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#10293 - Debt Finance From Lenders Perspective - Finance and Capital Markets

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COMMON TYPES OF FACILITY
OVERDRAFT TERM LOAN REVOLVING CREDIT FACILITY (RCF)
Purpose

A tool to aid cash flow by providing a reserve of easily accessible money to meet any shortfall in working capital (aka “working capital facility” (WCF))

Should be used temporarily. Once cash flow has recovered, should be used to reduce borrowing from overdraft.

 Provides company with lump sum for a specific purpose e.g. setting up business renewing assets (“capital expenditure”) or acquisitions.

  • Allows borrower to draw upon and repay tranches of the available capital as and when borrower requires.

  • Provides max. aggregate amount over specified period.

  • Combines flexibility of overdraft with certainty of term loan – borrower can draw whole loan at once and elect to repay parts it no longer requires.

  • Interest payment kept to a min.

  • WCF intending to meet borrower’s short term, fluctuating capital needs.
Basic Features

  • Current liability on balance sheet for borrower

  • No substantial documentation

  • Provided on banks ‘standard terms’. Little negotiation.

  • Subject to max. aggregate, usually a few 100k.

  • Subject to clean-down provision (see below)

  • Expensive – interest calculated on amount outstanding each day at fixed % above bank’s base rate.

  • Bank charge high fee for providing due to higher volume of admin compare to other facilities.

  • Typically borrower allowed a short period (‘availability period’) after execution during which it can utilise a lump sum up to a specified amount.

  • Availability period can be extended so money can be drawn in a number of portions (‘tranches’) when required – minimises interest payments.

  • Multicurrency term loans allows borrower to draw different pre-agreed currencies.

  • Drawn amounts can be ‘redenominated at end of an interest period.

  • Repaid in accordance with an agreed timetable – amortisation, balloon , bullet (see below)

  • Interest usually floats as fixed % above base rate (LIBOR). Can be fixed rate

  • Each tranche is usually borrowed for a relatively short period (1,3 or 6 months) after which it is technically repayable

  • Can be repaid and immediately re-drawn = “rollover”

  • Min notice period before each utilisation

  • Max and min amounts which may be drawn in one tranche.

  • Min period for which amount is borrowed is repaid

  • Max number of tranches drawn at one time.

  • Final repayment usually required in a bullet repayment, but can be restructured with a reducing availability thought its life (like amortisation repayment)

  • Commitment fee charged – calculated as a % of undrawn facility from time to time. Levied to cover capital adequacy costs.

  • Often subject to clean-down provision (see below)
Committed or uncommitted Uncommitted Committed (Usually) Committed (Usually)
On Demand Yes – must be repaid (reduced to zero) whenever bank demands. Generally not done without reason No (usually) – bank cannot withdraw facility unless the borrower defaults No
Can capital be re-borrowed once repaid? N/A No Yes - rollover
COMMON TERM LOAN REPAYMENT TIMETABLES
AMORTISATION BALLOON REPAYMENT BULLET REPAYMENT
Repayment in equal amounts at regular intervals over the term of the loan. Usually a repayment ‘holiday’ at beginning of term Repayment over several instalments where the instalment amount increase in size towards maturity Repayment in a single instalment at the end of the term of the loan
STAGES OF SYNDICATION IN A LARGE FACILITY
STAGE 1 STAGE 2 STAGE 3

  • Find a further group of banks (‘lead managers’ or ‘co-arrangers’) to provide a share of the facility with the arranger.

  • Lead managers each attempt to find more banks (‘participants’) to participate in syndicate by taking share of lead managers commitment.

  • Lead managers commonly underwrite the loan (they have to provide the whole loan if the cannot find any participants)

  • When facility is made, participating banks may sell their commitment to other banks or institutional lenders (‘secondary syndicates’).

  • Borrower will usually require the arranger to retain a substantial part of the facility (‘minimum hold’) as negotiations with arranger will be more difficult if they have little interest.
BANK’S CONCERNS
WHAT ARE ITS CONCERNS/AIMS? WHAT CLAUSES DO THEY WANT? WHAT TYPE OF CLAUSES WILL THE BANK WANT TO ACHIEVE THESE CONCERNS/AIMS

  • Its fees are paid

  • It receives interest on the loan

  • it eventually gets its loan capital back

  • The loan monies are used only for a specific purpose(s);

  • The borrower does not do anything which might put its ability to service and/or repay the loan at risk;

  • The borrower is monitored to give early warning of any possibility that it might be unable to service or repay the loan; and, in some cases,

  • All monies due to the bank are secured over the borrower’s assets
The facility agreement will need clauses to cover the use and flow of the borrowed money

  • amount and purpose of ;

  • fees;

  • interest payment;

  • repayment;

  • maturity;

  • early termination by the bank
Will need clauses designed to protect bank’s profit margin in the event that certain costs or other circumstances change

  • withholding tax is imposed (the ‘gross-up clause’);

  • regulatory capital costs increase (the ‘increased costs clause’);

  • the bank’s borrowing cost is not covered (the ‘market disruption clause’);

  • it becomes illegal for the bank to lend to the borrower (the ‘illegality clause’);

  • other unexpected costs are incurred (indemnities)
Provisions in the facility agreement allowing the bank to keep a check on the borrower’s ‘...
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