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Anthony S. DiSandro, Stevens & Lee

John C. Kilgannon, Stevens & Lee

Alyson Spurlock Danner, Bank of America

STRUCTURING AND NEGOTIATING

CREDIT AGREEMENTS WITH LENDERS

Presenters:• Anthony S. DiSandro

Shareholder

Stevens & Lee

• John C. KilgannonShareholder

Stevens & Lee

• Alyson Spurlock DannerAssistant General Counsel

Bank of America, N.A.

Initial Considerations in Credit

Agreements

• The definitive Credit Agreement is a myriad of traps for the

unwary given the often times dense nature of such

agreements and expansive use of unique definitions

• What does the Credit Agreement set out?

• Terms of the loans

• Borrowing and repayment procedures and the calculation of

interest and fees

• Liabilities and obligations of the parties

Specialized Loan Agreements

• Specialized loans require variations to the Credit

Agreement:

• First Lien loans

• Second Lien loans

• Covenant-lite loans

• Borrowing base loans (Asset-based)

• Cross-border facilities

Perspectives• General

• Lenders and Borrowers will want to complete the financing as quickly and efficiently

as possible

• Lender and Borrower will have different perspectives that will set the scene for the

negotiation of the more contentious clauses

• Lender’s Perspective

• Two Main Concerns:

• Whether it will recover the principal sum

• Whether it will promptly receive interest payments

• Lender will protect itself through use and control of the money

• The amount of the loan

• Conditions for Borrower to draw the loan

• Conditions for early termination if an event of default occurs

• Lender will also establish mechanisms and other protections for continuing

surveillance of the Borrower’s business and its use of the credit facility. These will

take the form of conditions precedent and representations

and warranties, along with affirmative and negative

covenants relating to the Borrower and the collateral

Perspectives (cont’d)

• Borrower’s Perspective

• Main Concern Flexibility of the Credit Agreement

• Is it practical to adhere to the terms?

• Will the Credit Agreement adversely impact the Borrower’s ability to operate its

business?

• Goals of the Borrower:

• Ensure certainty

• Minimize expenses (e.g. expense reimbursement obligations and other charges that

are difficult to quantify)

• Ensure lender’s attempts to monitor Borrower activities do not interfere with

Borrower’s ability to run its business

• Apply reasonableness and materiality thresholds

• Ensure flexibility with grace periods and mitigation clauses to avoid triggering events

of default

• Permit certain amendments to the loan documents with the

consent of the agent or the majority of the lenders

Structure of the Credit Agreement

• Definitions and Interpretation

• Borrowing Mechanics

• Conditions Precedent

• Representations and Warranties

• Covenants

• Events of Default

• Agency Provisions

• Miscellaneous Provisions

• Exhibits and Schedules

Definitions and Interpretation

• Defines capitalized terms used in the Credit Agreement

• Important because of the repetition of key terms

• Specific care should be taken in connection with the financial

covenant definitions (e.g., EBITDA, Fixed Charge Coverage Ratio,

Leverage Ratio, etc.)

• Review closely other important definitions such as the Pricing Grid

Matrix, Material Adverse Change, and other business related terms

• This section will also specify certain rules of interpretation, how to

apply payments due on a non-business day, and interpreting

accounting terms in accordance with GAAP

Borrowing Mechanics

• Sets out the terms for:

• Types of loans (e.g. term loan or revolving credit loan)

• Amount of the loans

• Time period for borrowing

• Outlines procedures for:

• Letters of Credit

• Swinglines

• Triggering Events resulting in mandatory payments of interest and principal

• Voluntary prepayments

• Computation of interest and fees

• Use of proceeds

• Mitigation obligations of the lender and replacement of lenders

• Capital adequacy

Conditions Precedent

• Conditions the Borrower must meet before the Credit Agreement is

binding and the lender will led money

• Two forms of conditions precedent:

• Conditions that must be satisfied before the first loan advance

• Examples:

• Production of documents

• Perfection of security interest in collateral

• Assurances that factual conditions have been satisfied for the particular deal

• Conditions that apply to all advances (first loan advance and all

subsequent advances)

• Examples:

• Representations and warranties remain true and accurate

• No events of default

• No material adverse changes

Representations and Warranties• Initially made on the closing date and restated on each day an advance is

made

• Purpose

• Gathering material information about the Borrower by the lender to assist in

decisions regarding whether to make loan advances and monitoring the ongoing

business of the Borrower

• Allocates risk between the Lender and the Borrower if a representation and warranty

is untrue (whether or not the Borrower is at fault)

• Misrepresentations usually entitle the Lenders to cease further advances and/or

trigger an event of default

• Borrower’s aim is to create flexibility through carve-outs and materiality

thresholds

• A Borrower should carefully review the representations and warranties that

are deemed repeated after the initial advance, which can therefore trigger an

Event of Default

• Carve-outs are generally listed on a Schedule to

the Credit Agreement

Covenants• Overview

• Covenants are designed to protect the Lender’s investment during the life

of the loan by monitoring the Borrower’s business activities

• Can both limit the actions a Borrower can take and require certain actions

to be taken

• Will provide an early warning signal of credit deterioration and allow the

lenders to have some influence on corrective action early in the process

• Borrower’s perspective: covenants limit the freedom of the Borrower

• Lender’s perspective: covenants seek to ensure that the financial

condition, business, and assets of the Borrower remain within the limits

that were the basis of the lender’s initial credit assessment

• Types of Covenants:

• Informational covenants

• Affirmative covenants

• Negative covenants

• Financial covenants

Covenants (cont’d)

• Informational Covenants

• Require certain financial statements and other monitoring reports

(e.g., borrowing base certificate) to be supplied by Borrower to the

lenders at a frequency to be determined by the parties

• May require notice of the occurrence of material adverse changes

or certain types of litigation

• Borrower should seek flexibility by making sure it has reasonable

time to provide such information and that it is only required to

provide that information that is within its knowledge

Covenants (cont’d)

• Affirmative and Negative Covenants

• Affirmative Covenants – actions that the Borrower agrees to take (e.g.

paying taxes, maintaining insurance, permitting lenders to inspect its

books and records)

• Negative Covenants – actions the Borrower is not allowed to take

without consent of the lender (e.g. incurring additional debt, allowing

additional liens on its assets, selling assets, paying dividends)

• One of the most highly negotiated areas in the Credit Agreement

• Lender seeks to reduce the risk that loan will not be repaid

• Borrower needs to ensure that the covenants are flexible enough in order to

allow it to continue to run its business

• Borrower should negotiate carve-outs from covenants for any actions it

needs to take or continue to take (e.g., permitted debt, permitted liens,

permitted acquisitions, tax dividends)

Covenants (cont’d)

• Financial Covenants

• Strongly tied to the negotiated definition section of the credit agreement (e.g. definition of

EBITDA)

• Monitor the following to provide warning signs of any credit deterioration:

• Leverage Ratio (debt to EBITDA) – sets a maximum ratio allowable to ensure that the loans

can be repaid from cash flow

• Coverage Ratios

• Measures the Borrower’s ability to pay certain obligations out of cash flow

• Interest Coverage Ratio – measures the degree to which Borrower’s cash can cover

interest obligations and requires a minimum amount of coverage

• Fixed Charge Coverage Ratio – includes principal payments in addition to interest

payments, and may include rent or dividends

• Minimum EBITDA – requires a minimum level of earnings that generate cash flow available

to repay the loans and serves as a measure of market value of the Borrower

• Net Worth Covenant – measures the amount of equity that a Borrower has, and requires the

Borrower to maintain a minimum amount of its net assets in excess of its liabilities

• Capital Expenditure Covenants – limit the amount that can be spent

on capital expenditures in a specified period

• Equity Cure Rights

Events of Default• Events which allow the lender to exercise their rights and remedies

• Examples: non-payment of interest or principal, breach of a covenant, bankruptcy of

Borrower, or judgments against the Borrower

• Default vs. Event of Default

• In the case of an Event of Default, remedies allow lender to:

• Accelerate repayment of the outstanding debt

• Enforce its security interests

• Cancel further commitments

• Suspend any additional advances

• Negotiate cure periods and material thresholds

• Borrower should seek flexibility by limiting the lender’s ability to exercise

remedies to only those situations in which an event of default is continuing

• Lender’s ability to exercise remedies should cease

once default or event of default has been cured or waived

Agency Provisions

• Not heavily negotiated

• Specific to syndicated loan agreements

• Specifies the rights and duties of the agent banks, with the lead bank

having the role of administrative agent and being responsible for:

• Advancing loans to the Borrower

• Collecting and distributing payments to the other lenders

• Administering the loan

• Interfacing with the Borrower on behalf of the lenders

• Administrative agent has the title of “collateral agent” in secured loans

and is responsible for holding and administering the collateral

• Provision typically includes language that limits the liability of the

agent banks and provides procedures for

replacing the agent banks

Miscellaneous Provisions

• Not heavily negotiated

• Boilerplate provisions that cover notices, integration,

counterpart and severability clauses, survival of certain

provisions, governing law, jurisdiction, waiver of jury trial,

absence of fiduciary duties and regulatory requirements

• Those sections that are negotiated cover set-off rights, waivers

and amendments, assignments, indemnification, and

confidentiality

Exhibits and Schedules

• Exhibits ensure that finals documents are substantially in the

form agreed to by the parties at the time the loan was made

• Schedules list items requested in the representations and

exceptions to the representations and warranties and

covenants

• Accuracy is important to avoid misrepresentation

• Borrower will want to ensure all carve-outs to the covenants are

included on the schedules to avoid breaching the Credit Agreement

Important Drafting Concepts• Materiality

• Borrower should seek flexibility through adding a materiality components to its

representations (e.g. breach of environmental or litigation representation only when

such breach results in a material adverse affect)

• Important to negotiate what is material, but to also limit the scope of the definition

to avoid catching immaterial matters

• Reasonableness

• Flexibility for the Borrower in removing absolutes obligations

• Forcing a lender to act reasonably gives the Borrower additional scope to disagree

• Permitted Discretion Concept

• Exceptions

• De minimis exception – avoids making minor breaches relevant (e.g. notice

requirements only for certain litigation claims over a certain threshold)

• Limiting cross-defaults to a material threshold amount to

prevent a cross default arising from breaches of

minor obligations

Post Closing – Understanding Continuing

Obligations

• Most loan documents impose continuing obligations on borrower

• Covenant – promise in contract to do, or refrain from taking, certain

transactions or acts

• Affirmative Covenant Requirements:

• Financial Statements

• SEC Filings

• Payment of Taxes

• Labor Issues

• Litigation

• Change Business Location

• Quarterly Reports

• Tax Returns

• Pension Obligations

• Notices of Defaults

• Government Notices

• Change Collateral Location

Post Closing – Understanding Continuing

Obligations (cont’d)

• Lenders have their money at risk – take covenant compliance

seriously

• Be mindful of covenant compliance – assign responsibility

• If loan documents are complex – ask counsel to prepare overview

• Formalize payment procedures

Financial Covenant Compliance

• For large loans, lender will require borrower to satisfy financial

covenants

• Measurements of financial wealth of borrower

• Financial covenant compliance certificate

• Debt Service Coverage Ratio ‒ current net operating income/total

debt service

• Debt to Equity Ratio ‒ Debt/Equity

• Working Capital ‒ Current Assets ‒ Current Liabilities

Financial Covenant Compliance (cont’d)

• Negative Covenants

• Prohibition on borrowing

• Prohibition on liens on assets

• Restrictions on distributions to equity

• Mergers/consolidation

• Dissipation of assets

Default

• Over course of borrowing cycle, business faces multitude of changes

at macro and micro level

• Fluctuations in global economy and business cycle

• Industry competition

• What constitutes a default?

• Not all defaults are created equal

• Some defaults require lender to prove “notice and opportunity to cure”

• Cure – opportunity to remedy default – return to status quo

• Understand what notice you are entitled to receive

Not All Defaults are Created Equal

• Payment Default – failure to make payment when due

• Non-monetary defaults

• Tripped Covenant

• Default under other obligations

• Judgment against borrower

• Revocation of license/business interruption

• False representations and warranties

• Regulatory Action

• Material adverse change

Lender’s Remedies Upon Default

• Acceleration – entire loan balance becomes immediately due and

owing

• Termination of further advances

• Default interest

• Setoff

• Collateral Recovery/Foreclosure

• Litigation

• Pursuit of guarantors

Borrower’s Strategies – Post-Default

• Formulate strategy to address default

• Avoid “head in the sand” mentality

• Understand dynamics of situation ‒ lender insecurity

• If goal is to avoid litigation ‒ communication is critical

• Work with counsel to develop strategy to remedy default

• Alternatives

• Forbearance Agreement

• Restructuring Agreement

• Refinance

Borrower’s Strategies – Post-Default (cont’d)

• Forbearance Agreement

• Provides borrower with breathing spell to address defaults

• Lender agrees to forbearance from exercising its remedy to specific period

of time

• In exchange for forbearance, lender will require additional protections

• Provision for satisfying default ‒ payments

• Forbearance comes with strings attached

• Lender may require new or enhanced covenants

Borrower’s Strategies – Post-Default (cont’d)

• Forbearance Agreement (cont’d)

• Additional Collateral

• Lender may conduct additional due diligence

• Specify indebtedness

• Identify default and admission of defaults

• Waive defenses to default

• No action on default

• Violation of security lien perfection

• Specify default/termination of forbearance

• Reaffirmance of guaranty

• Release claims against lender

• Fees

Borrower’s Strategies – Post-Default (cont’d)

• Restructuring Agreements

• Change in material terms of the loan

• Provides for restructuring of debt – change in maturity date, interest rate,

modification of covenants to ensure compliance

• May entail principal or interest holiday or forbearance

• May be a vehicle to bring in new lenders on pari passu or subordinated basis

• Conversion of debt to equity

• Refinance

• Internal or external factors may compel bank to require borrower to find

new lender

• Depending on economic and global factors, may prove difficult to find new

lender on similar terms

• May be opportunity to find better terms or

restructure debt

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