Negotiating a facility agreement as a corporate borrower: what should you consider?

As a borrower, if you’re thinking about entering into a facility agreement with a lender, it is important to consider a number of key issues before signing on the dotted line. In a typical facility agreement where a lender is to lend to a borrower, the lender’s lawyers will normally prepare the first draft of the facility agreement. Therefore, it is likely to be drafted in a way that will protect the lender’s position and can contain a number of onerous obligations for the borrower. However, there are a number of things you can do as a borrower when negotiating a facility which can help level the playing field. Some key points to consider are discussed below:

Commercial Terms

It is important to check the key commercial terms of the facility agreement against any agreed term sheet or heads of terms that you may have agreed at the start of any negotiations. These will normally include:

• The margin payable on the loan.
• The interest periods and interest payment dates.
• The repayment dates and amounts.
• The amount and timing of any fees payable on the facilities. Fees may include an arrangement fee, a commitment fee or non-utilisation fee, or a prepayment fee.

The commercial terms of a facility agreement may also be affected by other background factors applicable to the transaction. For example, any availability period for drawing the facilities should tie in with any completion schedule under any related agreement e.g. a property or business acquisition agreement. Consider what purpose you are entering into the facility for when considering terms and take advice from your relevant advisor.

Financial Covenants

A facility agreement may include covenants that measure the financial health of the borrower by reference to a range of metrics. These are designed to act as an early warning system for the lender, so that if a financial covenant is breached the lender is alerted to potential financial difficulties on the part of the borrower before a payment default.

If a borrower does experience financial difficulty, most facility agreements can be terminated on the part of the lender only on occurrence of specified events of default. One of the most common events is non-repayment of the loan. It is important that you seek to negotiate this point with a lender as you will want to ensure you have as much time as possible to rectify any issues that may arise.

Representations & Warranties

A facility agreement will typically include extensive representations and warranties given by the borrower in favour of the lender. Work through these to determine if you are able to give all the representations and warranties and try to negotiate any you cannot give without qualification. It is extremely important that any representations and warranties you do give are true and accurate as if not, it will likely constitute an event of default under the facility agreement and give rise to the lender being able to call in its loans.

Restrictions on business activities (including acquisitions, borrowing and disposals)

A lender may seek to restrict a borrower’s ability to operate certain parts of its business whilst any debt is outstanding with the lender. For example, this could include restrictions on further borrowings, paying out dividends, undertaking any acquisitions or disposals etc. Think about whether this could be an issue in the context of your transaction and wider business needs. This is especially common where money is borrowed to finance an acquisition or other expansion and where the lender expects a significant proportion of its money back before the likes of shareholders reward themselves or the business undertake further acquisitions.

Events of Default

Most facility agreements can only be terminated by the lender on the occurrence of certain specified ‘events of default’ and for so long as the same are continuing.

‘Events of default’ can include situations such as non-payment, non-compliance of any provision in the agreement, and insolvency. The event of default clause is one of the most important clauses to negotiate in the agreement. A borrower will want to obtain as much grace as possible to limit the circumstances in which the lender can terminate the agreement, demand repayment or enforce any security (or take other enforcement action). You should seek advice on such events to check that they are agreeable in the context of your transaction and if anything can be included to help mitigate these circumstances (e.g. an equity cure or otherwise).

Conditions Precedent

In most facility agreements, the borrower will generally be required to satisfy a number of conditions precedent (CPs) before the lender will make a loan available to a borrower which are often found in the schedule to a facility agreement.

It is important that any borrower can satisfy each of these CPs ahead of drawdown otherwise the loan will not proceed. To best protect your position, it is important to engage in communication with the lender on the CPs as early as possible to ensure these are satisfactory to both parties and will not cause any issues during the course of the proposed transaction.

This article has only considered some of the key areas for consideration when negotiating a facility agreement as a corporate borrower. You should strongly consider obtaining legal advice before entering into any agreement with a lender.

This article was prepared with the assistance of Rebecca Turner.