Large corporate loan agreements are often based on samples provided by the Loan Market Association (LMA). This is also true for facility agreements governed by Austrian law. The LMA documents are useful model agreements reflecting market standards. As is the case for most standard documents, parties must always consider whether certain terms should be modified to reflect the specifics of a given transaction and business. This in particular holds true for borrowers and sponsors. Any facility agreement should allow flexibility in operating the borrower's business for the term of the financing. As far as possible, it should also contain the risk of unforeseen events spilling over into the financing structure and thus provide a resilient platform.
Many of the issues that we will touch upon herein may be less relevant as long as the sun is shining (and financial performance is good). However, from a risk management perspective, borrowers are well advised to also be ready for rainy days (and potentially stressed situations). That's when a stable financing platform is needed most. A borrower would not want to have to rely on possible waivers or consents by lenders when the sailing gets rough.
At term sheet stage, involving the relevant finance, treasury and accounting functions is key. It is also worthwhile to involve the legal team and possibly external debt and legal advisors with a view to counterbalancing the asymmetry of finance-related experience that exists between arranging banks and (also frequent) borrowers. Investing time and effort into a reasonably detailed term sheet that takes into account foreseeable (and some unexpected) developments not only safeguards a level playing field but also speeds up the documentation process, thus reducing time to cash.
"Investing time and effort into a reasonably detailed term sheet that takes into account foreseeable (and some unexpected) developments not only safeguards a level playing field but also speeds up the documentation process, thus reducing time to cash."
Below is a selection of topical issues to bear in mind when drafting and negotiating the facility agreement. These issues broadly fall into the categories of:
- funding certainty;
- relationship character of the specific financing transaction;
- (p-)repayments as a result of unforeseen events; and
- contractual flexibility.
Many of the building blocks to enhance certainty of funding apply across all types of financings, but some depend on the purpose of the financing. The former category includes the (obvious) closed list of conditions to drawdown and the (less obvious) disapplication of statutory draw-stops. An example of the latter is the certain funds concept typically foreseen in acquisition financings. Under this concept, lenders will only be able to refuse disbursement during the certain funds period in case of a major incident. This, in combination with a clean-up concept regarding the target perimeter, seeks to provide a stable funding platform during the critical stages of closing an acquisition and integrating the target.
Free tradability of loans
These days, banking regulation and risk management considerations require (or at least create strong incentives for) free tradability of loans. This does not go together well with the relationship character of long-term financing and has brought aspects of debt tradability to the centre stage of many loan negotiations. The flipside of the coin are portability features that we see increasingly built into (customary) change of control clauses. Borrowers should closely align with their controlling shareholder(s) to see whether and what level of portability they desire.
When it comes to prepayments and repayments, care needs to be taken that prepayment events and events of default avoid inappropriate "hair triggers". Mandatory prepayments are usually triggered by a change of control and often – of course depending on the nature of the financing and subject to appropriate exclusions – relate to proceeds from a disposal, an insured event or an equity raise. As for events of default, appropriate cure rights (in relation to breaches of financial covenants often referred to as "mulligan clauses") and cure periods should be built into the operative clauses. Moreover, repeating representations and information undertakings that, if incorrect or breached will trigger an event of default, will be at the core of forward-looking negotiations between the parties to a financing transaction.
In relation to the relatively recent breed of sustainability linked ("green") financings, pursuant to prevailing market practice the relevant representations and undertakings (e.g. in relation to SPTs – sustainability performance targets) as well as reporting obligations (e.g. around KPIs), even if breached, are not typically designed to constitute an event of default, but may lead to margin adjustments. Thorough drafting will be required to ensure that this holds true also in light of customary reporting representations.
In practice, the general undertakings in a facility agreement are often more important than the representations. The general undertakings apply for the entire term of the financing and contain certain restrictions on the conduct of the business by the borrower and its group. Borrowers should look for the appropriate flexibility they need.
Borrowers often consider the majorities for decisions of the syndicate to be of little relevance to them. We are convinced that this approach is somewhat short-sighted since, of course, it will make a massive difference whether in response to a disruptive or otherwise unforeseen event all or a certain majority of creditors need to be brought on board. Carefully crafted majorities in combination with "yank-the-bank" and "snooze-you-lose" mechanics can be a massive relief in unstable times.
"Thinking ahead (with the help of experienced legal counsel) will allow borrowers to obtain stable financing of their hopefully growing business."
To conclude, thinking ahead (with the help of experienced legal counsel) will allow borrowers to obtain stable financing of their hopefully growing business.