Summary BPP - LPC - Debt Finance - High Distinction
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Course
LPC - Legal Practice Course
Institution
LPC - Legal Practice Course
Notes on all SGS exercises and solutions, exam tips and guide to answering exam style questions based on practice exams. These notes helped me achieve a high distinction in debt finance.
These are loans which are made between banks to ensure liquidity and to ensure that they are able
Interbank to meet the demands of their customers.
Loans LIBOR is the interest rate which applies between banks on the interbank market.
LIBOR forms a part of the borrower’s floating rate of interest.
Matched Where a lender is requesting to borrow money from other banks in the interbank market to provide
Funding sufficient level of loan as requested by their borrower client.
These are a series of rules which ensure that banks have sufficient capital set aside which can only
be used to repay depositors.
Capital Banks will need to set aside an amount of capital for each loan being made. However, the amount
Adequacy being set aside will differ as not all loans carry the same amount of risk of not being repaid. This
Rules gives rise to the concept of risk weighting, which relates to the amount of risk that a loan made by
the bank will not be repaid.
Complying with the capital adequacy rules represents a cost to the bank and such cost will be built
into the interest rate which banks will apply to loans made to borrower clients.
Relationship v A balancing act must be performed to maintain a bank’s relationship with their borrower clients
Risk versus protecting a bank’s interests from certain risks.
When assessing the risk of making a particular loan, the bank will want to know where the money
Recourse will come from to repay it and whether they will have legal recourse to such money.
Banks will look at balance sheets to assess such risk.
Profit = Interest – Cost of Funds
Profits Interest is the interest which is the rate charged to the borrower.
Cost of Funds is the cost to the bank to provide the funds which the borrower will borrow, such as
mandatory costs (e.g. regulatory costs), LIBOR if they are loaning money on the interbank market
or the margin.
Overview of Banking Transactions
Types of Debt Facility
§ Briefly allows borrower to draw more money if needed.
Overdraft § This is an on-demand facility, which allows the lender to call in the borrowed funds at any
time. Therefore, it does not provide the borrower with any certainty.
§ They usually incur high interest rates due to being unsecured.
§ Is a committed facility. The lender is bound to lend the money and repayment shall only
Term Loan occur on the agreed repayment dates or if there is an event of default leading to early
repayment.
§ Provides much more certainty for the borrower but is not flexible.
§ Is a committed facility by a lender to lend on a recurring basis on predefined terms.
Revolving Credit Therefore, the lender is bound to lend the money and repayment shall only occur on the
Facility (RCF) agreed repayment dates or if there is an event of default leading to early repayment.
§ RCFs allow the borrower to make multiple drawdowns during the overall availability period.
Each drawdown will be subject to its own conditions as agreed between the lender and the
borrower.
, § RCFs provide the borrower with certainty but also have some of the flexibility of an
overdraft as it will allow the borrower to draw down and repay amounts of capital during the
availability period.
Bilateral & Syndicated Loans
Bilateral Loans This is a single lender making a loan to a single borrower. A loan between two parties.
§ A loan made by two or more lenders on the same terms and governed by a single loan document.
§ There are many reasons why a lender may wish to provide a loan as part of a syndicate:
o Where the borrower has large financing needs which cannot be met by a single lender;
o To reduce the credit risk of making a large loan to the borrower; and
o To reduce the amount of capital they must set aside due to the making of a large loan in
compliance with the capital adequacy rules.
Syndicated Loans § The borrower appoints an arranger.
§ The arranger goes into the market and recruits a syndicate of multiple lenders who will be lending to
the borrower. However, there is only one loan agreement as opposed to multiple agreements
exclusive to each lender.
§ Once the loan agreement is signed, the arranger is replaced by the agent. The lenders will then send
the sum of their loans to the agent and the agent will send this to the borrower.
§ The borrower will only liaise with the agent throughout the life of the loan.
§ Under a syndicated loan, the obligation for banks to lend is several. Therefore, if one lender fails
to make its participation available to the borrower, the others are not obliged to make up the
difference.
• Where the borrower requests funds as soon as possible, it is common for a small number of banks
within the syndicate to underwrite the loan to the borrower (in return for an underwriting fee). Once
the full facility has been advanced to the borrower, they syndicate the facilities shortly after
completion by way of novation/assignment (called primary syndication).
• Secondary syndication is when the loan is transferred a long time after it has been completed.
(1) The borrower appoints an arranger. The arranger is a bank within the syndicate and will be tasked
with arranging the syndicated loan.
(2) The arranger goes into the market and recruits a syndicate of multiple lenders who will be lending to
Lifecycle of
the borrower. However, there is only one loan agreement as opposed to multiple agreements
Syndicated Loan
exclusive to each lender.
(3) Once the loan agreement is signed, the arranger is replaced by the agent (who is the same entity).
The lenders will then send the sum of their loans to the agent and the agent will send this to the
borrower.
(4) The borrower will only liaise with the agent throughout the life of the loan.
, Arranger
Look at clause 26 LMA Agreement
§ To advise the borrower on the terms of the loan, the loan structure, costs of the loan.
§ Putting the syndicate together by marketing the loan to other banks on either a best efforts basis or
underwritten basis.
§ Performing due diligence on the borrower and putting together the information memorandum which
is used to market the loan to potential syndicate lenders. Arranger will arrange road shows for
marketing loan.
Duties § They will negotiate the documents on behalf of the syndicate (the arranger is the face of the
syndicate) with the borrower.
§ The arranger will be appointed by a mandate letter, which will set out the basis upon which the
arranger will be appointed and will specify the arrangement fee, to be paid by the borrower.
§ The arranger can be appointed on either a:
o Best efforts basis – the arranger will promise to use its best efforts to assemble a syndicate of
banks willing to lend the required amount. However, if the arranger does not succeed in raising the
funds the borrower will not have access to them; OR
o Underwritten basis – the arranger or a small group of lenders underwrites the loan. Therefore, if
the full syndicate of banks cannot be put together on time, the arranger or other banks that provide
the underwriting will be obliged to make up any shortfall in the borrowing amount. Borrower will
have to pay an underwriting fee.
§ The arranger’s role and their responsibilities will cease on the signing of the loan agreement.
However, it is then common for the arranger to become the agent under the loan.
§ The information memorandum is the key marketing document for a syndicated loan and is prepared by
the borrower and the arranger.
§ The information memorandum will contain information on the borrower’s financial circumstances and
Information
details of the proposed loan facility and security.
Memorandum
§ The information memorandum is highly confidential and therefore any potential lenders who receive it
will have to provide a confidentiality undertaking.
§ The document is unregulated.
The most likely cause of action against the arranger would be negligent misstatement under the case of
Actions against Hedley Byrne v Heller or misrepresentation in relation to the contents of the information
Arranger memorandum which it will have prepared for the borrower.
In addition, there could be potential liability for breach of any other fiduciary duty owed by the bank in its
capacity as arranger.
Protections
• Include a clear disclaimer of liability in the information memorandum as part of the contents of the
document, this is known as the important notice. This would state, amongst other things:
o That the borrower is solely responsible for the information memorandum.
o The arranger has not independently verified the contents.
o Each potential lender should undertake its own assessment in deciding whether or not to
participate.
o The arranger is not responsible for updating the information contained in the information
memorandum.
• Should also be made clear in the loan agreement that the borrower takes full responsibility for all of
the information contained in the information memorandum.
• Borrower should indemnify the arranger from and against any liability arising from the information
memorandum. However, arranger should bear in mind that it is only likely to face a claim in the event
that the borrower defaults under the loan. As a result, borrower may not be able to meet the terms of
such indemnity.
• Arranger should make it clear in the loan agreement that as arranger it is not acting in a fiduciary
capacity and should not be treated as such, that it is entitled to carry out other business with the
, borrower and that it is under no obligation to account for any profits it makes in dealings with the
borrower on its own account.
• There should be specific reference in loan agreement to payment of arranger’s fees.
• Loan agreement should also contain a clear obligation on each of the other lenders to make its own
credit appraisal of the borrower before deciding to lend to it.
Agent
Look at clause 26 LMA Agreement
§ The arranger will usually convert into the agent once the loan agreement has been entered into.
General § The agent’s role will run for the duration of the loan.
§ The agent will act on behalf of the syndicate lenders as a whole and not the borrower. However, the
borrower will be responsible for paying the fees of the agent.
§ The agent acts as an intermediary between the borrower and the syndicate.
§ The role of the agent is purely administrative and mechanical, to ensure smooth running of loan.
The agent’s duties tend to be purely mechanical in nature and will be precisely defined and documented in the loan
agreement. The duties include the following:
• Paying Agent - ensuring that appropriate payments are made between the parties, such as the sums being
made available by the lenders to the borrower and the interest and principal payments being made by the
borrower to the lenders (on a pro rata basis). This includes the
• Determining Interest Rate – the rate which applies for each interest period and notifying this to the parties.
This will be particularly important where the loan has a floating interest rate (e.g. SONIA).
Duties • Postman for documents and notices – sending on all documents and notices received under the facility
agreement including administering any transfers between existing and new syndicate members, e.g. through
the use of transfer certificates.
• Signing off on initial CPs.
• Monitoring the borrower - Agent is not obliged to pro-actively monitor the borrower throughout the life of the
loan and will instead receive information and transmit this to the syndicate as appropriate, which will include any
information regarding breach or default by the borrower under the terms of the loan agreement.
• Interpreting loan agreement - if there is any doubt as to the meaning of the loan agreement or any other
documents, the agent will not wish to determine this itself and will instead engage lawyers to assist it with such
interpretation and a provision will be contained within the loan agreement which permits the agent to rely on
such advice.
• Calling EoD / Accelerating the loan – agent will have unilateral discretionary power to call an event of
default unilaterally but, would not, except in an emergency, take action without consulting the syndicate lenders
first and obtaining their instructions.
o Therefore, given the low fees paid to it the agent is commonly risk adverse and will usually only act in
respect of a default with the consent and on the instructions of the Majority Lenders (as defined as a
majority of two-thirds by value of the lenders). This is because under clause 26.2(a) LMA Agreement, the
agent is protected from liability in respect of any action (or lack thereof) taken in accordance with Majority
Lender instructions. In the event that urgent action is required, it will still often attempt to speak with at least
some of the important lenders to gain their approval before taking any action.
§ The duties of the agent will be narrowly defined so as to avoid any potential liability.
§ The agent will often only act in accordance with the Majority Lenders instructions (clause 26.2(a) LMA
Agreement). Majority Lenders will be defined differently in each loan agreement but will usually be two thirds
Absolving
(66 2/3%) of the total syndicate commitments.
Liability
§ However, certain decisions made in accordance with the loan agreement will require unanimous approval of
the lenders.
§ The use of Majority Lenders decisions to bind the syndicate speeds up process and prevents one lender
effectively having a veto. Examples of decisions are calling EoD/waiving EoD, determining material adverse
change or considering amendments to the facility agreement.
§ The agent may also seek to rely on external legal advice for what steps to take in relation to the loan. LMA
Agreement provides that they may do so.
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