Significant adverse effect: This definition is used in several places to define the severity of an event or circumstance, generally determining when the lender can take action in the event of default or require a borrower to remedy a breach of the agreement. This is an important definition that is often negotiated. One of Dodd-Frank`s implications will be to trigger some additional regulatory costs borne by banks that are subject to its regulations. Just like in Europe, the usual approach in the US is for the borrower to bear the risk of a regulatory change after signing the credit documentation, while lenders take the first day risk. Notwithstanding the entry into force of the Dodd-Frank Act, its scope and details will not be fully clarified until the terms of application have been established. At present, these regulations are still at different stages of preparation and discussion. Default events: These will be large. However, there are good reasons for them and, if properly negotiated, they should not allow the use of the loan unless there is a serious breach of the facility agreement. Borrowers often seek to negotiate a lender`s certificate setting out detailed calculations of the increased costs claimed and to include a timeframe for the lender`s retroactive claims on those costs (for example. Β nine months before notification of such a claim). Basel III requires higher capital ratios on the basis that banks should have an adequate and liquid capital buffer that is accumulated in good times and that could be used in the event of financial market shocks and minimise the public costs of a possible bailout. Mandatory capital buffers (capital as a percentage of risk-weighted assets) are therefore at the heart of current banking regulatory reforms.
If a lender attempts to invoke the provision for increased costs, borrowers may, as a last resort, replace that lender in the consortium in accordance with the terms of the financing document. However, such a measure would not necessarily be an easy solution, since the borrower would have to find a new lender who would be willing to replace the lender seeking to increase payment costs, and the borrower would be responsible for any shortfall to the extent that the new lender would not be willing to buy at face value. Lenders are advised to check whether their credit agreements contain such a deductive clause to ensure that they are adequately protected. Interest: The interest margin must match that specified in the lender`s letter of offer or condition sheet. LIBOR and mandatory bank fees are also due. Any provision for an increase or decrease in interest margin (known as a “margin ratchet”) should also correctly reflect the lender`s letter of offer or condition sheet. The big problem with this part of the cost increase clause is that it is subjective. The bank relying on the clause must decide how much the costs (resulting from changes in the capital requirement) are attributable to a particular loan. The clause tends to examine the financial situation of the lending bank as a whole, not just the loan in question.
There will also be default provisions regarding violations of the installation agreement itself. These may leave a period of time for recourse by a borrower and, in any case, apply only to material breaches or breaches of the most important contractual provisions. The non-payment provision usually includes a grace period to cover administrative or technical difficulties. Defaults in insolvency should also include reasonable grace periods and appropriate waivers of solvent restructuring with the consent of the creditor. For more information on cannon`s facility agreements, please contact the Loan Markets Association or the Association of Corporate Treasure. Availability: The borrower must check if the facilities are available when the borrower needs them (for example. B to finance an acquisition). Lenders often assume that they need two or three days` notice before facilities can be used or used. This can often be reduced to a one-day period or, in some cases, even a notification around a certain time on the day of use.
The lender must have enough time to process the loan application, and if there are multiple lenders, it usually takes at least 24 hours. Some of the most important definitions that appear in any loan agreement are: – Finally, a syndicated credit agreement will contain many provisions concerning an agent bank and its role. These will often not be immediately relevant to the borrower, but it must be considered that the agent bank can only be replaced with his consent and that the agent bank has sufficient powers to act independently in order to give the borrower the flexibility he needs. A borrower will not want to seek the consent or waiver of a large consortium of lenders. Some banks attempt to completely exclude capital requirements from the scope of the cost increase and address them in different ways – for example, through a “margin ratchet” or the inclusion of a negotiation provision in the loan agreement to clarify what should happen if the borrower`s risk weighting (as attributed to their respective loan) changes after the loan is signed. LIBOR: The London Interbank Offered Rate (LIBOR) is a daily benchmark rate based on the interest rates at which banks can borrow unsecured funds from other banks. It is generally defined for the purposes of a credit agreement by reference to a key interest rate (usually the British Bankers` Association interest rate equalisation rate for the currency and period concerned) or the base reference rate, which is the average interest rate at which the bank can raise funds on the London interbank market. Interest is due at the end of each interest period, interest periods can be fixed periods (usually one, three or six months), or the borrower can choose the interest period for each loan (options are usually periods of one, three or six months).
This clause is intended to cover the increased costs associated with a bank that primarily (but not exclusively) meets these capital requirements. Representations and warranties are similar in all installation agreements. They focus on whether the borrower is legally able to enter into financing contracts and the nature of the borrower`s business. They will often be broad, and the borrower may try to limit them to questions that, if not correct, would trigger a significant negative effect. This classification may apply to many insurances and guarantees relating to the borrower`s business (para. B e.g., litigation, environment and accounts), but it is unlikely to be acceptable to the lender to limit the borrower`s ability to enter into financing agreements or with respect to material financial information. Financial companies or covenants regulate the financial situation and health of the borrower. You define certain parameters within which the borrower must work. Comments from the borrower`s accountants should be sought as soon as possible with respect to their content. The dates on which these entities will be audited should be examined, as should the separate financial definitions that will be applicable. Financial covenants are a key component of any loan agreement and are most likely to trigger a default event in the event of a breach.
Stronger borrowers may be able to negotiate a right to remedy financial harm, for example by investing more money in the business. This is called an “equity remedy.” The cost increase clause is one of many clauses in a facility agreement that are intended to protect the lender`s approach to “cost plus” lending, that is: All costs associated with granting a particular loan that would otherwise adversely affect the lender`s performance should be on behalf of the borrower. The clause generally allows lenders to cover any increase in costs incurred as a result of compliance with a change in law or regulation that occurs after the date of the credit agreement. A capital increase required as a result of the Basel III reform or the payment of the direct debit may fall within the scope of these rules. There may also be provisions for advance payments from insurance proceeds or sales. These often allow the borrower to first use these funds to replace the assets sold or the damaged money against which it was received. These provisions allow for the deduction of costs and taxes, so only net proceeds should be used to replace assets. In the past, the purpose of the cost increase clause was to protect lenders from costs arising from unforeseen changes in law or regulation.
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