CHAPTER 10 CREDIT FACILITIES -- FIFTEEN ISSUES FOR THE BORROWER AND ITS COUNSEL1
| Jurisdiction | United States |
(May 2006)
CREDIT FACILITIES -- FIFTEEN ISSUES FOR THE BORROWER AND ITS COUNSEL1
Kelly N. Matthews
Holme Roberts & Owen LLP
Denver, Colorado
PETER O. HANSEN
Peter O. Hansen, a partner in the Denver office of Holme Roberts & Owen LLP, joined the firm in 1996. His practice focuses on general commercial and corporate transactions, with an emphasis on financing and energy and natural resources transactions. He has represented both borrowers and lenders in large secured and unsecured commercial loan and credit transactions, and has represented companies in the issuance of and compliance with debt securities and tender offers and consent solicitations for debt securities. He also has represented developers, operators, investors and public utility site hosts in numerous transactions involving tax credits under Section 29 of the Internal Revenue Code. Peter is a member of the firm's opinion committee. Education: J.D., University of Denver, 1995; M.B.A., Daniels College of Business, University of Denver, 1995; B.A., University of Colorado, 1990; Order of St. Ives, 1995; Phi Beta Kappa, 1990. Admitted in Colorado since 1996.
KELLY N. MATTHEWS
Kelly N. Matthews, a partner in the Denver office of Holme Roberts & Owen LLP, joined the firm in October 2001. Kelly practices in the areas of general corporate and commercial law, with an emphasis on secured and unsecured commercial loan and credit transactions, venture capital transactions, and representation of emerging growth companies. Education: J.D., University of Colorado School of Law, 1998 (Order of the Coif); B.A., Economics, Stanford University, 1993. Activities: Esprit Entrepreneur, On-Site Visits Committee Chair and Member of Steering Committee, 2002-04; Colorado Women's Chamber of Commerce, WBE Committee Member, 2004-2005; University of Colorado Law Review, Articles Editor, 1996-1998. Admitted in Colorado since 1998; also admitted in the Colorado Supreme Court.
Nearly all companies need to borrow money at some point in time, whether to finance an acquisition, for general working capital, or for other purposes. The lender, whether it is a commercial bank, another financial institution, a hedge fund or other type of lender, usually is represented by counsel that spends a significant portion of its time drafting and negotiating loan documents on behalf of lenders. The borrower's counsel, on the other hand, often has limited experience negotiating loan documents. This paper is intended to assist a borrower's counsel in identifying and addressing some of the more important issues for a borrower that arise in a loan transaction.
This paper is not a comprehensive guide to negotiating a loan transaction on behalf of a borrower, and many issues that can impact a borrower over the life of a loan are not discussed. Complete coverage of all of the issues that are important to a borrower would require a treatise. The topics addressed in this paper were selected because they can be of significant concern to borrowers and they frequently arise in loan documents. Every set of loan documents, every borrower, and every lender are different, and in any given loan transaction there will be a number of additional issues that the borrower and its counsel will need to analyze and address.
Nearly every loan document is negotiable to some extent. Usually, by the time outside counsel becomes involved in a loan transaction, both the lender and the borrower have invested significant time in developing a relationship and agreeing on some key economic terms of the loan, and have a strong interest in closing the loan. Lenders want to maintain a good relationship with their borrower, and do not want to deal with defaults under the loan documents any more than the borrower does. As a result, lenders are generally willing to negotiate reasonable and appropriate changes to loan documents to tailor the documents to the needs of a particular borrower, as long as the loan documents continue to provide adequate protections and remedies to the lender, consistent with its internal policies and credit approvals. The authors have only rarely run into a lender with a "take-it-or-leave-it" approach, and even in those few instances the borrower has been able to negotiate some key improvements to the loan documents.
The extent of any particular borrower's ability to negotiate the loan documents, however, depends on a number of factors, including the relationship between the borrower and the lender, the creditworthiness of the borrower, the purpose of the loan, the amount of
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time and money the borrower is willing to spend to negotiate the documents, the internal polices of the lender, the terms under which the lender obtained its credit approval for the transaction, the size of the transaction, whether the loan is syndicated or with a single lender, and other factors. Because the borrower pays the legal fees for both its counsel and the lender's counsel, extensive negotiation of the loan documents can be expensive. While some borrowers ask their counsel to analyze and negotiate every sentence of the loan documents, other borrowers do not have the leverage, time or money to take that approach, and seek to identify and negotiate only the few most significant points in the loan documents. The borrower's counsel needs to understand the borrower's leverage and its constraints, and negotiate accordingly.
Some of the topics discussed in this paper can be tough negotiating points. Not every borrower will have the ability to negotiate all of the provisions discussed in this paper. Even borrowers with significant negotiating leverage and a strong financial position may not be able to negotiate all of the provisions discussed in this paper in every transaction. The borrower's counsel should negotiate the best terms that it can for the borrower under the circumstances of the transaction, and ensure that the borrower understands any remaining material concerns so that the borrower can make an informed decision whether to close the loan.
I. Term Sheets and Commitment Letters -- Involve Counsel Early
Often the first step in a commercial loan transaction, after the lender and the borrower have agreed on the key economic terms of the loan, is the negotiation and execution of a term sheet or commitment letter.2 Borrowers should involve their counsel in reviewing and negotiating the commitment letter. Counsel can assist in identifying potential problems with the loan structure and advise the borrower at an early stage whether the loan terms proposed by the lender are reasonable.
The borrower should consider carefully whether the commitment letter should be binding on the parties. If the commitment letter is a binding agreement, the borrower may be unable to negotiate changes to the deal struck in the commitment letter after it is signed, which could result in the borrower being forced to proceed with an unintended structure or unfavorable terms, or paying additional fees to negotiate changes. As a result, the borrower and its counsel should negotiate the commitment letter until it accurately describes the agreed business deal in sufficient detail, and ensure that there is sufficient flexibility under the commitment letter to negotiate any provisions that are not fully addressed. Binding commitment letters have the advantage of locking the lender into making the loan; however, even "binding" commitment letters contain numerous conditions to the lender's obligations that make the commitment letter much less binding on the lender than the borrower would expect. Among other things, the lender usually has no obligation if final documents are not executed or conditions precedent are not satisfied by a certain date.
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If the commitment letter is not binding, borrowers and their counsel sometimes spend less time negotiating the commitment letter, and move quickly to the negotiation of definitive transaction documents. Even though a commitment letter may not be binding, it should accurately reflect the parties' agreement on the major business points. The primary disadvantages to a non-binding term sheet are (1) the lender has the flexibility to back out of the transaction if it is not satisfied with the progression of negotiations or it otherwise loses interest in the transaction, and (2) a number of important issues are often left for the definitive documents, which increases the likelihood that the lender and the borrower may disagree on significant issues after spending considerable time and money drafting and negotiating the definitive agreements.
The transaction will proceed more smoothly if the borrower carefully considers, and the commitment letter reflects, all of the fundamental economic terms of the loan as well as any other key business points. Those terms normally are (1) in the case of a term loan, the amount of the loan; (2) in the case of a revolving loan, the amount of the revolving loan commitment and the amount of any sublimit for letters of credit; (3) the applicable interest rate; (4) the amount of any fees payable to the lenders (in a syndicated facility, fees payable to the agent are addressed in a separate fee letter with the agent that is negotiated at the same time as the commitment letter); (5) the term of the loan or commitment; (6) repayment terms, including any mandatory prepayment provisions; (7) a description of the borrowing base provisions (if applicable); (8) the identity of any guarantors; (9) a description of the collateral (including whether the loan is full or limited recourse); (10) title opinion requirements; (11) the primary (or all) of the affirmative and negative covenants; (12) the primary (or all) of the financial covenants, if any, and (13) the primary (or all) events of default. The commitment letter likely will also address the borrower's indemnification of the...
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