Loan Agreement Checklist

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loan agreement Covenants/Negotiating points

1. Purpose of Loan. Many lenders will try to make this section as specific as possible, which limits the Borrower’s flexibility. Instead, the purpose of the loan should normally be for “general corporate purposes”, or something similar. The Lender will have plenty of other ways in which to check on the use of funds and the Borrower’s financial viability without having the limitation specified in the Purpose section.

2. Availability/Commitment Fee. The period of availability – the time period during which funds can be drawn under the loan agreement – should be as long as reasonably required by the Borrower. During this period, the Lender may require the payment of a Commitment Fee on the undrawn portion of the loan. This fee should be reasonable and is typically about ½ of 1% per annum. Theoretically, this Commitment Fee is paid to the Lender for their “reserving” the funds for the Borrower. Practically, this is just a way for the Lender to increase the overall effective return on the financing arrangement.

3. Notice of Borrowing. The Lender will typically require that the Borrower give a Notice of Borrowing, essentially to give the Lender time to line up the funds for the Borrower. However, since this normally only requires several days in most foreign markets, this notice period should be reasonable and give the Borrower flexibility in planning its cash needs. A 3-5 day notice period should be sufficient.

4. Interest Payment. Try to stretch out interest payment intervals. The longer, the better. Never agree to pay interest in advance, which effectively increases the cost of the loan. Interest should always be paid in arrears.

5. Prepayment. The right to prepay is very important to have on a long or medium term loan. Interest rate conditions may change dramatically or the tax position of the Company may change, requiring an adjustment to the debt/equity structure of a subsidiary. Typically, the fairest way to accomplish this is through “broken funding” language, whereby the Lender is “made whole” in their return on the loan, despite the prepayment. This assumes the Lender is able to relend the prepaid funds to another borrower of similar credit at a similar spread over the remaining life of the loan, or, puts the funds on deposit for a similar period of time. It is hard for a lender to argue against such a fair arrangement.

6. Penalty Interest. Many lenders want very high penalty interest on overdue payments, as a way to discourage borrowers from missing or delaying payments. However, conditions may occur in the normal course of business in some countries that will cause delays. It’s fair for a lender to earn a “penalty” or “premium” in such cases. A premium such as 1-2% over the rate stated in the underlying agreement, paid during the period of delay, is typical.

7. Withholding Taxes. It’s preferable to pay interest net of withholding taxes, but many lenders prefer a gross up in those cases where a withholding tax attaches to payments. If this is the case, then it’s reasonable for the Borrower to ask for an undertaking from the Lender to refund tax credits it may get for such taxes paid by the Borrower.

8. Representations and Warranties. It’s best to qualify all representations and warranties as being true "to the best of Borrower's knowledge and belief", as of the date of the loan agreement. The Borrower should not be in default for unknowingly saying something was a fact when it really was not, or where it may not have all the necessary information available to make the rep./warranty. Likewise, representations and warranties should not automatically continue throughout the term of a loan. It’s reasonable for a Lender to have to ask for a rerepresentation/warranty during the life of the loan, with the Borrower providing as required. 9.Material and Adverse Change. Many loan agreements require that the Borrower...
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