LexisNexis Practical Guidance®

The most common types of borrowers that might wish to borrow money are:

• •companies;
• •partnerships;
• •trusts;
• •individuals; and
• •unincorporated associations.

This guidance note gives a brief outline of the types of borrowers and the relevant legislation. It also briefly refers to the “Know your customer” checks that a lender must apply to a borrower or any party to a transaction under anti-money laundering and counter-terrorism financing obligations.

See Types of borrowers.

The key finance parties involved in a syndicated loan arrangement or syndicated loan facility are the lenders, the agent, the security trustee, the arranger and any hedge counterparties. This guidance note considers the roles and duties of these key parties with reference to the Asia Pacific Loan Market Association (APLMA) Australian form of loan documentation.

See The finance parties.

This guidance note covers the duties and role of the facility agent (defined in the Asia Pacific Loan Market Association (APLMA) documentation as the agent) in a syndicated loan agreement, with reference to relevant provisions in the APLMA Australian secured term and multicurrency revolving syndicated facility agreement.

It also considers the rights of the agent and methods it may employ to protect itself and exclude liability whilst carrying out its role as agent. The guidance note also considers the mechanisms for the appointment and resignation of the agent.

See The facility agent.

In times of financial crisis, it is not just borrowers who are under financial pressure. Finance parties (eg lenders, facility agents and security trustees) are also at risk of getting into financial difficulty. Facility documents have developed over time (particularly as a result of the financial crisis which began in 2008) to deal with issues raised by the credit risk of the finance parties.

Facility agents play a crucial role in the mechanics and administration of syndicated facility agreements. If they do not perform their duties, both the lenders and the borrower can be adversely affected.

This guidance note explains the key issues involved where a facility agent is in financial difficulty, including:

• •the key areas of concern in relation to the facility agent's role in syndicated facility agreements;
• •the key elements of common provisions in facility agreements which are included to deal with the credit risk of the facility agent; and
• •points to note when dealing with a facility agreement which has an impaired facility agent.

Where appropriate, this guidance note highlights relevant provisions in the highlights relevant provisions in the APLMA Australian secured term and multicurrency revolving syndicated facility agreement.

See Finance party default — facility agent.

Loan transactions typically start with the term sheet and mandate phase. This guidance note outlines what occurs during this phase, including the parties to a potential transaction entering into confidentiality arrangements, agreeing the key terms of the transaction and establishing their roles in the deal. The length of this phase will vary considerably, depending on the complexity and nature of the deal.

See Term sheet and mandate phase in loan transactions.

This guidance note describes what is involved in the conditions precedent phase in loan transactions. This phase often overlaps with the finance documents phase in loan transactions. Once the lawyers have started to draft the finance documents, the list of conditions precedent which the borrower will need to provide to the lender (or the facility agent in a syndicated transaction) before it can draw down the loan will start to take shape.

This phase is usually the second longest phase in the transaction. The length of this phase will depend on the number of conditions precedent in the transaction and the efficiency with which the borrower provides the relevant documents.

See Conditions precedent phase in loan transactions.

Once the structure of the deal has been agreed and the term sheet agreed and signed, the parties will proceed to the key documentation phase of the transaction. This guidance note describes what is involved in this phase. For transactions with very tight deadlines, work may start on the key finance documents before a term sheet is signed. This phase will most likely be the longest phase in the transaction and could range from just a few weeks for a simple transaction to many months for complex transactions.

See Finance documents phase in loan transactions.

Signing and completion are important milestones in a loan transaction. There are two possibilities as to their timing:

• •signing and completion take place on the same day — in such cases, all the conditions precedent to funding will need to be satisfied (or have been waived) before signing and completion can take place; or
• •there is a gap between signing and completion — this allows the parties to commit to the deal on signing but leave themselves time between signing and completion to satisfy any outstanding conditions precedent to funding.

This guidance note addresses what must occur during the signing and completion phase.

See Signing and completion in loan transactions.

Once the finance documents have been signed and the conditions precedent have been satisfied (or waived in writing), there are a few final tasks that need to be undertaken before completion can take place. This guidance note outlines those pre-completion tasks, including making the necessary searches and registrations and dealing with arrangements for the transfer of funds.

See Preparing for completion in a loan transaction.

This guidance note explains what may occur after completion of a loan transaction. It looks at addressing any conditions subsequent and other administrative tasks such as collation of original documents and preparation of a transaction bible for the parties’ records. This phase should be a short phase which is completed as soon as possible but can often take longer than expected.

See Post-completion phase in loan transactions.

This guidance note explains the repayment, prepayment (both voluntary and mandatory) and cancellation provisions in a facility agreement. It also addresses how repayment provisions may differ for term loans and revolving loans, break costs and premiums associated with voluntary prepayments and the typical events which trigger mandatory prepayment. Where appropriate, this guidance note highlights relevant provisions in the Asia Pacific Loan Market Association (APLMA) Australian secured term and multicurrency revolving syndicated facility agreement.

See Repayment, prepayment and cancellation.

In financing transactions, conditions precedent are the conditions that need to be fulfilled for funding to occur. This guidance note explains:

• •the nature of conditions precedent;
• •the different types of conditions precedent (ie documentary or factual);
• •the typical conditions precedent contained in a facility agreement;
• •what needs to be taken into account when determining whether the conditions precedent have been satisfied; and
• •what happens if the conditions precedent are not satisfied.

This guidance note looks at the usual conditions precedent in a finance transaction at the time of:

• •first drawdown; and
• •future drawdowns throughout the life of the facility.

Where appropriate, this guidance note highlights relevant provisions in the Asia Pacific Loan Market Association (APLMA) Australian secured term and multicurrency revolving syndicated facility agreement.

See Conditions precedent.

This guidance note considers the meaning of representations and warranties under general contract law. It looks at their purpose in the context of financial transactions and the common types of representations found within the facility documentation. It also considers when representations are made during the life of a facility and the common negotiating points for the parties when agreeing the documentation.

Where appropriate, this guidance note highlights relevant provisions in the Asia Pacific Loan Market Association (APLMA) Australian secured term and multicurrency revolving syndicated facility agreement.

See Representations and warranties.

This guidance note addresses:

• •what undertakings, or covenants, are in the context of finance documents;
• •the usual types of undertaking found in facility documentation recording a corporate loan to an investment grade borrower (information undertakings, financial covenants and general undertakings); and
• •the common negotiating points and concerns for both the lender and borrower.

Where appropriate, this guidance note highlights relevant provisions in the Asia Pacific Loan Market Association (APLMA) Australian secured term and multicurrency revolving syndicated facility agreement.

See Undertakings (covenants).

This guidance note will specifically examine the undertaking prohibiting the creation of security which is often referred to as the negative pledge. The negative pledge provides that, with some exceptions, the borrower may not create or permit to subsist security or quasi-security over its assets in favour of a third party. This guidance note also covers the restriction on the borrower’s ability to make asset disposals typically included in facility agreements.

See Negative pledge undertaking.

This guidance note further examines negative pledges, often being one of the most important undertakings in a facility agreement. It addresses the following:

• •why negative pledge clauses are used in commercial transactions;
• •the consequences of breaching negative pledge provisions;
• •how negative pledges are viewed in the context of security and quasi-security; and
• •key considerations when drafting a negative pledge clause.

See Negative pledges.

Financial covenants are a specific type of undertaking. They are promises to meet or comply with certain financial thresholds.

This guidance note examines:

• •why financial covenants are used in finance transactions;
• •how financial covenants are selected for a particular transaction;
• •key issues which arise in the context of all financial covenants; and
• •what testing periods and compliance certificates are.

See Financial covenants — principles.

This guidance note explains:

• •the most common financial covenants used in general corporate lending, namely:
• • ◦minimum net worth or tangible net worth;
• • ◦gearing ratio;
• • ◦leverage ratio or debt to equity ratio;
• • ◦cashflow cover ratio;
• • ◦interest cover ratio; and
• • ◦loan to value ratio;
• •a typical starting point for each of those financial covenants; and
• •some items which could be included or excluded from definitions within financial covenants.

See Common financial covenants.

Most facility agreements therefore include a mechanism under which a lender can, if it chooses, take certain actions if the borrower breaches the loan agreement or certain other events occur. The events that allow the lender to take such action are normally specifically set out in the facility agreement and are referred to as “events of default”.

This guidance note considers:

• •the purpose of events of default included in facility agreements;
• •common events of default relating to borrowers and guarantors;
• •continuing events of default;
• •the differences between an event of default, default and potential event of default; and
• •alternatives for lenders to acceleration.

Where appropriate, this guidance note highlights relevant provisions in the Asia Pacific Loan Market Association (APLMA) Australian secured term and multicurrency revolving syndicated facility agreement.

See Events of default.

The concepts of material adverse change (MAC) and material adverse effect (MAE) are used in different but related ways in a typical facility agreement.

This guidance note covers:

• •points to consider when drafting and negotiating a material adverse change event of default and a material adverse effect definition;
• •declaring an event of default on the basis of the material adverse change event of default and the consequences of accelerating the loan as a result or using the event of default as a drawstop;
• •using the material adverse effect definition to qualify representations, covenants and events of default; and
• •the material adverse change representation.

See Material adverse change and material adverse effect in facility agreements.

The concepts of material adverse change (MAC) or material adverse effect (MAE) are typically included in the following three key provisions of a facility agreement:

• •the definitions clause;
• •the list of representations; and
• •the list of events of default.

This guidance note sets out:

• •a sample MAE definition with drafting notes;
• •a sample MAC representation with drafting notes; and
• •a sample MAC event of default with drafting notes.

See MAC clauses for a bilateral facility agreement.

Where an Australian tax resident borrower pays interest to a lender that is not tax resident in Australia, the borrower is required to deduct and pay to the Australian tax authority, interest withholding tax at the rate of 10%. However exceptions to this rule apply where:

• •the interest is derived by a non-resident of Australia in carrying on a business in Australia at or through a permanent establishment (ie an Australian branch); or
• •a withholding tax exemption or rate reduction applies.

This guidance note considers Australian interest withholding tax and the “public offer” exemption. It also examines loan note subscription structures (for syndicated loans of less than $100 million).

See Interest withholding tax.

A legal opinion, typically in letter form, is a document that sets out opinions as to matters of law. It is not legal advice, and should not be used as a substitute for legal advice. While opinions are expressed in the document, they are not a guarantee of a particular outcome.

The most common uses of a legal opinion include as a documentary conditions precedent, and in restructuring and insolvency scenarios. A legal opinion provides the addressee (usually a financial institution such as a bank) with information as to matters of law to enable the addressee assess the legal risks involved in a transaction. It is common place that a legal opinion is provided at the closing of a transaction (a “closing opinion”), ahead of settlement or drawdown of the first advance.

Customarily, a law firm issues a legal opinion to its own client, often the lender in a financing transaction. This is because, among other things, issuing a legal opinion to a party who is not a client of the law firm can raise issues of professional conduct, conflict of interest and breach of confidentiality.

This guidance note outlines the main purposes of a legal opinion, explains who are the typical addressees of a legal opinion, gives examples of when a legal opinion is used, considers the scope of a legal opinion, and provide some general comments relating to foreign law opinions, including when and why one may be required.

See Legal opinions — the essentials.

Legal opinions typically follow a set structure — they will start with an introduction:

• •that provides background information to the transaction; there will be a clear description of the parties involved;
• •matters relating to reliance (who can rely on the legal opinion) and disclosure (restrictions on disclosing the legal opinion) will be set out in an unambiguous manner;
• •there will be separate sections for the actual opinions as well as the assumptions and the qualifications upon which the opinions are based; and
• •matters relating to liability will be precisely stated.

This guidance note focuses on providing some key drafting points and tips so legal practitioners can properly follow the legal opinion structure and matters that need to be covered by the legal opinion.

When instructed to draft a legal opinion, legal practitioners can use the Lending — steps to be taken before issuing a legal opinion. While there are no one universally agreed set of steps that a legal practitioner must take before issuing a legal opinion, this checklist sets out some practical matters to guide a legal practitioner’s thinking.

A very common scenario is that a lender's lawyers will provide a draft legal opinion to the lender for approval before completion. Such a legal opinion is usually reviewed by the lender's in-house counsel.

With this in mind, this guidance note also focuses on providing practical tips for reviewing a draft legal opinion from the lender’s perspective. This will help legal practitioners provide feedback as well as assist in finalising the legal opinion.

See Drafting or reviewing a legal opinion.