presents commitment letters in commercial...

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Commitment Letters in Commercial LoansBorrower and Lender Strategies to Negotiate and

presents

Borrower and Lender Strategies to Negotiate and Enforce Binding Loan Commitments

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

Today's panel features:Aric T. Stienessen, Hinshaw & Culbertson, Minneapolis

Pauline M. Stevens, Partner, Morrison & Foerster, Los AngelesEric Goodison Partner Paul Weiss Rifkind Wharton & Garrison LLP New YorkEric Goodison, Partner, Paul Weiss Rifkind Wharton & Garrison LLP, New York

Tuesday, August 24, 2010

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Commitment Letters inCommitment Letters in Commercial Loans

Borrower and Lender Strategies to Negotiate and Enforce Binding Loan Commitmentsand Enforce Binding Loan Commitments

A t 24 2010August 24, 20101:00 PM – 2:30 PM Eastern Standard Time

Aric T. Stienessen Pauline M. Stevens Eric Goodison

PPresenters

Pauline M Stevens PartnerPauline M. Stevens, PartnerMorrison & Foerster, Los AngelesShe represents lenders throughout the credit cycle of financial p g ytransactions. She regularly works on syndicated and bilateral leveraged, multicurrency, project, and public financings, derivatives, workouts, and restructurings. She has worked with agricultural businesses, chemical manufacturers, energy companies, entertainment companies, governmental entities, healthcare companies and many others.

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PPresenters

Eric Goodison PartnerEric Goodison, PartnerPaul Weiss Rifkind Wharton & Garrison LLP, New YorkHe has over 20 years of experience as a financing lawyer. He y p g yrepresents domestic and international clients in their borrowing and lending and other financing transactions, including acquisitions, divestitures, and restructurings. He has significant expertise in structuring, negotiating and consummating all types of leveraged financings.

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Presenters

Aric T Stienessen AssociateAric T. Stienessen, AssociateHinshaw & Culbertson LLP, MinneapolisHe represents lenders, investment banks and borrowers in commercial p ,finance transactions. He also represents businesses and real property developers in sales and purchase transactions involving commercial real property, and handles transactions involving mergers, acquisitions, divestitures and corporate organization and governance.

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Outline

I. Legal developments A. Recent case law trends — Amcan Holdings, Inc. v. Canadian

Imperial Bank of Commerce 894 NYS 2d 47 (N Y App DivImperial Bank of Commerce, 894 NYS 2d 47 (N.Y. App. Div. 1st Dep’t Feb. 4, 2010)

B. Teachers InsuranceC. CopelandpD. Other Relevant Case Law

II. StructureA. Binding or nonbindingB. Conditions

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Outline Cont.

III. Negotiating key terms A. General scope of termsB. Loan amount C. Collateral D ID. Interest rate E. Prepayment penalty F. Guaranties G. Financial covenants H Casualty and condemnation proceedsH. Casualty and condemnation proceeds I. Default provisions J. Affirmative and negative covenants K. Other considerations

IV. Impact of Credit Crisis on enforcing commitments and resolving disputesA. Credit Suisse et al. vs. HuntsmanB. New customary terms

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V. Questions and Answers

I L l D l tI. Legal Developments

A Amcan Holdings Inc v Canadian Imperial Bank ofA. Amcan Holdings, Inc. v. Canadian Imperial Bank of Commerce, 894 NYS 2d 47 (N.Y. App. Div. 1st Dep’t Feb. 4, 2010)Two term sheets provided that the credit facilities:

“will only be established upon completion of definitive documentation” containing terms and conditions in term sheet and other terms “reasonably” required by CBIC.

C diti d t “ l d t f t ti f thiConditions precedent were “usual and customary for transactions of this type.”

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I L l D l t C tI. Legal Developments Cont.

Amcan term sheets established:Amcan term sheets established:

Line of Credit Amount

Amortization

Interest and FeesInterest and Fees

Collateral (including pledge of equity in one of the borrowers)

Definitions

Key Terms

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Amcan:Amcan:Not an enforceable contract, because:

Intent of the parties was not to form a contract (subject to terms required by the lender, definitive documents)

No explicit statement intending to be bound

Term sheets contemplated later agreementsTerm sheets contemplated later agreements

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B Teachers Insurance and Annuity Association Of America v TribuneB. Teachers Insurance and Annuity Association Of America v. Tribune Company, 670 F. Supp. 491 (SD NY 1987).

T t f li i t t f ll ti t d d thTwo types of preliminary contracts: fully negotiated and those still to be negotiated.

First type includes contract where there is an agreement to negotiate in good faith additional and customary terms. Second type does not carry duty to continue to negotiate.

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C Copeland v Baskin Robbins U S A 117 Cal Rptr 2d 875 (CalC. Copeland v. Baskin Robbins U.S.A., 117 Cal. Rptr. 2d. 875 (Cal. Ct. App. 2002)

L tt t ifi d t f lli f t i f ilitLetter agreement specified terms for selling manufacturing facility and product supply agreement, including:

PriceNon-refundable depositAgreement regarding co-packing agreement to be determined

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I L l D l t C tI. Legal Development Cont.

CopelandCopeland

Although the parties failed to reach agreement on the co-packing g p g p gagreement, the Court found a binding contract had been formed, because:

Parties contracted to negotiate in good faith

Covenant of good faith and fair dealing appliedCovenant of good faith and fair dealing applied

Damages measured by injured party’s reliance on agreement to ti t

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negotiate.


D Other recent cases:D. Other recent cases:

Allgood Entertainment, Inc., et al v. Dileo Entertainment and Touring, Inc. et al., USDC SDNY, 09 Civ. 5377 (filed June 10, 2009)( )

JDH Capital, LLC v. Flowers, 2009 NCBC 4 (N.C. Sup. Ct. Mar. 13, 2009)

Crockett Capital Corp. v. Inland American Winston Hotels, Inc., 2009 NCBC 5 (N.C. Sup. Ct. Mar. 13, 2009)

The Scottish Coal Company Limited v. Danish Forestry Company Limited, JuneThe Scottish Coal Company Limited v. Danish Forestry Company Limited, June 25, 2010, available at: http://www.scotcourts.gov.uk/opinions/2010CSIH56.html

R&D Construction Group Limited v. Hallam Land Management Limited, 9/16/09, available at: http://www scotcourts gov uk/opinions/2009csoh128 html

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available at: http://www.scotcourts.gov.uk/opinions/2009csoh128.html

II St tII. StructureA. Binding or Nonbindingg g

1. Lender’s Perspectivea. Lender’s fees and expenses, including attorneys’ fees, paid

regardless of whether loan closes2. Borrower’s Perspective

a. Trade off – underwriting fees and grant of exclusivity vs “certainty” of funds

b. Certain transactions require a fully underwritten commitment (acquisitions), while others may not (dividends, refinancing)

c Expenses paid only at closec. Expenses paid only at close B. Conditions

1. Lender’s Perspectivea. No material adverse changeb Approval from participants or syndicatesb. Approval from participants or syndicatesc. Be mindful of tying arrangements

2. Borrower’s Perspectivea. Depends on fully underwritten vs best efforts, general rule the

fewer the better -- need to understand “Flex” terms to see if

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fewer the better need to understand Flex terms to see if commitment is really a disguised best efforts

II St t C tII. Structure Cont.b. Sometimes borrower wants lender to have an “out” so they have a transaction

out – very dangerous strategy c. Best Efforts deal – subject to lenders coming in on market clearing terms so

limiting conditions is potentially less important d. Underwritten deal – want an exhaustive list (avoid wording such as “to

include” or “including”) and as narrow and as objective as possible with any l d d i i d b i d di (b hlender determinations made by commitment party and not syndicate (both a cosmetic issue for seller in an acquisition and an economic issue if reverse break fee on financing)

Hot button issues:Hot button issues:

1) Due diligence2) Maximum closing leverage3) Solvency – certificate or opinion; objective vs subjective standard4) Outside date and marketing or syndication period4) Outside date and marketing or syndication period5) Approval of financial statements6) Limiting closing representations to “Specified Representations” matching

acquisition agreement7) Acquisition Agreement amendments and approval

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) q g pp

III N ti ti K TIII. Negotiating Key TermsA. General Scope of Terms

1 Need further negotiations ordinary & customary definitive documentation1. Need further negotiations, ordinary & customary definitive documentation2. Identify key parties (Lender/group, servicer, borrower, guarantors)3. Terms unique or controversial to particular loan

B. Loan Amount1. Lender’s Perspective

a. “Not to exceed”b. All advanced and accruing interest, though possibly subject to control and

disbursementc. Basis for fees

2. Borrower’s Perspectivea. Commitment to cover full amount necessary – watch terms like “up to” b ABL t ti l t i t lti t t t ti f l d tb. ABL potential uncertainty over ultimate amount at time of close due to:

i. Fluctuations in borrowing base assets ii. Field Audits to be done iii. Eligibility criteria to be negotiated

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iv. Reserves v. Minimum Availability or Liquidity at close

III N ti ti K T C tIII. Negotiating Key Terms Cont.

c Abilit for Incremental Facilitiesc. Ability for Incremental FacilitiesC. Collateral

1. Lender’s Perspectivea. Cross-collateralizea. Cross collateralizeb. Releases and substitutionsc. Priority and intercreditor and subordination agreementsd. Access agreements

2. Borrower’s Perspectivea. Negotiate exceptions or identify categories – leaseholds, immaterial

collateral b Timing of perfection – “Sungard” post closing language for nonb. Timing of perfection – Sungard post closing language for non

stock/ucc collateral c. Intercreditor – if multiple secured commitments (1st/2nd lien structure

or ABL/Term crossing lien structure), outline key intercreditor terms (priority standstill etc )

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(priority, standstill, etc.)


D Interest RateD. Interest Rate1. Lender’s Perspective

a. 360 day conventionb. Default interest upon default occurrence (vs. continuing/uncured

default)2. Borrower’s Perspective

a. 365 day for Base Rate b Default Rate only on overdue only if required other mitigationb. Default Rate – only on overdue, only if required, other mitigation c. Payment periods – quarterly vs monthly for non Libor loans

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E Prepayment PenaltyE. Prepayment Penalty1. Lender’s Perspective

a. Amount, frequency, timing, and noticeb. Due upon acceleration

2. Borrower’s Perspectivea. Exceptions – “involuntary acts” such as excess cash, casualty

events b Make Whole better than a “no call”b. Make Whole better than a no call

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F GuarantiesF. Guaranties1. Lender’s Perspective

a. Payment and collectionb. Secured or Unsecuredc. Standstill

2. Borrower’s Perspectivea. Limit to domestic entities, avoid a 956 “material cost” analysis b C id t i t d tb. Consider unrestricted concept c. Stop chain at one level above borrower, so any super hold co is

unrestricted

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G Financial CovenantsG. Financial Covenants1. Lender’s Perspective

a. Compliance certificatesb. Understand metrics (EBIT vs. Gross Sales vs. Cash)

2. Borrower’s Perspectivea. Agree cushion to plan and perhaps identify plan b. Consider setting levels or annual levels with mid year stepdowns

TBDTBD c. Consider asking for Equity Cure right

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H Casualty and condemnation proceedsH. Casualty and condemnation proceeds 1. Lender’s Perspective

a. Percentage damageb. Reinvest or repay the loan

2. Borrower’s Perspectivea. Definitely want a full reinvestment right b. Where to apply proceeds pending reinvestment – cash collateral or

pay down linepay down line

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I. Default ProvisionsI. Default Provisions 1. Lender’s Perspective

a. Cross-defaultb. Grace periods and opportunities to cure

2 B ’ P ti2. Borrower’s Perspectivea. Generally negotiated in loan documentation phase b. Identify the list of defaults, limit surprises later c. Introduce concept of grace periods, cure rights and materiality

thresholds

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J Affirmative and Negative CovenantsJ. Affirmative and Negative Covenants1. Lender’s Perspective

a. Keep in mind expectations of participants/syndicatesb. Recognize the common covenants and specifically address

covenants unique to the particular loan 2. Borrower’s Perspective

a. Generally negotiated in loan documentation phase b Identify the covenants and introduce concept of materiality thresholdb. Identify the covenants and introduce concept of materiality threshold

and grace periods c. Greater specificity on financial reporting (how long and how often)

and hedging d. On negative covenants, consider addressing key exceptions such as

material acquisitions or acquisition flexibility generally, debt incurrence, dividend expectations, know or planned major asset sales, sale lease back transactions or major planned cap ex

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K Other ConsiderationsK. Other Considerations A. Lenders Perspective

1. Length of commitment and protection on being shopped 2. Ability to successfully syndicate – assistance, flex, assignment

B. Borrower’s Perspective 1. Length of commitment, time to complete transaction 2. Other material terms: amortization, voting rights, mandatory

prepayments (equity sweeps excess cash flow asset sales)prepayments (equity sweeps, excess cash flow, asset sales), borrower or affiliate right to acquire debt

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IV. Impact of Credit Crisis on Term Sheets, Enforcing p , gCommitments and Resolving Disputes

A Credit Suisse Securities (USA) LLC and Deutsche Bank SecuritiesA. Credit Suisse Securities (USA) LLC and Deutsche Bank Securities, Inc. v. Huntsman Corp., 269 S.W.3d 722 (2008 C. Appeals 9th District of Texas) available at http://www fellowlawyers com/index php?option=com content&taskhttp://www.fellowlawyers.com/index.php?option com_content&task=view&id=3021&Itemid=143

Commitment letter between Hexion and banks under New York lawCommitment letter between Hexion and banks under New York law had various conditions precedent to funding.

D l t f d th t H i f il d t t it bli tiDelaware court found that Hexion failed to meet its obligations under a merger agreement with Huntsman and endangered the commitment availability by its Delaware lawsuit.

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IV. Impact of Credit Crisis Cont.

A Huntsman contA. Huntsman, cont.

Huntsman said that the banks had stalled so that their commitment would terminate and filed lawsuit in Texas alleging fraud, tortious interferenceterminate and filed lawsuit in Texas alleging fraud, tortious interference with merger, negligent misrepresentation and civil conspiracy.

Court enjoined the banks from filing a declaratory judgment suit alleging j g y j g g gmerged entity would be insolvent. The decision was confirmed on appeal, because, among other things, the commitment letter’s New York forum selection clause did not require that all suits related to the matter had to be filed in New Yorkfiled in New York.

Should lenders be addressed in forum selection clauses of acquisition agreements?

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agreements?

IV. Impact of Credit Crisis Cont.

B New Customary Terms Should term sheets address:B. New Customary Terms. Should term sheets address:

Dodd-Frank Act effects, including increased costs

Extent of defaulting lender terms, particularly in context of intercreditor issues

Foreign Account Tax Compliance Act of 2009

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