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3 Corporate Loans

3 Corporate Loans

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Published by: api-3803117 on Oct 17, 2008
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Bank Lending - A Look at the Standard Provisions of a Facility Agreement and General Considerations
CORPORATE LOANS
-
fall into the following categories:
-
borrowing from banks and financial institutions; and
-
borrowing or raising of funds from the public
Purpose
o
For due diligence etc also need to look at such documents. Acting for banks etc also need to know how to
construe such docs and how client interest is covered
o
Or for personal purposes eg housing loan
\u201cThe Right Precedent\u201d
-
Importance of choosing the right precedent for corporate loans
-
Different types of loan agreements \u2013 syndicated; loans with arrangers; purchase of shares (warranties &
requirements differ)
-
Factors include:
i.
Query if the precedent is a previously negotiated one
ii.
Parties with similar or vastly different bargaining powers \u2013 1-sided? Bank lending to small
developer?
iii.
Suitability in context of present case
-
Check few precedents & know what clauses are commonly provided in market practice
-
Eg. Broken funding costs; cross-default clauses
Types of bank lending
-
\u2022 Bilateral \u2013 bet borrower and lender
-
\u2022 Syndicated
\ue000Two or more banks contract with borrower to provide credit on common terms
\ue000Each bank acts on a several basis in funding its proportion of the facility
\u2022

Eg 3 lenders toge contributing 100% o commitment, one 60% and other two 20% - several means that one member not resp for commitment of other lenders, if any lender x come up with his proportion of the commitment other lenders not aked to fork it out

\ue000Agent bank acts as agent for banks and co-ordinates and administers all aspects of the facility
\ue000The syndicate may be formed before or after the execution of the facility agreement and its
participants may change during the period of the facility -- This is determined by transfer provisions
in the facility agreement.
o
Diff incentives to form\u2013
\ue000if lead bank, have direct rr with borrower but may not want too much exposure to one partr borrower
because internal guidelines such tt canot be too much of own resources to fund any partr borrower \u2013
also certain restriction may appy depednign on industry
\ue000Other banks want to participate \u2013 can do so with smaller exposure and htose not currently lending to
borrower in partr industry can gain experience in tt industry
BORROWING FROM FINANCIAL INSTITUTIONS
-
kind of facilities obtained would be that most suitable for the business of the company
(1) Trade Financing
(i)
Overdraft Facilities
\u2022
credit up to a stipulated maximum
(ii)
LC/TR Facilities
\u2022
L/C = letter of credit
\u2022
TR = trust receipt
\u2022
Brief description of a transaction involving LC/TR:
(a) Singapore Buyer enters into contract to purchase goods from Seller in
Japan
(b) Contract provides for payment by an L/C
1
(c)Singapore Buyer approaches Bank in Singapore for L/C facilities.
Procedure is as follows:

(A) Singapore Buyer applies for a L/C which is made in Issuing Bank\u2019s standard form which incorporates an undertaking by applicant to reimburse the Issuing Bank

(B) Issuing Bank issues a L/C in favour of the Seller of Japan and the
L/C is sent to the Paying Bank in Japan who notifies Japanese
Seller

(C) Japanese Seller ships goods and sends shipping documents
comprising:

\ue000bills of lading
\ue000bill of exchange (sight bill)
\ue000invoices
\ue000other documents

to Paying Bank in Japan against payment under the L/C.
The Paying Bank sends shipping documents to Issuing
Bank in Singapore. The Issuing Bank then informs the
Singapore Buyer and releases the shipping documents to
the Singapore Buyer against payment of the sight bill

(D) If the Singapore Buyer had arranged with the Issuing Bank for
further financing say for 3 months, then the shipping documents
will be released to the Singapore Buyer against a bill of exchange
issued by the Singapore Buyer in favour of the Issuing Bank
payable in 3 months and against TRs. If further financing is
provided, the Singapore Buyer issues a new bill of exchange in
favour of the Issuing Bank which then releases the shipping
documents to the Singapore Buyer against TRs

(E) TRs are poor security and are dependent on the ability to trace
goods which could be problematical
(iii)
Bills Discounting Facilities
\u2022
Singapore Seller exports goods
\u2022
It draws a bill of exchange and discounts it to the Bank
\u2022
Bank either discounts it in the market or sends it to the collecting bank abroad for
collection
\u2022
Collecting bank will forward the bill to the Buyer for collection if it is a sight bill
and for acceptance if it is a time bill
(iv)
Guarantee Facilities
\u2022
Issue shipping guarantees on behalf of consignees of goods to enable them to collect
the goods without bills of lading
(2) Non trade-related Financing
\u2022
financing of manufacturing concerns or project financing, may take any of the following forms or
combination:
a) Overdraft Facilities
b) Revolving Facilities
c) Short Term Advances
d)Term Loans\ue001 Analysis of Credit Facilities Agreement \u2013 the Term Loan:
1. Definitions and interpretation
2. Amount, purpose and use of the facility

3. Conditions precedent
4. Drawdowns
5. Interest

6. Prepayment and repayment
7. Commitment fee
8. Cancellation
2
9. Tax
10. Changes in circumstances
11. Representations and warranties
12. Negative covenants
13. Positive covenants
14. Default in payment of expenses

15. Default
16. Miscellaneous indemnities
17. Notices

18. Costs and expenses
19. Amendments and waiver
20. Successors and assigns

21. Communications
22. Severability
23. Governing law and jurisdiction
d) Guarantee Facilities
\u2022
where large-scale financing is required, the Borrower will give a mandate to an arranger(s) or
manager(s) to syndicate the loan
\u2022
upon syndication, the loan will be administered by the facility agent
\u2022
documentation will govern not only the relationship between the Borrower and the lender(s), but
that of the lender(s) inter se, the agent and the manager(s)
The Facility Agreement
o
Standard clauses:-
o
\u2022 Parties \u2013 in many syndicated deals many diff parties and each will have diff titles. Eg lender,
facility agent/ trustee, borrower, arrangers (co-arrangers, subarrangers etc)
o
\u2022 Definitions and Interpretation
o
\u2022 The Facility \u2013 set out what agreement is wrt facilty provided by lender to borrower.
o
Basic type of facilities: -
o
Term\ue000Loan of a specific amount for a specific period of time. Repayment may be in
instalments or bullet. Amounts repaid or prepaid cannot be redrawn.
o
\u2013 Revolving
\ue000Loan of a specific amount for a specific period of time but the borrower can

drawdown, repay and redraw at its discretion. Each drawing reduces the available
amount and each repayment restores it. Final epayment will be made on the final
maturity at the latest although in some cases, reductions in the available facility can
occur at regular intervals.

o
\u2013 Guarantee
\ue000Facility pursuant to which bank(s) issues guarantee(s) to a nominated beneficiary in
relation to e.g. an instalment payment for an acquisition of assets
\ue000Bank guarantee as good as saying tht if present payment on bank, will get payment in
full
o
Letter of Credit
\ue000Facility pursuant to which bank(s) issue letter(s) of credit to support structured
transactions. Certain institutions provide funds during precompletion phase of a
project only if completion risk is underwritten by a syndicate of banks
o
\u2013 Multicurrency
\ue000This facility contains a multicurrency option permitting the borrower to switch
currencies periodically. .\u2014borrows in various currency
Other Standard Provisions
-
\u2022 Purpose of the Facility
o
Working Capital
3

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