The Handbook of International Loan Documentation

Second Edition

S. Wright

• Verlag: Palgrave Macmillan
• Jahr: 2016
• ISBN:
  9781137383372
• Auflage: 2
• Thema: Business
• Thema: Financial Services

This new edition provides a highly practical and comprehensive resource for bankers and lawyers, at all levels of experience, involved in international lending. The author covers the terms of international loan documentation with comprehensive explanations of the purpose of the provisions, and of areas that may require negotiation.

PART
1	ADMINISTRATIVE PROVISIONS

This Part deals with those parts of a loan agreement which are mechanical in nature: the definitions, procedures for drawdown, calculation of interest, and the like. These provisions are contained in clauses 1–17 of the LMA Term Loan.

1	Interpretation

CLAUSE 1: DEFINITIONS AND INTERPRETATION – SECTION 1 – AN INTRODUCTION

1 Introduction

Loan agreements contain detailed definitions. This helps, 1.001

to ensure consistency between different provisions of the document;

to avoid ambiguity; and

to keep the complexities out of the body of the agreement (see Box 1.1).

Box 1.1

For example, in the operative provisions, a simple statement can be made, such as The Borrower shall not create any Encumbrances other than Permitted Encumbrances. The general purpose of this provision is easily understood, while its application, and therefore its impact on the borrower, is only understood by reviewing the detail in the definitions.

There are traps for the unwary in using definitions. Principally these are: 1.002

reading (or not reading) the definitions in context;

appreciating (or failing to appreciate) that the definitions may need different meanings in different contexts;

avoiding circular definitions; and

avoiding including operative provisions.¹

We look at each of these issues here.

Definitions out of context

It is hard to comment on, or to fully appreciate the implications of, any particular definition out of context (see Box 1.2 on page 52). 1.003

Box 1.2

For example, appreciating whether the definition of ‘Financial Indebtedness’ should or should not include derivative transactions depends on the reader knowing where the definition will be used and with what purpose.²

It may therefore be sensible to skip the definitions clause and start reading from the operative clauses starting at clause 2 (or, rather, at clause 1.2, for reasons discussed here). When a defined term is encountered, its definition can then be reviewed in context. This makes it easier to appreciate the detail of the definition.

The suggestion is to commence reading at clause 1.2, so as to be aware of any words which have been defined by that clause without that fact being flagged by the use of capital letters.

Clause 1.2 is intended to deal with references to concepts (such as a person) as opposed to specific words (such as ‘Encumbrance’). In this interpretation clause, concepts are broadened without their being given capital letters (see Box 1.3). 1.004

Box 1.3

So you can see there is no attempt to define ‘person’ – instead of saying ‘person means ABC’ the statement is that ‘person includes ABC’. The idea is to extend the ordinary meaning, not to provide a complete definition.

This can lead to the existence of the wider meaning which has been given to the concept being overlooked. It is therefore sensible to read the interpretation clause (clause 1.2) before reviewing the operative clauses and to make special note of the words and concepts which have been defined without being capitalized (see Box 1.4).

Box 1.4

For example, assume clause 23.13 is drafted to say ‘On, and at any time after, the occurrence of an Event of Default which is continuing, the Agent may ... [accelerate the Loan]’.

On its own, this appears clear. However, it needs to be read in the context of clause 1.2(d) which defines the word ‘continuing’.³ When that meaning is taken into account, the reader will appreciate that clause 23.13 has a somewhat different meaning than would have been understood from reading clause 23.13 alone.

Different meanings in different contexts

While the definitions help to ensure consistency throughout the document it may be that consistency is not required in some cases. 1.005

Borrowers frequently request that adjustments be made to a definition which, on consideration, the lenders may wish to make in some instances (e.g. the negative pledge) but not others (e.g. the conditions precedent) (see Box 1.5).

Box 1.5

For example, the borrowers may request a definition of ‘Permitted Encumbrances’ which allows the creation of a wide variety of security interests over the company’s property. The lenders may be willing to agree to this request in the context of the negative pledge but may want to be more restrictive as to the security interests which may exist at the date of the first advance of the loan. In that case changing the operative clauses would be a better option than changing the definition.

It is therefore advisable to leave the definitions alone and make changes as appropriate in the operative clauses. Similarly, when reviewing the definitions, it is important to review them in each context in which they are used, as the definition may be appropriate in some circumstances but may require adjustment in others.

Circularity

It is not unusual to find that a defined term itself refers to another defined term. This, if carried to extremes, can make the definitions very difficult for readers to understand. In some cases, it might make the definitions meaningless (see Box 1.6). 1.006

Box 1.6

An example of a meaningless definition is, ‘ “Outstanding Indebtedness” means all moneys outstanding under the Security Documents’ while ‘ “Security Documents” means all documents executed as security for the Outstanding Indebtedness’.

Operative provisions

The definitions are there to explain what particular expressions mean. They should not include any operative provisions, such as positive or negative undertakings or conditions. The main hazard of including operative provisions in the definitions is that they are harder to find there. At the extreme they may also be ineffective. 1.007

CLAUSE 1: DEFINITIONS AND INTERPRETATION – SECTION 2 – THE LMA DEFINITIONS

Clause 1.1 Some definitions

The following definitions in the LMA Term Loan deserve particular attention.

Base Currency Amount

This definition is used in a multicurrency facility as a reference point for the lenders to determine from time to time what the amount of the loan would have been had it always been drawn in a single currency and remained in that currency.⁴ 1.008

Break Costs

‘Break Costs’ means the amount (if any) by which: 1.009

(a)the interest which a Lender should have received for the period from the date of receipt of all or any part of its participation in a Loan or Unpaid Sum to the last day of the current Interest Period in respect of that Loan or Unpaid Sum, had the principal amount or Unpaid Sum received been paid on the last day of that Interest Period;

exceeds:

(b)the amount which that Lender would be able to obtain by placing an amount equal to the principal amount or Unpaid Sum received by it on deposit with a leading bank in the Relevant Interbank Market for a period starting on the Business Day following receipt or recovery and ending on the last day of the current Interest Period.

Floating rate loans are generally drafted on the basis that the borrower will have the ability to choose the interest periods from time to time⁵ but that the borrower must take the reinvestment risk⁶ if any payment is made by the borrower in the middle of an interest period. This is achieved by clause 11.4 discussed at 5.040, which requires the borrower to pay the lenders’ ‘Break Costs’ if payments are made in the middle of an interest period. 1.010

Comment In the context of large loans, some borrowers may request that the definition be adjusted to reflect the time value of ...