happened or that may

happen

• Certificates confirming fullfilment of C & U

 Loan agreement: covenants and
undertakings

• Financial covenants

– Obligation of borrower to preserve its financial and

economic position

– Certificates of the borrower for specific periods

– Sometimes it is requested that borrower´s auditors certify

 Loan agreement: covenants and
undertakings

• Financial covenants

– Obligation to keep the accounting value during specific

periods

– Obligation not to go beyond a specific debt level

– Ratio between interest payable by borrower and income

(within a specific period)
 Loan agreement: covenants and
undertakings

• Financial covenants

– Ratio between cash outflow and inflow

– Expenditure restrictions in each period

– Value of security must be higher than a certain amount

referenced to principal and interest
 Loan agreement: covenants and
undertakings

• Borrower´s obligations concerning…

– Activities of the borrower

– Purpose of the loan

 Loan agreement: covenants and
undertakings

• Obligation of the borrower to…

– Run his business like he has done so far

– Not to change the nature of his business

– Keep all the licenses, insurance, etc, in place

 Loan agreement: covenants and
undertakings

• Borrower must represent that the lender´s

claim is…

– Pari passu with the rest of non secured creditors

– The first on the object of the security

 Loan agreement: covenants and
undertakings

• Negative pledge / disposal of assets

– Obligation not to give more security to third parties

over its assets

– Ensure that the assets of the borrower will be at

the disposal of the unsecured creditors

– Obligation not to transfer assets

 Loan agreement: covenants and undertakings

• Negative pledge / disposal of assets: effects

– Suspend the contract and request the devolution of the funds (events
of default clause)

– Injunction against the third party (in tort) if…

• Breach of the borrower

• Knowledge of the third party

• Intention of the third party

– Clause that obliges the borrower to create a credit right in favor of the
lender if another right is created in favor of the third party
 Loan agreement: event of default and
acceleration

• Lender cannot request the early devolution of the loan

for any breach of contract

• Events of default clause: if any “event” takes place,

lender is entitled to…

– Suspend or terminate the loan agreement and…

– Claim devolution

– New York law: good faith in order to be able to claim

accelerated payment
 Loan agreement: events of default and
acceleration

• Interpretation

– Careful in the drafting of the clauses

– Indicate that lender may only claim vs borrower if

event of default continues when lender decides to
file claim
 Loan agreement: events of default and
acceleration

• Non-payment on the due date (sometimes

grace period)

• Breach of R & W or C & U

• Cross-default

• Enforcement vs Borrower
 Loan agreement: events of default and
acceleration
• Commencement of insolvency proceedings

• Loss of a security right concerning the

agreement

• Third party events

• Material adverse change of the borrower

 Loan agreement: event of default and
acceleration

• Cross-default

– Event of default in an agreement will be considered as an E

of D in other agreements

– Allows creditors to take advantage of the more onerous

terms in other agreements

– It may lead to multiple events of default in all the loan

agreements of the borrower
 Loan agreement: events of default and
acceleration

• Material adverse change

– Substantial change in the borrower´s situation

– Lender´s discretion

– No arbitrariness
Contratos de préstamo: