/
Structuring Loan Structuring Loan

Structuring Loan - PowerPoint Presentation

olivia-moreira
olivia-moreira . @olivia-moreira
Follow
549 views
Uploaded On 2016-09-19

Structuring Loan - PPT Presentation

Agreements Post Restructuring Provisions Preamble Amount and term of the loan Representations and warranties Conditions of lending Provisions Default Provisions Description of collateral Covenants of the borrower ID: 468671

loan borrower bank covenants borrower loan covenants bank term conditions agreement financial amount collateral restrictive provisions lending lender negative

Share:

Link:

Embed:

Download Presentation from below link

Download Presentation The PPT/PDF document "Structuring Loan" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.


Presentation Transcript

Slide1

Structuring Loan Agreements

Post RestructuringSlide2

Provisions

Preamble

Amount and term of the loan

Representations and warranties

Conditions of lendingSlide3

Provisions

Default Provisions

Description of collateral

Covenants of the borrower

MiscellaneousSlide4

Preamble and Description

The preamble sometimes does little more than name lenders and borrowers, stating that an agreement has been entered into

Statement of purpose may be included, as well as commitment fees, interest rates, prepayment rights and a definition of terms used in the agreementSlide5

Amount and Term of the Loan

Sets forth the amount of the loan, the manner in which the borrower may draw down amounts, the interest rate, fees, maturity dates, and the provisions relating to prepayments

If the commitment agreement supports a term loan, it will call for periodic equal paymentsSlide6

Amount and Term of the Loan

However, provisions are sometimes made for a balloon payment or "bullet payment" at maturity. Balloon payments require periodic equal payments made with a larger lump sum payment due at the end of the term loan. Similar to a balloon payment, a "bullet payment" sometimes includes a provision requiring cash flows from operations or asset sales above a predetermined amount to be earmarked for loan amortization to reduce the balloon or bullet portion of the loan. Slide7

Representations and Warranties

Refers to the possession of adequate licenses, patents, copyrights, trademarks, and trade names to conduct business in addition to the economic, financial, and legal circumstances prevailing at the time the original credit decision was madeSlide8

Representations and Warranties

Is/does borrower

legally incorporated.

In good standing.

has the power to make the agreement, execute the notes and to perform.

submit financial statements that are correct and reflect the borrower's true financial condition.

is permitted to borrow under the borrower's charter and by laws, governmental regulation, and other agreements as authorized by the board of directors.Slide9

Conditions of Lending

This article is concerned with the conditions that must exist and the representations that must delivered to the lender in order to make the commitment binding.

Before disbursing any monies under the loan, legal counsel must be satisfied with the documents submitted by the borrower which including:

Charter and by lawsSlide10

Conditions of Lending

Resolutions adopted by the company's board of directors authorizing the contemplated transaction, together with any other required resolutions (for example, authorizing hypothecation of collateral, insurance, or guarantees).

Certificates of good standing from those jurisdictions where the major properties of the borrower are located or a substantial portion of the borrower's business is transacted.

Copies of all consents and approvals which might have had to be obtained.

Copies of other debt instruments to which the borrower might be subject.Slide11

Conditions of Lending

Copies of all consents and approvals which might have had to be obtained.

Copies of other debt instruments to which the borrower might be subject.Slide12

Conditions of Lending

On the financial side of the conditions precedent, lender should have obtained

a signed copy of the loan agreement and note(s) to be issued

in those instances where collateral is to be pledged, appropriate instruments should have been executed and, if applicable, the collateral should be in the hands of the lenderSlide13

Conditions of Lending

On the financial side of the conditions precedent, lender should have obtained

a similar consideration evolves around the execution and delivery of guarantees

certifications should also be obtained when a contemplated loan is part of a larger financing program involving the raising of additional capital funds, the discharge of other indebtedness, or the prior investment of the borrower's own funds in a venture to be financed partly by the contemplated loan.Slide14

Default Provisions

All term loans have default provisions under which the long-term lender has the right to accelerate the payment of the loan

This is mandated with an acceleration clause which states that if certain conditions are not met, the total loan is immediately due, or at the very least, gives the bank the right to renegotiate the terms

If such a clause is excluded from the agreement, the bank is obliged to wait until each installment is due before legal action can be taken against the borrower.

The fact that the right exists does not mean that it is always used, but it does give lenders flexibility at a time when they need room to maneuver.Slide15

Loan Covenants

The basic covenants in every term loan agreement should he constructed around these three principles:

Limitation of other indebtedness.

Prohibition of secured obligations or of obligations ranking ahead of the commercial term loan.

A provision for the maintenance of a certain minimum working capital.

Furnishing financial statements. Slide16

Affirmative Covenants

Bank furnished with financial statements periodically with any relevant information as requested.

Borrower carry insurance satisfactory to the bank to reduce those risks that are insurable.

Borrower to maintain working capital at or above a stated amount.

Management that is satisfactory to the bank

Banks often require that

key man

insurance be carried on those people in responsible positions who cannot be readily replaced.Slide17

Description of Collateral

When the loan is a secured loan, the agreement sets forth a detailed description of the collateral and how it is to be handled

If the collateral consists of securities, the agreement normally specifies who is to receive the interest or dividends, who is to have the right to vote the stock, under what conditions the securities are to be sold, and if sold, who is to receive the proceeds from the sale Slide18

Negative Covenants

Objectives: prevent a dissipation of assets that would weaken the firm's financial strength, and the assumption of obligations (definite or contingent) that might reduce the borrower's ability to repay the loan.

Negative covenants are particulars the borrower agrees not to do during the life of the loan unless prior consent is obtained from the lending bank. Slide19

Negative Covenants

Example, if a borrower agrees not to pay dividends, it cannot happen by accident that dividends are paid

Financial ratios are usually treated as negative covenants

Borrower agrees not to pledge assets as security to other lender

Borrower aggress not to sell receivables

Prohibitions regarding merger and consolidation, except with the approval of the bank, are also generally included for the bank's protection

To assure that the productive ability of the concern remains intact, a prohibition is usually included against the sale or lease of substantially all of the borrower's assets

Not to make loans to others or to guarantee, endorse, or become surety for othersSlide20

Negative Covenants

Prohibitions regarding merger and consolidation, except with the approval of the bank, are also generally included for the bank's protection

To assure that the productive ability of the concern remains intact, a prohibition is usually included against the sale or lease of substantially all of the borrower's assets

Not to make loans to others or to guarantee, endorse, or become surety for othersSlide21

Restrictive Clauses and/or Secondary Covenants

Restrictive clauses and/or secondary covenants seem similar to negative covenants but are basically different

.Negative covenants in general prohibit certain acts of management, while restrictive clauses permit certain acts but restrict their latitude.Slide22

Restrictive Clauses and/or Secondary Covenants

Prohibition of the sale, discount, or other disposition of accounts receivable with or without recourse.

Prohibition of changes in other debt instruments.

Limitation of prepayment or redemption of other long term debt. The purpose of such a provision is to prevent the bank from being the last to be repaid. It also prevents the firm from using the bank's funds to pay off some other lender. If a borrower owes long-term debts to others, a limitation may be placed on the amount that may be retired annually without also retiring a portion of the term debt owed to the bank. Slide23

Restrictive Clauses and/or Secondary Covenants

Prohibitions on mergers or consolidations, asset sales, and acquisitions.

Prohibitions on investments in other enterprises.

Limitations on capital expenditures. The purpose of this limitation is to prevent the firm from overextending itself. The amount that can be invested will vary considerably but may be limited to the company's annual depreciation charges.

Limitations may also be placed on salaries, bonuses, and advances to officers and employees, as well as to others. The limitation on salaries and bonuses is a way of forcing a borrower to "tighten his belt" until he has adequate capital fundsSlide24

Restrictive Clauses and/or Secondary Covenants

Limitations on dividends. The restriction on dividends may be in terms of a certain percentage of

cumulative

earnings, or it may be specified that dividends not be allowed to reduce retained earnings below a certain level.Slide25

Restrictive Clauses and/or Secondary Covenants

Limitations on treasury stock purchases to prevent a weakening of the firm's financial strength.

Restrictions on the purchase of securities, with the usual exception of United States government obligations. This limitation is designed to prohibit speculation in securities.Slide26

The Miscellaneous Section

The final section sets forth any matter to be specified that does not logically fall in one of the previous sections. It includes where notices to borrowers or lenders shall be sent, what law governs the agreement, the duties of the agent bank in syndicated loans, and the borrower's agreement to pay certain expenses.