Post by Sapphire Capital on Jul 11, 2008 23:56:28 GMT 4
CLOSING
CONSIDERATIONS IN NEGOTIATING A COMMERCIAL LOAN
I. PRELIMINARY INQUIRIES
A. What is the purpose of the credit?
B. What interest rate is applicable?
(currency related, libor, fibor, etc.)
(LIBOR=LONDON INTERBANK OFFERED RATE
FIBOR=FRANKFURT INTERBANK OFFERED RATE)
C. Will funds go upstream, downstream, or to affiliates?
D. Who is borrower (or guarantors, etc.)?
1. Is it (or are they) subject to special governmental jurisdiction?
2. Are different usury limits applicable?
3. Are there any loan limit considerations?
4. Are there any affiliate lending considerations?
5. Are there any insider lending relationships subject to FIRA?(Financial Institutions Regulatory and Interest Rate Controll Act of 1978 and 1982)(Director or officer interlock between borrower and lender or any correspondent? Is borrower or affiliate of borrower significant shareholder of lender or correspondent of lender?)
E. What are the primary sources of repayment?
1. Credit of:
a. Borrower?
b. Parent?
c. Subsidiary(ies)?
d. Customer(s)?
e. ESOP?(Employee Security and Pensions)
2. Is cash flow adequately protected?
3. Is there any subordinated debt and is it properly subordinated?
F. Collateral or use of proceeds
1. To what extent is collateral to be granted?
a. Perfected security interests and liens
b. Right to call for collateral
(1) At will or upon certain event
(2) When other debt is secured
c. Negative pledge
2. Does nature of collateral or use of proceeds raise special considerations?
a. Regulation U?(no answer needed)
b. FIRA (pledge of bank stock)?
c. Peculiar perfection statutes (e.g., assignment of government claim, nt, trademar, copyright, operating authority, or FCC license or lien on documented vessel or aircraft)?
d. Significant filing fees or stamp taxes?
e. Choice of law issues?
II. CREDIT AGREEMENT
A. Preliminary Considerations
1. Term loan, revolving credit, hybrid, or other?
2. Names, legal nature, and roles of all parties?
3. Multiple lenders? Agent bank?
B. Commitment to lend
1. Amount committed
2. Advances
a. Number, frequency, and minimum amounts
b. Method of request
c. Place and time of funding
d. Type of funds
3. Expiration of commitment
4. Reduction or termination of commitment
C. Terms of Payment
1. Principal payment dates
2. Interest payment dates
3. Interest rate
a. Fixed
b. Variable rates keyed to:
(1) Prime
(2) Secondary certificate of deposit rate
(3) Eurodollar rate
(4) Commercial paper market rate
(5) Federal Reserve rediscount rate
c. Highest lawful rate
d. Computation on 360-or 365-day years (also applies to
fees, etc.)
4. Penalty rate for late payment
a. Past due principal
b. Past due accrued interest
5. Prepayments
a. Mandatory
b. Voluntary
(1) Premium or penalty
(2) Notice (irrevocability)
(3) Minimum amounts
(4) With all accrued interest
(5) Limitation or specification of sources
(6) Order of application (preferably inverse)
6. Fees
a. Origination fee (front-end charge on total loan)
b. Servicing fee (periodic):
(1) Keyed to total loan?
(2) Keyed to usage?
c. Commitment fee (if not immediate and full disbursement
of funds):
(1) Keyed to unused portion?
(2) Keyed to cmmitment plus usage?
d. Compensating balance deficiency fee
7. Order of application of proceeds
a. Unreimbursed expenses
b. Fees
c. Accrued interest
d. Principal
e. Other
8. Delay any payment due on nonbusiness day
9. Evidence of indebtedness(notes)
D. Security
1. Guaranties
a. All subsidaries?
b. Other?
2. Collateral
3. Cash collateral account or look box
a. Any usury implications?
b. Source of deposits?
c. Use of funds (investment by lender)?
d. When can borrower make withdrawals?
e. Application to loan balance?
4. Secured Obliation
a. Limited to instant loan(s) or inclusive of other existing
debt and future debt?
b. Interest?
c. Collection expenses?
d. Renewals and extensions?
E. Representations and Warranties-determine to which subsidiaries
and /or affiliates each representation applies
1. Existence, authority, and qualification (corporate, partnership, or other)
2. Power, authority, and all apropriate licenses and permits to
(a) conduct business (materiality), and (b) consummate loan
transaction
3. No governmental approval required; statement of extent of
government control
4. Ownership of subsidiaries-list of subsidiaries
5. Trade names in past five years
6. Insider relationship with lender-FIRA
7. Financial statements
a. Consolidated and /or consolidating?
b. Pro forma?
c. GAAP and fairly present position and results
d. No undisclosed material liabilities
e. No undisclosed material adverse change
8. Existing or potential defaults under or violations of (whether
caused by loan transaction or not):
a. Organizational documents (articles and bylaws or partner-ship agreement)
b. Other agreements (materiality)
c. Laws
(1) Materiality
(2) ERISA (unless separate representation)
(3) Other laws peculiarly applicable
9. Existing or potential litigation (materiality)
10. Existing judgments (materiality)
11. Taxes
a. Filed all requisite returns (materiality)
b. Paid all taxes except those contested in good faith and adequate
reserves established
c. Provisions adequate for current year
12. ERISA (unless included in representation as to compliance with all laws)
a. No defined benefit plans or multiemployer plans; or
b. No material accumulated funding deficiencies, no material liability to PBGC, no withdrawal from multiemployer plan, and no prohibited transactions or
reportable events
13. Title to assets
a. Good and marketable title to properties reflected in current financials
b. All leases (materiality) in full force and effect
c. All requisite trademarks, service marks, patents, etc. in full force and effect
14. Existing liens
a. None except:
(1) Scheduled
(2) Permitted by covenants
(3) Materiality
b. No negative pledges
15. Existing indebtedness and obligations
a. Scope
(1) All contractual obligations?
(2) Only indebtedness for borrowed money?
b. None except:
(1) Scheduled
(2) Permitted by covenants
(3) Materiality
16. Other contracts and agreements-none except:
a. Scheduled
b. Permitted by covenants
c. Materiality
17. Purpose of loan proceeds
a. Proper corporate purposes
b. Regulation U compliance
c. Funding payroll (creates witholding tax concerns)
d. Payment of specified existing debt or obligations
18. Collateral
a. Title
b. Full force and effect (assigned contracts, etc.)
c. Perfection and / or priority
d. Location of collateral (or of books and records related thereto)
e. Other as to specific types of collateral (e.g., Rule 144 stock)
19. General
a. Other material facts
b. Genuineness of all writings
20. Representations and warranties peculiar to the particular borrower, its business or subsidiaries, and the use of the loan proceeds
F. Conditions Precedent
1. For initial advance (or closing if a single advance)
a. Organizational certifications (to which subsidiaries and/or affiliates do these apply?)
(1) Articles of Incorporation
(2) Bylaws
(3) Certificate(s) of corporate existence and good standing
(4) Certificate(s) of qualification as foreign corporation(s)
and good standing
(5) Resolutions
(6) Incumbency
(7) Partnership Agreement
(Cool Certificate of Limited Partnership
(9) Declaration of Trust
(10) Other
b. Legal opinions
(1) Opinion of counsel for borrower, including:
a) Certain representations are true and correct
(should include representations as to existence and status, ownership of subsidiaries, authority approval by tribunals, and others that are peculiar to the loan)
(b) To the best of their knowledge, after reasonable investigation, certain other representations are true and correct (concerning litigation, compliance with laws, defaults under other documents, judgments, taxes, existing liens existing debt, existing material agreements, and others that are peculiar to the loan)
(c)Due authorization of loan papers evidences valid and binding obligations
(d) Satisfaction of all conditions precedent
(e) Other specific opinions peculiar to the particular loan
(f) Such other matters as lender may request
(2) Opinion of counsel for lender
(a) Loan papers evidence valid and binding obligations
(b) Such other matters as lender may request
c. Promissory note(s)
d. Guaranty(ies) (or comfort letter, note purchase agreement, or other take-out)
e. Subordination Agreements (intercompany, all affiliates, and/or oher)
f. Stock collateral
(1) Pledge Agreement
(2) Stock certificates and stock powers
(3) Regulation U Purpose Statements
(4) Certificate of secretary of issuer of stock as to capitalization, etc.
(5) Rule 144 certifications, if appropriate
g. Real property collateral
(1) Deed(s) of trust or mortgage(s)
(2) Financing statement(s)
(3) Title report(s)
(4) Title policy(ies)
(5) Survey(s)
(6) Estoppel and consent certificates from landlords,
prior mortgagees, and landlord mortgagees
h. Other collateral
(1) Security agreement(s)
(2) Financing statement(s)
(3) Certificate(s) of UCC search(es)
(4) Certificate(s) of title
(5) Receipt of possession and proper endorsement or all items to be pledged
i. Assignment(s) of life insurance policy(ies) and copy(ies) of policy(ies)
j. Schedule of insurance and copy(ies) of policy(ies)
k. Copies of all other material (especially financing agreements
l. Compliance certificate (no default and representations still true)
m. All other items required by lender
n. Items peculiar to the particular loan
2. For each advance
a. Any items listed above for the initial advance which should be also required or each subsequent advance
b. Written request or application
c. Representations are true and correct
d. No default
e. Availability of commitment
f. Additional collateral documentation
3. Waivers (some provision for disbursement without all conditions having been met, and the effect thereof)
G. Affirmative Covenants. Determine (i) to which subsidiaries and/or affiliates each covenant applies, and (ii) whether covenant is designed to actually restrict or to serve as an indication of problems developing
1. Selection of affirmative and negative covenants depends upon function desired. Covenants can generally be classified as those designed to:
a. Require disclosure of relevant information
b. Require conformity to sound businees practices
c. Prohibit material changes in structure or nature of businees
d. Maintain financial integrity:
(1) Balance sheet or net worth
(2) Income statement or liquidity
e. Protect collateral and other assets
f. Impose restrictions addressing peculiar needs or particular situation
2. Use proceeds as represented
3. Keep proper books and records
4. Financial statements
a. Consolidated and/or consolidating?
b. Annual (audited)
c. Quarterly and/or monthly (unaudited)
d. Compliance certificate from officers and/or independent auditors
5. Notices of:
a. Changes in material facts
b. Litigation
c. Defaults or potential defaults
d. ERISA (notifications from PBGC, reportable events, or
termination events)
6. Copies of all public and shareholder reports
7. Pay taxes and file all returns when due, unless contested in
good faith, adequate reseves are established, and no lien
filed or, if filed, bonded against
8. Pay all debts and obligations, unless contested in good faith and adequate reserves are established
9. Pay expenses of lender related to loan agreement and amendments even if loan never closes and related to enforcement of rights
10. Maintenance of existence (partnership, corporate, etc.)
11. Maintenace of assets and businees
12. Maintenance of insurance
a. Amount (book value, replacement value, loan amount)
b. Type(s) (perils and property)
c. In favor of whom
d. Report
e. Maintain all assigned insurance
f. Standard mortgagee clause
13. Demand deposit balances (or pay fee in lieu of balances)
14. Compliance with laws and agreements
15. Additional guaranties
16. Additional affiliate subordination agreements
17. Additional documents to maintain and to perfect (and to maintain priority of ) liens and security interests
18. Collateral maintenance agreements
19. Lock-box account
20. Additional information requested by lender
21. Permit lender to inspect books and premises and confer with officers and directors
22. Covenants peculiar to particular loan
H. Negative Covenants.
Determine (i) to which subsidiaries and/or affiliates each covenant applies, and
(ii) whether covenant is designed to actually restrict or to serve as an indication of problems developing.
1. Limitation on debt (Query: What is included in definition of debt ?); consider permitting:
a. Subject loan
b. Existing debt and renewals thereof
c. Other specified debt
d. Intercompany debt if
(1) Fully subordinated, or
(2) Owed by an obligor (borrower or guarantor) on subject loan
e. Contractual obligations otherwise permitted
f. Capitalized leases otherwise permitted
g. Contingent liabilities otherwise permitted
h. Other debt, subject to limitation based on:
(1) Dollar amount, or
(2) Financial ratios (e.g., debt-to- worth, interest
coverage, etc.)
2. No prepayment or amendment of other debt
3. Limitation on contractual obligations (Query: What is included in contractual obligation”that is not already covered in definition of debt?); consider permitting:
a. Existing contractual obligations
b. Obligations to pay taxes
c. Accounts payable in the ordinary course of business
d. Salaries and wages
e. Other, subject to limitations in other covenants
4. Limitations on contingent liabilities; consider permitting:
a. Any guaranties of instant credit
b. Existing contingent liabilities
c. Intercompany contingent liabilities
d. Endorsements for deposit or collection
e. Other, subject to limitations in other covenants
5. Limitation on capital expenditures
6. Limitation on lease obligations
7. Limitation on insider compensation
8. No liens (and no negative covenants in other financil agreements against creating liens) except:
a. Liens in favor of lender
b. Existing liens and renewals thereof
c. Other specified liens
d. Liens for taxes:
(1) Not yet due and payable (inchoate)
(2) Property contested and reserves, etc., established
e. Landlord liens (not yet due and payable-inchoate)
f. Mechanic_s liens
(1) Not yet due and payable (inchoate)
(2) Properly contested and reserves, etc., established
g. Purchase-money liens related to the asset purchased
h. Liens under capitalized leases related only to the assets leased
i. Pledges or deposits related to employment insurance, ect.
j. Pledges or deposits to secure bids, tenders, contracts, bonds, etc.
k. Zoning and similar restrictions on real property
l. Stayed liens arising in connection with contested claims, etc.
9. No acquisitions, mergers, or dissolutions
10. Limitation on loans, advances, and investments; consider permitting:
a. Intercompany advances which also constitute permitted debt
b. Investments in current obligations of, or guaranteed by the U.S.
c. Certificates of deposit issued by commercial banks
d. Current trade and customer receivables incurred in ordinary course of business on customary trade terms (dollar limit)
e. Other (dollar limit)
11. Limitation on dividends (other than in stock), redemptions, and other distributions to equity holders; consider permitting cash dividends up to certain percentages of accumulated net income
12. No issuance of securities, convertible instruments, carrying rights, or warrants
13. No sales of assets; consider permitting:
a. Sales of inventory in ordinary course of business
b. Replacement of equipment
14. No transactions with affiliates except in armslength transactions
15. ERISA
a. No prohibited transactions
b. No funding deficiencies
c. No termination
16. No change in location of collateral(or books and records related thereto)
17. No new businees
18. No changes in fiscal year or accounting methods
19. No attempted assignment
20. Negative covenants pecutiar to particular loan
I. Financial Tests(usually Negative Covenants)
1. Preliminary considerations
a. Determine to which subsidiaries and/or affiliates each test applies
b. what is purpose/scope of the test?
(1) Maintenance-must be in compliance at all times?
(2) Incurrence-must be in compliance immediately after an event(e.g., the creation of additional debt or liens) for the event to be permitted?
c. To what period(s) does the test apply?
(1) At all times while debt is outstanding?
(2) Each fiscal year(or quarter or month)?
(3) Each 12-month period ending on or after date of loan agreement?
d. What is the purpose of the test?
(1) Protect overall financial position(balance sheet)?
(2) Protect liquidity(income statement)?
2. Net worth tests
a. Preliminary considerations
(1) what is included in net worth? Only tangible assets?
How is subordinated debt treated?
(2) Is the test intended to be a maintenace or an incurrence test?
b. Minimum net worth(dollar amount)
c. Debt-to-worth ratio
3. Liquidity tests
a. Minimum “cash”position
(1) Balance sheet “cash”(cash and marketable securities)
(2) Dollar limit, ratio to revenues, or etc.
b. Minimum working capital
(1) Do you exclude perpaid expenses, other than insurance, from current assets?
(2) Dollar limit, ratio to long-term or total debt, or etc.
c. Minimum current ratio
(1) Current assets-to current liabilities
(2) Current “quick” assets-to-current liabilities
d. Cash flow (or net income)tests
(1) Definition of cash flow
(a) Limited to income from operations?
(b) Allow provision for taxes actually payable with respect thereto?
(c) Allow inclusion of
(i) depreciation
(ii) all other noncash charges
(iii) other?
(2) Keyed to:
(a) Minimum ratio of cash folw-to-:
(i) Principal payments in that period
(ii) Interest payments in that period
(iii) Capital expenditures in that period
(iv)Capitalized lease payments in that period
(v) Other
(vi) Some combination of (i) through (v)
(b) Maximum ratios of the following to cash flow:
(i) Expenses for continuing operations
(ii) Current debt
(iii) Other
(iv) Some combination of (i) through(iii)
J. Events of Default-Determine to which subsidiaries and/or affiliates each default applies and what is effect of waiver
1. Failure to pay obligation(consider five days grace, especially on nonprincipal)
2. Failure to keep or perform covenants(consider 20 days grace on affirmative covenants, but none on negative covenants)
3. Debtor relief (bankruptcy):
a. become insolvent
b. Fail to pay debts generally as become due
c. Apply for, consent to, or acquiesce in any debtor relief proceedings
d. Failure to discharge other petitions in 60 days
4. Attachment(materiality; grace period)
5. Payment of judgments(materiality;grace period)
6. Antitrust proceedings
7. Nonpayment of other debt(materiatity; grace period)
8. Acceleration of other debt(materiality; grace period)
9. Impairment of collateral or ability to pay
10. Misrepresentation
K. Remedies and Rights of Lender
1. What events cause automatic acceleration(e.g., bankruptcy)?
2. Remedies after default:
a. Acceleration
b. Judgment
c. Foreclosure on collateral
d. Performance
e. Termination of commitment
f. Offset
g. All other rights and remedies by law, equity, or otherwise
3. Non-waiver of defaults
4. Lender not liable for diminution of collateral value
5. Cumulative remedies available
6. Interest during default (supra)
7. Application of proceeds (supra)
8. Attorneys_fees and other expenses(supra)
9. Lender not in control
10. Indemnification of lender
L. Miscellaneous
1. Accounting terms
a. Applicability of GAAP
b. Effect of changes in GAAP-alternatives:
(1) Thereafter keep two sets of financials
(2) Moratorium on covenants until mutually amended
(3) Covenants deemed amended to give effect to changes
2. References explained:
a. Money
b. Headings
c. Exhibits
b. Number and gender of words
3. Notices
4. Form, number, and substance of all documents subject to lender approval
5. No exception to any covenant permitted if another covenant would be violated
6. Survival of representations and covenants
7. Governing law
8. Usury savings clause
9. Invalid provisions; severability clause
10. Statement as to entirety of agreement and method of amendment
11. Execution in multiple counterparts
12. Parties bound
a. Borrower cannot assign
b. Lender can sell participations
13. Termination of any prior loan agreements
CONSIDERATIONS IN NEGOTIATING A COMMERCIAL LOAN
I. PRELIMINARY INQUIRIES
A. What is the purpose of the credit?
B. What interest rate is applicable?
(currency related, libor, fibor, etc.)
(LIBOR=LONDON INTERBANK OFFERED RATE
FIBOR=FRANKFURT INTERBANK OFFERED RATE)
C. Will funds go upstream, downstream, or to affiliates?
D. Who is borrower (or guarantors, etc.)?
1. Is it (or are they) subject to special governmental jurisdiction?
2. Are different usury limits applicable?
3. Are there any loan limit considerations?
4. Are there any affiliate lending considerations?
5. Are there any insider lending relationships subject to FIRA?(Financial Institutions Regulatory and Interest Rate Controll Act of 1978 and 1982)(Director or officer interlock between borrower and lender or any correspondent? Is borrower or affiliate of borrower significant shareholder of lender or correspondent of lender?)
E. What are the primary sources of repayment?
1. Credit of:
a. Borrower?
b. Parent?
c. Subsidiary(ies)?
d. Customer(s)?
e. ESOP?(Employee Security and Pensions)
2. Is cash flow adequately protected?
3. Is there any subordinated debt and is it properly subordinated?
F. Collateral or use of proceeds
1. To what extent is collateral to be granted?
a. Perfected security interests and liens
b. Right to call for collateral
(1) At will or upon certain event
(2) When other debt is secured
c. Negative pledge
2. Does nature of collateral or use of proceeds raise special considerations?
a. Regulation U?(no answer needed)
b. FIRA (pledge of bank stock)?
c. Peculiar perfection statutes (e.g., assignment of government claim, nt, trademar, copyright, operating authority, or FCC license or lien on documented vessel or aircraft)?
d. Significant filing fees or stamp taxes?
e. Choice of law issues?
II. CREDIT AGREEMENT
A. Preliminary Considerations
1. Term loan, revolving credit, hybrid, or other?
2. Names, legal nature, and roles of all parties?
3. Multiple lenders? Agent bank?
B. Commitment to lend
1. Amount committed
2. Advances
a. Number, frequency, and minimum amounts
b. Method of request
c. Place and time of funding
d. Type of funds
3. Expiration of commitment
4. Reduction or termination of commitment
C. Terms of Payment
1. Principal payment dates
2. Interest payment dates
3. Interest rate
a. Fixed
b. Variable rates keyed to:
(1) Prime
(2) Secondary certificate of deposit rate
(3) Eurodollar rate
(4) Commercial paper market rate
(5) Federal Reserve rediscount rate
c. Highest lawful rate
d. Computation on 360-or 365-day years (also applies to
fees, etc.)
4. Penalty rate for late payment
a. Past due principal
b. Past due accrued interest
5. Prepayments
a. Mandatory
b. Voluntary
(1) Premium or penalty
(2) Notice (irrevocability)
(3) Minimum amounts
(4) With all accrued interest
(5) Limitation or specification of sources
(6) Order of application (preferably inverse)
6. Fees
a. Origination fee (front-end charge on total loan)
b. Servicing fee (periodic):
(1) Keyed to total loan?
(2) Keyed to usage?
c. Commitment fee (if not immediate and full disbursement
of funds):
(1) Keyed to unused portion?
(2) Keyed to cmmitment plus usage?
d. Compensating balance deficiency fee
7. Order of application of proceeds
a. Unreimbursed expenses
b. Fees
c. Accrued interest
d. Principal
e. Other
8. Delay any payment due on nonbusiness day
9. Evidence of indebtedness(notes)
D. Security
1. Guaranties
a. All subsidaries?
b. Other?
2. Collateral
3. Cash collateral account or look box
a. Any usury implications?
b. Source of deposits?
c. Use of funds (investment by lender)?
d. When can borrower make withdrawals?
e. Application to loan balance?
4. Secured Obliation
a. Limited to instant loan(s) or inclusive of other existing
debt and future debt?
b. Interest?
c. Collection expenses?
d. Renewals and extensions?
E. Representations and Warranties-determine to which subsidiaries
and /or affiliates each representation applies
1. Existence, authority, and qualification (corporate, partnership, or other)
2. Power, authority, and all apropriate licenses and permits to
(a) conduct business (materiality), and (b) consummate loan
transaction
3. No governmental approval required; statement of extent of
government control
4. Ownership of subsidiaries-list of subsidiaries
5. Trade names in past five years
6. Insider relationship with lender-FIRA
7. Financial statements
a. Consolidated and /or consolidating?
b. Pro forma?
c. GAAP and fairly present position and results
d. No undisclosed material liabilities
e. No undisclosed material adverse change
8. Existing or potential defaults under or violations of (whether
caused by loan transaction or not):
a. Organizational documents (articles and bylaws or partner-ship agreement)
b. Other agreements (materiality)
c. Laws
(1) Materiality
(2) ERISA (unless separate representation)
(3) Other laws peculiarly applicable
9. Existing or potential litigation (materiality)
10. Existing judgments (materiality)
11. Taxes
a. Filed all requisite returns (materiality)
b. Paid all taxes except those contested in good faith and adequate
reserves established
c. Provisions adequate for current year
12. ERISA (unless included in representation as to compliance with all laws)
a. No defined benefit plans or multiemployer plans; or
b. No material accumulated funding deficiencies, no material liability to PBGC, no withdrawal from multiemployer plan, and no prohibited transactions or
reportable events
13. Title to assets
a. Good and marketable title to properties reflected in current financials
b. All leases (materiality) in full force and effect
c. All requisite trademarks, service marks, patents, etc. in full force and effect
14. Existing liens
a. None except:
(1) Scheduled
(2) Permitted by covenants
(3) Materiality
b. No negative pledges
15. Existing indebtedness and obligations
a. Scope
(1) All contractual obligations?
(2) Only indebtedness for borrowed money?
b. None except:
(1) Scheduled
(2) Permitted by covenants
(3) Materiality
16. Other contracts and agreements-none except:
a. Scheduled
b. Permitted by covenants
c. Materiality
17. Purpose of loan proceeds
a. Proper corporate purposes
b. Regulation U compliance
c. Funding payroll (creates witholding tax concerns)
d. Payment of specified existing debt or obligations
18. Collateral
a. Title
b. Full force and effect (assigned contracts, etc.)
c. Perfection and / or priority
d. Location of collateral (or of books and records related thereto)
e. Other as to specific types of collateral (e.g., Rule 144 stock)
19. General
a. Other material facts
b. Genuineness of all writings
20. Representations and warranties peculiar to the particular borrower, its business or subsidiaries, and the use of the loan proceeds
F. Conditions Precedent
1. For initial advance (or closing if a single advance)
a. Organizational certifications (to which subsidiaries and/or affiliates do these apply?)
(1) Articles of Incorporation
(2) Bylaws
(3) Certificate(s) of corporate existence and good standing
(4) Certificate(s) of qualification as foreign corporation(s)
and good standing
(5) Resolutions
(6) Incumbency
(7) Partnership Agreement
(Cool Certificate of Limited Partnership
(9) Declaration of Trust
(10) Other
b. Legal opinions
(1) Opinion of counsel for borrower, including:
a) Certain representations are true and correct
(should include representations as to existence and status, ownership of subsidiaries, authority approval by tribunals, and others that are peculiar to the loan)
(b) To the best of their knowledge, after reasonable investigation, certain other representations are true and correct (concerning litigation, compliance with laws, defaults under other documents, judgments, taxes, existing liens existing debt, existing material agreements, and others that are peculiar to the loan)
(c)Due authorization of loan papers evidences valid and binding obligations
(d) Satisfaction of all conditions precedent
(e) Other specific opinions peculiar to the particular loan
(f) Such other matters as lender may request
(2) Opinion of counsel for lender
(a) Loan papers evidence valid and binding obligations
(b) Such other matters as lender may request
c. Promissory note(s)
d. Guaranty(ies) (or comfort letter, note purchase agreement, or other take-out)
e. Subordination Agreements (intercompany, all affiliates, and/or oher)
f. Stock collateral
(1) Pledge Agreement
(2) Stock certificates and stock powers
(3) Regulation U Purpose Statements
(4) Certificate of secretary of issuer of stock as to capitalization, etc.
(5) Rule 144 certifications, if appropriate
g. Real property collateral
(1) Deed(s) of trust or mortgage(s)
(2) Financing statement(s)
(3) Title report(s)
(4) Title policy(ies)
(5) Survey(s)
(6) Estoppel and consent certificates from landlords,
prior mortgagees, and landlord mortgagees
h. Other collateral
(1) Security agreement(s)
(2) Financing statement(s)
(3) Certificate(s) of UCC search(es)
(4) Certificate(s) of title
(5) Receipt of possession and proper endorsement or all items to be pledged
i. Assignment(s) of life insurance policy(ies) and copy(ies) of policy(ies)
j. Schedule of insurance and copy(ies) of policy(ies)
k. Copies of all other material (especially financing agreements
l. Compliance certificate (no default and representations still true)
m. All other items required by lender
n. Items peculiar to the particular loan
2. For each advance
a. Any items listed above for the initial advance which should be also required or each subsequent advance
b. Written request or application
c. Representations are true and correct
d. No default
e. Availability of commitment
f. Additional collateral documentation
3. Waivers (some provision for disbursement without all conditions having been met, and the effect thereof)
G. Affirmative Covenants. Determine (i) to which subsidiaries and/or affiliates each covenant applies, and (ii) whether covenant is designed to actually restrict or to serve as an indication of problems developing
1. Selection of affirmative and negative covenants depends upon function desired. Covenants can generally be classified as those designed to:
a. Require disclosure of relevant information
b. Require conformity to sound businees practices
c. Prohibit material changes in structure or nature of businees
d. Maintain financial integrity:
(1) Balance sheet or net worth
(2) Income statement or liquidity
e. Protect collateral and other assets
f. Impose restrictions addressing peculiar needs or particular situation
2. Use proceeds as represented
3. Keep proper books and records
4. Financial statements
a. Consolidated and/or consolidating?
b. Annual (audited)
c. Quarterly and/or monthly (unaudited)
d. Compliance certificate from officers and/or independent auditors
5. Notices of:
a. Changes in material facts
b. Litigation
c. Defaults or potential defaults
d. ERISA (notifications from PBGC, reportable events, or
termination events)
6. Copies of all public and shareholder reports
7. Pay taxes and file all returns when due, unless contested in
good faith, adequate reseves are established, and no lien
filed or, if filed, bonded against
8. Pay all debts and obligations, unless contested in good faith and adequate reserves are established
9. Pay expenses of lender related to loan agreement and amendments even if loan never closes and related to enforcement of rights
10. Maintenance of existence (partnership, corporate, etc.)
11. Maintenace of assets and businees
12. Maintenance of insurance
a. Amount (book value, replacement value, loan amount)
b. Type(s) (perils and property)
c. In favor of whom
d. Report
e. Maintain all assigned insurance
f. Standard mortgagee clause
13. Demand deposit balances (or pay fee in lieu of balances)
14. Compliance with laws and agreements
15. Additional guaranties
16. Additional affiliate subordination agreements
17. Additional documents to maintain and to perfect (and to maintain priority of ) liens and security interests
18. Collateral maintenance agreements
19. Lock-box account
20. Additional information requested by lender
21. Permit lender to inspect books and premises and confer with officers and directors
22. Covenants peculiar to particular loan
H. Negative Covenants.
Determine (i) to which subsidiaries and/or affiliates each covenant applies, and
(ii) whether covenant is designed to actually restrict or to serve as an indication of problems developing.
1. Limitation on debt (Query: What is included in definition of debt ?); consider permitting:
a. Subject loan
b. Existing debt and renewals thereof
c. Other specified debt
d. Intercompany debt if
(1) Fully subordinated, or
(2) Owed by an obligor (borrower or guarantor) on subject loan
e. Contractual obligations otherwise permitted
f. Capitalized leases otherwise permitted
g. Contingent liabilities otherwise permitted
h. Other debt, subject to limitation based on:
(1) Dollar amount, or
(2) Financial ratios (e.g., debt-to- worth, interest
coverage, etc.)
2. No prepayment or amendment of other debt
3. Limitation on contractual obligations (Query: What is included in contractual obligation”that is not already covered in definition of debt?); consider permitting:
a. Existing contractual obligations
b. Obligations to pay taxes
c. Accounts payable in the ordinary course of business
d. Salaries and wages
e. Other, subject to limitations in other covenants
4. Limitations on contingent liabilities; consider permitting:
a. Any guaranties of instant credit
b. Existing contingent liabilities
c. Intercompany contingent liabilities
d. Endorsements for deposit or collection
e. Other, subject to limitations in other covenants
5. Limitation on capital expenditures
6. Limitation on lease obligations
7. Limitation on insider compensation
8. No liens (and no negative covenants in other financil agreements against creating liens) except:
a. Liens in favor of lender
b. Existing liens and renewals thereof
c. Other specified liens
d. Liens for taxes:
(1) Not yet due and payable (inchoate)
(2) Property contested and reserves, etc., established
e. Landlord liens (not yet due and payable-inchoate)
f. Mechanic_s liens
(1) Not yet due and payable (inchoate)
(2) Properly contested and reserves, etc., established
g. Purchase-money liens related to the asset purchased
h. Liens under capitalized leases related only to the assets leased
i. Pledges or deposits related to employment insurance, ect.
j. Pledges or deposits to secure bids, tenders, contracts, bonds, etc.
k. Zoning and similar restrictions on real property
l. Stayed liens arising in connection with contested claims, etc.
9. No acquisitions, mergers, or dissolutions
10. Limitation on loans, advances, and investments; consider permitting:
a. Intercompany advances which also constitute permitted debt
b. Investments in current obligations of, or guaranteed by the U.S.
c. Certificates of deposit issued by commercial banks
d. Current trade and customer receivables incurred in ordinary course of business on customary trade terms (dollar limit)
e. Other (dollar limit)
11. Limitation on dividends (other than in stock), redemptions, and other distributions to equity holders; consider permitting cash dividends up to certain percentages of accumulated net income
12. No issuance of securities, convertible instruments, carrying rights, or warrants
13. No sales of assets; consider permitting:
a. Sales of inventory in ordinary course of business
b. Replacement of equipment
14. No transactions with affiliates except in armslength transactions
15. ERISA
a. No prohibited transactions
b. No funding deficiencies
c. No termination
16. No change in location of collateral(or books and records related thereto)
17. No new businees
18. No changes in fiscal year or accounting methods
19. No attempted assignment
20. Negative covenants pecutiar to particular loan
I. Financial Tests(usually Negative Covenants)
1. Preliminary considerations
a. Determine to which subsidiaries and/or affiliates each test applies
b. what is purpose/scope of the test?
(1) Maintenance-must be in compliance at all times?
(2) Incurrence-must be in compliance immediately after an event(e.g., the creation of additional debt or liens) for the event to be permitted?
c. To what period(s) does the test apply?
(1) At all times while debt is outstanding?
(2) Each fiscal year(or quarter or month)?
(3) Each 12-month period ending on or after date of loan agreement?
d. What is the purpose of the test?
(1) Protect overall financial position(balance sheet)?
(2) Protect liquidity(income statement)?
2. Net worth tests
a. Preliminary considerations
(1) what is included in net worth? Only tangible assets?
How is subordinated debt treated?
(2) Is the test intended to be a maintenace or an incurrence test?
b. Minimum net worth(dollar amount)
c. Debt-to-worth ratio
3. Liquidity tests
a. Minimum “cash”position
(1) Balance sheet “cash”(cash and marketable securities)
(2) Dollar limit, ratio to revenues, or etc.
b. Minimum working capital
(1) Do you exclude perpaid expenses, other than insurance, from current assets?
(2) Dollar limit, ratio to long-term or total debt, or etc.
c. Minimum current ratio
(1) Current assets-to current liabilities
(2) Current “quick” assets-to-current liabilities
d. Cash flow (or net income)tests
(1) Definition of cash flow
(a) Limited to income from operations?
(b) Allow provision for taxes actually payable with respect thereto?
(c) Allow inclusion of
(i) depreciation
(ii) all other noncash charges
(iii) other?
(2) Keyed to:
(a) Minimum ratio of cash folw-to-:
(i) Principal payments in that period
(ii) Interest payments in that period
(iii) Capital expenditures in that period
(iv)Capitalized lease payments in that period
(v) Other
(vi) Some combination of (i) through (v)
(b) Maximum ratios of the following to cash flow:
(i) Expenses for continuing operations
(ii) Current debt
(iii) Other
(iv) Some combination of (i) through(iii)
J. Events of Default-Determine to which subsidiaries and/or affiliates each default applies and what is effect of waiver
1. Failure to pay obligation(consider five days grace, especially on nonprincipal)
2. Failure to keep or perform covenants(consider 20 days grace on affirmative covenants, but none on negative covenants)
3. Debtor relief (bankruptcy):
a. become insolvent
b. Fail to pay debts generally as become due
c. Apply for, consent to, or acquiesce in any debtor relief proceedings
d. Failure to discharge other petitions in 60 days
4. Attachment(materiality; grace period)
5. Payment of judgments(materiality;grace period)
6. Antitrust proceedings
7. Nonpayment of other debt(materiatity; grace period)
8. Acceleration of other debt(materiality; grace period)
9. Impairment of collateral or ability to pay
10. Misrepresentation
K. Remedies and Rights of Lender
1. What events cause automatic acceleration(e.g., bankruptcy)?
2. Remedies after default:
a. Acceleration
b. Judgment
c. Foreclosure on collateral
d. Performance
e. Termination of commitment
f. Offset
g. All other rights and remedies by law, equity, or otherwise
3. Non-waiver of defaults
4. Lender not liable for diminution of collateral value
5. Cumulative remedies available
6. Interest during default (supra)
7. Application of proceeds (supra)
8. Attorneys_fees and other expenses(supra)
9. Lender not in control
10. Indemnification of lender
L. Miscellaneous
1. Accounting terms
a. Applicability of GAAP
b. Effect of changes in GAAP-alternatives:
(1) Thereafter keep two sets of financials
(2) Moratorium on covenants until mutually amended
(3) Covenants deemed amended to give effect to changes
2. References explained:
a. Money
b. Headings
c. Exhibits
b. Number and gender of words
3. Notices
4. Form, number, and substance of all documents subject to lender approval
5. No exception to any covenant permitted if another covenant would be violated
6. Survival of representations and covenants
7. Governing law
8. Usury savings clause
9. Invalid provisions; severability clause
10. Statement as to entirety of agreement and method of amendment
11. Execution in multiple counterparts
12. Parties bound
a. Borrower cannot assign
b. Lender can sell participations
13. Termination of any prior loan agreements