Ucl - Term Loans

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Ordinary "term" loan

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outright transfer of money from a lender to a borrower, subject to contractual obligation on that borrower to pay periodical amounts of interest to the lender during the life of the loan and to repay the capital amount of the loan at the end of the loan period

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Does lender have any rights to property?

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No - unless it takes some security. So lender has only personal rights in contract/tort aside from any rights in a security agreement

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How is loan K terminated?

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Generally done w/ "acceleration" of repayment obligations

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How is acceleration triggered?

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by occurence of an "event of default" in loan K

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5 categories of loan covenants

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1. covenants as to condition of the borrower
2. ...as to borrower's performance during the life of the loan
3. ...as to continued feasibility of the loan
4. circumstances in which loan will be accelerated and provisions governing the manner of acceleration
5. negative pledge and pari passu provisions

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Controls on the buyer - if there is no security taken

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Only a specific K provision identifying purpose for money - breach may lead to (1) payment of damages, (2) termination of K, or (3) creation of equitable interest by way of Quistclose trust

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Borrower's 2 types of K obligations

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1. K obligation to repay loan capital at termination of loan agreement
2. K obligation to pay interest

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2 ways to terminate a loan

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1. termination at the expiry date identified as the end of term
2. terms of loan K which impose other obligations other than purely payment of money [loan covenants]

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Secured loan contracts

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K which is improved by use of one of the techniques for taking security

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Termination of secured loan K

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termination linked in the K to the realization of the security provided by borrower at the outset

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Guarantees

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if borrower fails to make payment under a loan K then some other person pays on her behalf; generally not accepted from holding companies b/c they have no assets of their own

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Quistclose trusts

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when loan K specifies that loan moneys are to be used only for a specialized purpose, lender gets an equitable proprietary interest in the loan moneys even after they are transferred to the borrower

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significance of Quistclose trust

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if borrower goes into insolvency, because there is a trust over the loan moneys, they are not distributed amont the borrower's creditors. Also grants the lender ability to trace the loan money into mixed accounts

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1. Covenants as to condition of the borrower

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borrower must make covenants to satisfy lender's credit risk concerns. if a covenant is breached, the loan becomes immediately repayable. borrower must represent that all info is correct

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Types of covenants as to condition of borrower

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1. capacity and authority to act
2. continued solvency of the borrower (can include credit downgrade or deterioration of credit)
3. financial condition of borrower (employment status of individual or accounting condition of corporate)
4. calculation of credit risk (can constitute MAC), debt coverage ratio
5. prohibitions on restructurings of the borrower
6. provision of information (reporting obligations)

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2. Covenants as to borrower's performance

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1. obligations to make repayments of interest on timely basis; repayments of capital
2. no cross-default on any other laons
3. no acceleration of payments under this or any other loan

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3. covenants as to continued feasibility of the loan

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1. commercial feasibility
2. any supervening illegality of K under criminal law or regulatory principles that would make it void/unenforceable
3. changes in tax treatment

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4. acceleration of obligations

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once event of default has occured, loan is repayable immediately and lender is entitled to recourse to any of the contractual credit support mechanisms available under the loan K

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Power of acceleration

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English law generally - lender with a right to accelerate may do so as she sees fit without any grace period if K permits recovery on that basis. Usually courts read in a condition subject to the "usual banking conditions". BUT lender might not be entitled to demand immediate repayment unless the K provides it.

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Wrongful acceleration

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if bank wrongfully accelerates and thereby causes loss to the borrower, then bank will be liable for damages to compensate borrower's loss

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Failure to lend

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if a bank fails to lend then the customer may proceed against it. Bank bears burden of proving loss. If borrower could acquire funds elsewhere on similar terms, only nominal damages.

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5a. negative pledge clause

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borrower undertakes not to subordinate any of its assets to a secured interest of any other perdon

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5b. pari passu clause

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provision stipulating that the borrower must not allow any creditor to acquire an advantage over any other creditor; all unsecured creditors have their rights in proportion to their respective rights in equal step

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Subordinated debt

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If a loan is not secured or if it is not possible to use a negative pledge clause because there are already loans in place with them, any further loans must be made with a higher rate of interest to accomodate the lack of security. Lender with only subordinated debt will be an unsecured creditor only entitled to recover amounts once secured lenders have been repaid.

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Purpose of Master Agreement

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used to bring all the parties' many transactions together to constitute a single agreement for insolvency, netting, termination etc. Ensures formal nicities so parties can set-off obligations in the event of an insolvency. Also lets parties terminate their transactions quickly and neatly by establishing "conditions" of their transactions and providing express termination provisions.

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form of Master Agreement

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standard market terms which the parties may amend/extend with a schedule that is negotiated by the parties. each individual transaction contracted under the master agreement umbrella is documented by a "confirmation" then supplemented by any "credit support documentation"

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When are Master Agreements typically used?

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1. when parties intend to conduct a large number of similar transactions
2. large number of risks created by the type of product that the parties want to control in all their transactions
3. when there is a standard master agreement used in relation to a particular product, even if the parties intend to transact once

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Construction of financial contracts

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interpreted as the meaning that would be conveyed to a reasonable person with all the background knowledge available to the parties at the time K was created; words given ordinary meanings except where context requires a particular meaning known by the parties at the time of the K

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conditions v. mere warranties

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conditions are terms that cut to the heart of the contract so that any breach entitles the non-defaulting party to terminate the contract. Mere warranties may impose obligations on one or other of the parties but do not require the contract to be treated as terminated

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Condition precedent

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a condition which must be performed before the contract comes into effect.

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Common conditions precedent

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parits' obligations subject to counterparty having performed certain actions (making payment, delievering appropriate documentation); having specified status (appropriate capacity to act, having granted agent appropriate authority to act, not being insolvent). If conditions have not been satisfied, K is void and unenforceable. Ct must decide whether the condition relates to the K being effective at or simply whether breach of the condition brings the K to its end.

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Test for conditions precedent

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term must go to the root of the matter, so that failure to perform it would render the performance of the rest of the contract a thing different in substance from what the defendant had stipulated for

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Test for warranty

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term which, when breached, gives rise to a claim for damages but not a right to treat the K as repudiated

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Principles regarding catagorization of terms as conditions or warranties

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where parties have expressly identified a provision as being fundamental to the K, that term will be considered a condition; if not expressly stated, ct will apply the tests

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LIBOR

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London Interbank Offered Rate
- reference rate, used in calculating interest rates