negotiating the loan agreement

NEGOTIATING A LOAN AGREEMENT

Premiere Date, JUNE 3, 2014

NEGOTIATING A LOAN AGREEMENT: JUNE 3, 2014

FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC©2014 1

Practical and entertaining education for business owners and executives, Accredited Investors, and their legal and

financial advisors.For more information, visit www.financialpoise.com

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DISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST

FOR YOUR INDIVIDUAL NEEDS

FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC©2014


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ABOUT THIS EPISODE OF THE SERIES

• The Loan Agreement is the road map of most loans. Banks and lawyers start out with a Loan Agreement that is usually favorable to the Lender. Some parts of the Loan Agreement may be negotiable. This webinar will discuss the various provisions of a Loan Agreement and how to negotiate the negotiable provisions.

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Negotiating a Loan Agreement• A. General Strategies

– 1. Negotiate every comma– 2. Negotiate only most important provisions– 3. Ambiguous vs. Detailed

• B. Commitment vs. Loan Agreement• C. Specific Provisions

– 1. Prepayment ability

– 2. Default sections

– 3. Remedy Section

– 4. Change of Control

– 5. Non-recourse carve outs

– 6. Representations and warranties

– 7. Reporting Requirements

– 8. Careful drafting of definitions of covenants

– 9. Careful drafting of definitions of eligible accounts/inventory



General Strategies

• A. Negotiate everything1. Pros

a) Allows you to trade this for thatb) You may get more than you expected (worst they can do is

say “no”) c) Lender fatigue

2. Consa) Costs more on both sidesb) Starts relationship off on a sour notec) Diminishing returns – most items are never going to come

into playd) Takes longer to get to closing



General Strategies

• B. Negotiate only most important provisions1) Pros

a) Saves you money in attorney fees

b) Starts relationship off on a good note

c) Fees being spent actually protect you on most important issues

d) Cuts down time to close

2) Consa) There are marginal items that perhaps you could have

improved to your benefit

b) Less to trade on with lender




General Strategies• C. Ambiguous or Detailed – some pros can also be cons and vice -versa

– 1. Ambiguous Pros• Ambiguous provisions of a loan agreement are generally construed against the drafter by

courts/judges. This can work to a borrower’s advantage• Ambiguity allows for a borrower to argue to its lender what was meant by certain provisions after loan

officer is no longer at the bank• Depending on the provision that is ambiguous, borrowers may be able to stretch the true intent of the

parties to its advantage.

– 2. Ambiguous Cons• Ambiguous terms can lead to long, expensive litigation that could result in ambiguity being decided in

favor of opposing party• Ambiguous provisions can lead to breakdown of long standing relationships between a borrower and

its lender. Inevitably you end up arguing over what was meant. Arguments between a lender and its borrower are never desired.

• Uncertainty in lending atmosphere can lead to fewer loans.

• D. Negotiating the Commitment Letter – When is it too late to negotiate Business Terms?– 1. Never too late- however, arguing business terms on the last draft of a loan agreement can

cause hard feelings and a bad start to a new lending relationship.– 2. Some business terms are still unsettled at term sheet time. OK to negotiate during due

diligence

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General Strategies• E. First steps in Negotiating Loan Agreement

– 1. Business Level• Check with client to get goals/most important elements• Check with client to understand its risk tolerance• Check with client to see what other options are available if loan falls through due to negotiations• Understand your client’s business and how it operates – for instance, does the borrower send out bills when it ships,

when the order is placed or some time after shipping. This could make a difference in a borrowing base definition of eligible receivables.

• Review business terms of the loan as client understands them• Attempt to discover bank’s/individual loan officer’s reputation for negotiation

– 2. Legal Level• Check with client to get goals/most important elements• Investigate lender’s counsel to determine ability and propensity to negotiate• Make sure client’s legal house is in order (operating agreement, standing with the state, resolutions to borrow,

authorized officers, etc..)• Read every word of every document – even the boilerplate. Every word means something.• Check Venue/Jurisdiction to make sure it works for borrower• Make sure defined words (words that start with a capital letter) are actually defined somewhere• Make sure definitions work for how business operates• Make sure business terms in documents match business terms in term sheet and borrower’s intent• Go over representations and warranties with client to make sure they are true and accurate• Make sure name of borrower matches official name with Secretary of State• Eliminate any section that is not applicable – many lenders use form documents that contain provisions that do not apply

to each deal. • Check to make sure default, reps and warranties sections are consistent amongst all loan documents

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Negotiating Specific Provisions

• 1. Defaults - be crystal cleara) nonpayment - no cure, no notice vs. notice and

cure. 5-7 days is reasonable

b) default in any other agreement with lender.

c) default in any agreement with anyone else (materiality standard is appropriate here).

d) borrower or guarantor filed BK, ABC, receivership. If multiple guarantors, perhaps carve out non-material guarantors

e) involuntary BK - give 60 days to get out.



Specific Provisions

f) change of control (see below)

g) death of guarantor - soft death (chance to replace within a certain time period).



Specific Provisions

• 2. Change of Control

a) Carve out family

b) Carve out less than x%

c) Carve out inter-company

d) Particular individual




Specific Provisions

• 3. Material Adverse Change – try to remove if you are a borrower.

– Tough to define up front

– Tough to determine during active loan if this has occurred.

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Specific Provisions

• 4. Representations and Warranties

a) Knowledge qualifiers

b) Without further investigation qualifier

c) True when made only

d) Environmental concerns

e) Specific Real Estate considerations

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Specific Provisions

• 5. Covenants a) Test all financial covenants – make sure you understand

them and can run them the same way as the lenderb) Carve out debt limitsc) Carve out transfer issuesd) Specific Real Estate considerations

• No requirement to replace if rehab happening• Ability to contest taxes• Consider how much lender input is required for new leases –

perhaps limit lender’s consent by size or dollar amount, not required for renewals

• Consider dollar limitation requirement for lender’s consent to changes to the property

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Specific Provisions

• 6. Definitionsa) Eligible Accounts/Inventory

• Check eligibility time limits – ok to negotiate if business does not operate under standard net 30 terms

• Inventory eligibility – ok to negotiate if slow moving items are staples that can be sold at any time

• OK to negotiate extension of eligibility time for historically slow paying customers that always pay in the same time period (customer for the last 5 years has always paid a/r on the 100 the day)

b) Financial Terms/Ratios – make sure definitions work. Talk to borrower’s accountant to make sure.

c) Does “borrower” include subsidiaries? Should it?d) Does “Liabilities” or “Obligations” include other debt on other

loans borrower has with lender. Should it?

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Boilerplate

• A. Waiver of jury – good for lender, bad for borrower. Usually not negotiable.

• B. Venue and jurisdiction – check to make sure they work for borrower. Lender may control this though.

• C. Notices – make sure notice sections filled out with proper address

• D. Service- service by mail – good for lender, bad for borrower. Service when deposited in mail –good for lender, bad for borrower






William Schwartz

Bill is a partner in the Banking & Restructuring Group of Levenfeld Pearlstein, and concentrates his practice on representing borrowers and lenders in financial services, litigation (including bankruptcy) and workouts. Bill takes a complete approach to client service. He works to achieve the results his clients want, and in doing so, he also strives to make the experience of working together a positive one. Bill recognizes the time constraints facing his client, and works to reduce the distractions often caused by focusing on the “small picture.” He believes that communicating with your attorney and boredom do not have to be synonymous. As a result, he takes a real interest in his clients and strives to consistently demonstrate that in his frequent interactions. He also represents receivers in foreclosure cases, buyers and sellers at UCC sales, buyers from assignees for the benefit of creditors, and buyers of notes and mortgages. In the few years, Bill co-authored the chapter “Federal Court Receiverships” in the book Strategic Alternatives for Distressed Businesses (Thompson-West 2013) and an article in Buyouts Magazine entitled “Buying Distressed Assets Outside of Bankruptcy” (Thomson Reuters, June, 2010).



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Matt ThiedeMatt Thiede – Managing Director – O’Keefe LLC Matt’s vast experience as a financial leader in public accounting and industry provides a strong foundation to provide creative solutions to client problems. He quickly analyzes client situations, performs detailed analysis and develops restructuring plans needed in turnaround consulting, forensic accounting, bankruptcy and insolvency services, litigation, and business valuation. Mr. Thiede joined O’Keefe after 15 years of experience where he served as a financial executive in publically traded and privately held businesses accumulating broad experience in the acquisition and turnaround of financially distressed businesses including two private equity backed companies. He has successfully turned around underperforming businesses, negotiated with lenders that wanted to liquidate his companies, and worked with shareholders with disparate interests, while working with turnaround professionals. His experience in negotiating complex credit facilities proves to be invaluable to his clients. Additionally, he is experienced in serving as a financial expert in complex litigation cases, and business valuation. Mr. Thiede is a registered CPA in the State of Illinois, is a Certified Valuation Analyst (CVA), and holds a Bachelor of Science in Accounting from DePaul University and a Master of Business Administration in Entrepreneurship from KellstadtGraduate School of Business in Chicago, Illinois.


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