The Mechanics of Loan Documentation - A Post Graduate Certificate Course Delivered by Distance Learning
Course Highlights and Agenda
This postgraduate certificate course has been developed to provide you with a comprehensive step-by-step guide to the documentation used in corporate loans, bilateral loans and syndicated loans. The course consists of eight intensive and practical modules, studied by distance learning over a 16 week duration.
This is the only distance learning course that focuses in-depth on the practicalities of loan documentation and offers professionals within the sector the opportunity to enhance both their technical and theoretical knowledge of the subject. Plus, you also have the option of submitting an assignment to be assessed by Middlesex University for a postgraduate certificate.
The course will prove invaluable for anyone involved in the negotiation, structuring and administration of loan documentation. Approaching the topics in a modular format, the course will enable you to grasp the key concepts in a practical way and thus helping you build a firm platform on which to expand your knowledge.
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Module 1 - The Choice of Law, Enforcement, Contractual Interpretation, Secondary Lending
- Determining which law is applicable to which types of transaction
- Understanding the different types of law that can be applicable to financial transactions
- Resolving how to enforce contractual rights where multiple jurisdictions are involved
- Identifying how contracts are interpreted in English Law
- Summarising the need for lenders to sell down financial assets
- Debating the documentation implications of lender sell-down
Summary of Module
Before we can get 'stuck in' to the detailed clauses in a finance document and debate the commercial objectives and protections of lenders, borrowers, guarantors and security providers, we have to step back and take a look at how the law works. In turn that means an examination of the following matters:
- There are 196 countries in the world. Whose law will govern cross-border transactions?
- Where English law is chosen, in what circumstances will we encounter statute law, common law, or equity law?
- Since in corporate lending transactions it mostly common law that applies, how does the common law actually work?
- If I get a judgment in my favour, how can I apply it against the assets and cash flows of my counterparty, especially if they are located in another country?
All of the agreements we shall be looking at during the subsequent modules - loan agreements, guarantees, and security arrangements - have one thing in common. They are all contracts:
- If I have a contract, how safe is it negotiate the wording of a draft agreement?
- Does the law apply special meaning to certain words or phrases?
A controversial area of legal documentation surrounds the right of financiers to sell-down loan assets. This topic starts with a summary of why lenders need this right, how it has been complicated by Basel capital adequacy rules, and what safeguards borrowers should be introducing into the documentation regarding consents and confidential information.
Module 2 - Pre-requisites for the Enforcement of Contractual Rights
- Clarifying the importance of corporate and directors powers and authorities
- Identifying when the company law of the borrower's / guarantor's jurisdiction is relevant
- Focusing on the precautionary requirements prior to executing documentation
- Understanding the errors and their implications in contracting
- Appreciating the benefits of conducting annual security and documentation audits
Summary of Module
Under Common Law systems there are certain requirements for any contract, be it a loan agreement, guarantee, or security document, to be enforceable at law. Failure to ensure that these requirements are met will often be fatal to the interest of a financier. Some of these requirements are technical and would not be obvious to a non-lawyer.
Understanding the power of the company, the delegated powers of the directors and who is authorised to commit the company are important. The adoption of certain procedures at the time of originating the transaction can reduce the possibility that these issues will arise at the time enforcement of rights becomes relevant.
Module 3 - The Key Clauses in a Loan Agreement
- Familiarising with the layout of the contents of typical loan agreements
- Identifying the shortcomings of some key clauses within a documentation of the loan
- Debating the potential amendments in approach to overcome the shortcomings
- Understanding the legal duties of an Agent Bank in a syndicated loan
- Clarifying the restricted ability of the Agent to disclaim liability for negligence
Summary of Module
In the following module we will be delving into the contents of the multicurrency syndicated loan agreement issued by the UK's Loan Market Association. However, this module identifies how loan agreements are typically set out and clarifies the legal effect of things such as Representations & Warranties.
We then go on to examine several key clauses in the loan document where people often have a false understanding of the legal effect - a gap between the usual perception of the clause and the actual effect. The module concludes with an extensive review of the role of the Agent Bank within a syndicated facility. The Agency clause is actually a contract-within-a-contract. It is the arrangement by which the participating banks confer powers onto the Agent bank.
The module identifies:
- The agent's role
- The potential for liability in negligence
- The consequences of negligence
- The ability to disclaim liability
Module 4 - The LMA Syndicated Multicurrency Loan Agreement
- Detailing the principal clauses in the LMA loan agreement
- Understanding both the borrowers’ and the bankers’ perspectives
- Identifying areas of controversy to be resolved in commercial negotiations
Summary of Module
The previous module concentrated focus on some specific clauses. In this continuation we work through the loan agreement and focus on the likely areas where borrower and lenders will have differing objectives. For each of the clauses we identify the effect of the clause, the problems or issues that may arise between the negotiating parties, and suggest some amendments that may be considered to reconcile borrower and lender positions.
Module 5 - Guarantees and Letters of Comfort
- Understanding the extensive common law rights of a guarantor
- Identifying the technical wording, changes to which can affect the legal effect of the guarantee
- Appreciating how a guarantee removes each of those common law rights
- Addressing the debate of whether letters of comfort are legally enforceable
- Resolving how to analyse the effect of a comfort letter forensically
Summary of Module
Common Law guarantees are technical documents and represent dangers for financiers since their protection is embedded in words and phrases that have a technical legal effect. The protection can be jeopardised by clumsy renegotiation of the words used.
We look at why Common Law has traditionally been biased in favour of the guarantor, and what rights the guarantor has inherited. A guarantee is a document that one-by-one removes those rights, without which a guarantee would have limited value to a debt financier.
Many financiers believe a letter of comfort not to be worth the paper it is written on. Others believe it is entirely legally enforceable. Neither simplistic position is correct. Some comfort letters have binding legal effect and some don't. Our challenge is to identify what attributes a comfort letter must have for it to be enforceable.
Module 6 - Security Under English Law
- Understanding how the different types of taking security are related to each other
- Identifying the required characteristics of each security type
- Familiarising with the layout and effect of clauses in a typical mortgage document
- Appreciating the challenges in valuing security
Summary of Module
Security, and the taking of it, is jurisdictionally specific. It also has a degree of complexity to it. This module seeks to focus primarily on the application of English Law.
Many international financings are conducted through special purpose vehicles and the greater ease of taking security in Common Law jurisdictions, causes the SPVs to often be incorporated in such jurisdictions - specifically so a Fixed & Floating Charge can be taken.
We go through each of the security types and detail examples of how the security is taken, how it is enforced and the problems and restrictions that can arise.
Module 7 - Insolvency and Contractual Rights
- Appreciating the range of options that financiers have when confronted with non-performing loans
- Identifying the potential liabilities of directors for wrongful trading
- Familiarising with the process of a voluntary loan workout
- Overview of the different form of insolvency regime
- Clarifying the documentation issues that arise in implementing a loan workout
Summary of Module
The principal difficulty for financiers is that the insolvency law that will apply is not that of the locus of the loan, but the place of incorporation of the borrower / guarantor. This requires lenders to have a broad appreciation of the insolvency practice in a variety of different jurisdictions - not just their own. The majority of corporate borrowers will have subsidiaries in a variety of different jurisdictions.
The guiding principle of Common Law contracts is "Freedom of Contract". So what the parties have agreed should be applied.
However, the guiding principle of any country's insolvency law will be "Pari passu treatment of unsecured creditors". When these guiding principles clash, it is the insolvency law that takes priority over contract law.
If financiers are aware of how their loan and security arrangements can be overridden by insolvency law, they would be better able to protect themselves when originating the loan.
Whilst the detail of each country's insolvency law differs - the essential commercial principles are the same. These are reviewed in the module, and their method of implementation is illustrated. The module also details what happens when companies get into financial difficulties - the process and considerations involved in loan workout - voluntary schemes of arrangement, moratoria and loan restructurings.
Module 8 - When the Borrower is a Special Purpose Vehicle
- Identifying the reasons that the structuring of transactions and contracts needs to change when the borrower of funds is a SPV
- Determining the devices to protect a SPV from the consequences of the contractual failure of operational counterparties
- Understanding the structures adopted by financiers to manage and control project cash flows
- Appreciating the position of financiers when projects fail
- Understanding the typical structure of leveraged buyout transactions
- Identifying the inter-creditor issues that arise with multiple financing tranches, and how they are resolved in the documentation
Summary of Module
A number of things change when the Borrower of debt funds is a Special Purpose Vehicle. The financiers are exposed to a narrow business base, and/or there is little margin for error. The tendency of the financier is towards:
- Focus on cash-flows rather than accountancy
- Micro-management of the cash-flow in the documentation process
- Protective measures to react to under-performance of the underlying business
- A tendency away from using courts to protect rights and towards Alternative Dispute Resolution
The Module reviews these issues and then deals with them under the quite different circumstances of limited recourse financings and Leveraged financings.
With limited recourse (ie project financings), the main issues are the exposure to a single source of cash-flow and the absence (or severe limitation) of recourse to a creditworthy sponsor. In such cases, because the SPV is almost by definition, financially weak, transactions need to be structured to 'protect' the SPV from the fallout of disputes, contracts need to be structured so that the SPV is always "in the money" and the financiers will have a pre-occupation with cash-flow control features.
With leveraged financings, the main complication is the inter-creditor issues of multiple layers of financing and their rights vis-à-vis each other when the underlying business starts to underperform