Loan Documentation & Security Issues

Part One

The Key Precedents in the Loan Market

• Investment-grade vs leveraged/high yield - key dividing line in credit markets, why & how it matters

• LMA documentation training looks at the Leveraged Facilities Agreement

• LMA Real Estate Multi-Property Investment Transactions

• LMA Real Estate Development Transactions

• Review of the 4 segments of the European leveraged loan market agreement (key differences)

• Case Study: Review key aspects of a term sheet in the context of a relevant deal, including the market flex

The Key Players in a Loan & Their Roles

• Bilateral, clubs & syndicated

• Dramatis personae in the loan

• The mandated lead arranger

• Origination & syndication departments

• Credit Department

• Portfolio department

• The facility agent & security agent

• Key lessons from the Stabilus case

• Case Review: Stabilus case - what are the lessons for Security and Facility Agents, Credit bidding

Issues Relevant to Syndicated (and club) Deals

• The various types of Lenders & what they want Banks vs Institutions vs Direct Lenders

Role and importance of “The Instructing Group”

Critical voting thresholds for lenders and borrowers, too (including the super-majority)

How ‘yank the bank’ and ‘snooze you lose’ clauses can be used to manipulate the syndicate

Transfer Restrictions

• When can the lender transfer their loan (triggers)

• Who can they transfer to (White and Blacklists)

• What about sub-participations – restrictions

Anti-Net Short (‘Windstream’) Provisions

• Background and rationale of ‘Windstream’ provisions

• What is a ‘Net Short Provision”

• Who is a “Net Short Lender”

• Exceptions ‘Affiliates’ and how to deal with them

• ‘Unrestricted Lenders’

Net Short Representations – when must they be provided?

Implications for Net Short Lenders

How to Approach the Credit Agreement

• Understanding the Borrower’s aims

• Three key aspects to consider first

• The interplay of the various “financial scenarios”

• How to “read” the SFA – where to start

• Negotiating tactics in handling the banks What do the lenders want – the 3 key areas

• Knowing where to focus your negotiating firepower

• How to handle the lenders when things “go wrong”

Different Types of Facilities: Use and Key Issues

• Review the typical facilities in the SFA

• Overview of Accordion / Incremental Facilities

• Capex facility – what to look for

• Revolving Credit Facilities  Fee /margin structure – what’s the market for committed amounts

• Rollovers & cashless rollovers (lessons from Lehman)

Scope of the Loan

• “The Restricted Group” - coverage

• What is a Subsidiary

• Material Subsidiaries – what material and where it matters

• Immaterial subsidiaries (where & how they matter)

• Non-Guarantor Restricted Subs (“NGRS”)

• Unrestricted subsidiaries

The “Permitted baskets” and Cash Sweeps

• Traditional LMA ‘hard-capped” baskets

• Grower baskets - Types of baskets (problems with the RCF basket)

• Basket structure

• The specified variable - what does it cover (EBITDA, Assets)?

• Debt reclassification - Key risks for lenders

Builder baskets (which deals and where are these used)

Permitted Indebtedness

• Accordion vs Incremental facilities

• MFN – key aspects

• Sunset periods

• Key negotiating issues

Permitted Disposals

• LMA approach vs Cov-lite approach

• Potential problems with fair market value and designated non-cash consideration

Permitted Security & Guarantees

• Securing additional debt - senior, junior, pari passu

• Permitted Liens and Permitted Collateral Liens - how it can dilute/subordinate lenders

Synchronising the baskets – why it matters for borrowers

Margins & Fees

• Arrangement & Commitment fees

• “Typical” margins

• Original Issue Discount (role and rationale)

• Libor/Euribor Floors

• Margin ratchets - which facilities should it apply to, and when should it kick in?

Part Two

Mandatory Prepayments (Cash Sweeps)

• Disposal proceeds / Asset sales

• Standard LMA approach

• Cov-lite approach

• Excess Cashflow

• Change of Control

• Sale of all or substantially all of the assets/business

• Other sweeps

• Insurance proceeds

• IPOs

• Change of control

• Acquisition proceeds

Covenants Generally

• Information – why they matter

• General undertakings - The Guarantor Coverage test  Percentage coverage?

• Which commands are included ('material' vs ‘non-material')

• What type of collateral must be provided?

Financial covenants

• Typical LMA covenants for Leveraged deals

• Springing leverage covenants (use and application)

• Headroom – what’s market

• Equity cures – what’s the market, what are the key negotiating points

• Deemed cures – where and why they matter

Problems (manipulating) with EBITDA (what to watch)

• How EBITDA inflates risk in Credit Agreements

• Exceptional add-backs

• Business synergies

• Proforma adjustments

MAC clauses post the recent Urvascocase

Default vs. Events of Default vs Mandatory Prepayments

• Overview of the key EoDs

• What is a Default?

• Insolvency & Insolvency proceedings (in light of Urvasco case)

• Change of Control - what does it mean & what should it mean?

• Which events should be Mandatory Prepayments & not EoDs

The Potential Impact of COVID-19 on Loan Terms

• MAC(Material adverse change) clause on agreement Can lenders invoke these?

• Carve-outs for borrowers going forward

RCFs(Revolving Credit Facility)

• Can market disruption be used to draw-stop borrowers?

• Dangers for lenders

Market disruption clauses – what to look for

Financial covenants – Does Covid-19 = an Exceptional item?

Repeating Reps

Cessation of business – is this an EoD?

Force Majeure ‘style’ clauses (not an English legal concept)

A Lender’s Toolkit (Techniques for Preventing Subordination/Dilution)

• Taking and perfecting security varies across jurisdictions, this section provides an analysis of the key tools lenders should consider to maximise recovery and minimise dilution or subordination in distress

• The two cost-dangerous words for Lenders  What does “Senior” mean

• What does “Secured” mean

Key security principles – the “first-in-time first-in-line” rule

Security is important, but control of security is critical

The importance of having a “single point of enforcement”

How to create a “comprehensive” security package for lenders

The Negative Pledge – the good news and the bad

Guarantees

• How they help

• Problems with guarantees

Security over the Borrower’s assets – helps, but only half the story

• Problems in civil jurisdictions (e.g. Germany)

The Pledge over the Borrower’s shares (why this is essential)

Forms of Security (UK)

• Debentures  What is a debenture – review cases and definitions

• What does it cover – all monies vs specific monies

• Types of security available in English law

Fixed vs floating charges - Key differences; relevant cases

• The Qualifying Floating Charge Holder (“QFCH”)

• Who is the QFCH – why and when it matters

Quasi Security

• Defined - LMA approach vs Companies Act

Registering & perfecting security

Methods of perfecting security

Training Objectives

• Analyse the key commercial aspects of the Senior Facility Agreement (“SFA”).

• Understand the key issues which affect the various facilities in the loan, including the market approach to Accordions, MFN and sunset periods.

• Understand the key parties in the Restricted Group and identify sources of value leakage.

• Learn about the key voting thresholds in club deal syndicated loan (what is a super-majority and why it matters).

• Discuss the main "Permitted” baskets structured on a fixed and grower basis and identify problems created by debt reclassification.

• Discuss the role of the Financial Covenants - which one matters, and what’s the market for large vs smaller deals.

• Review the various techniques in which lenders can take security and prevent dilution and/or subordination by other parties.

• Discuss the different types of security applied in the UK and civil jurisdictions in Europe, and how lenders can construct a protective shield around the lender.

• Review the impact of COVID-19 on Loan Terms from Lenders’ & Borrowers’ perspectives.

Case Studies: A case study will focus on the key commercial terms of the loan agreement. Aspects covered include, inter alia, the Restricted Group, information and financial covenants and general undertakings (including guarantor coverage test), fees pricing, margins and margin ratchets, cash sweeps and the "permitted" baskets. Consideration is also given to the market flex clause and its role in syndication. The case study seeks to offer perspectives from both borrowers' and lenders’ perspectives.

Training Course Summary

Historically, loan security documentations were based on LMA precedents. But this has changed over the last few years for mid-market and larger deals, in response to competition from the high-yield bond markets and direct lenders who now play a major role in mid-market lending. These twin pressures have given rise to the introduction of various innovations such as grower and builder (permitted) baskets, incremental (accordion) facilities and cov-loose/lite facilities.

Redcliffe Training's Loan Documentation and Security Issues course covers the key commercial aspects of loan documentation. Given the standardised approach to lending across Europe, the course has a pan-European relevance.

Security is a major issue for lenders, but taking and perfecting security varies across jurisdictions. Although this loan documentation and security issues training does cover security under English law, it also provides participants with a toolkit creating a comprehensive security package for lenders to maximise value in distress and minimise dilution.

Furthermore, syndicated (and club) loans raise extra issues such as voting thresholds and transfer restrictions as well as white and blacklists.