100 4 Debt
Common headings therefore include: (1) Financial Obligations (a. The facility or the
amount of loan; b. Currency provisions; c. Rate of interest; d. Interest period and its calcu-
lation; e. Other charges; f. Pre-payment of the loan amount; g. Repayment; h. Taxes); (2)
Covenants; (3) Conditions Precedent; (4) Representations and Warranties; (5) Events of
Default; (6) Applicable Law; and (7) Dispute Resolution.
Loan agreements appear to be heavily biased in favour of the lenders.^56 (a) Condi-
tions precedent signal to the lender that the loan agreement is binding and en-
forceable after the terms of conditions precedent have been met. (b) The purpose
of representations and warranties is to ensure that the risk level is acceptable to the
lender. (c) Covenants seek to mitigate the risk that the borrower becomes unwill-
ing or unable to perform its repayment obligations. Covenants therefore impose
rectrictions on the borrower’s future actions and ensure that the lender obtains in-
formation on the borrower. (d) To further enhance their confidence that the bor-
rower can be forced to repay the money, the lender will include a series of events
of default provisions and remedies provisions in the loan agreement. The lender is
given the right to call the loan in default and accelerate the loan repayment if cer-
tain described events occur. (Those events tend to include the following: the bor-
rower’s failure to repay any portion of the principal amount of the loan or to make
interest payments or to pay any of the fees associated with the loan on the agreed
date; the borrower fails to be in compliance with any of the representations or war-
ranties; the borrower fails to act in compliance with any of the covenants; the bor-
rower defaults on its other financial commitments; and a material adverse change
in the condition of the borrower.) (e) Loan agreements will also contain provisions
to deal with the consequences of a dispute arising between the lender and the bor-
rower.^57
Definitions. Loan agreements can be very detailed. The Anglo-American draft-
ing technique involves the excessive use of defined terms (see Volume II). De-
fined terms can be understood and negotiated only with reference to the operative
clauses of the agreement in which the term appears.
For example, the borrower should pay attention to the definition of indebted-
ness. In most loan agreements, the defined term “indebtedness” will be used in at
least three contexts: the negative pledge clause, the financial covenants, and the
cross-default clause. The defined term indebtedness will most probably be used in
clauses that either act as a constraint on the borrower’s actions or pose a threat to
the borrower. Accordingly, the borrower’s negotiating objective will be to limit
the scope of that term. The lender, in contrast, will prefer a wide definition of in-
debtedness.^58
Typical clauses. Apart from a long list of definitions, loan agreements tend to
contain a long list of other detailed clauses. Typical clauses that the borrower
would, in any case, need to understand include clauses on: (a) the facility and
other financial obligations; (b) the purpose of the facility; (c) drawdown; broken
(^56) Ibid.
(^57) Ibid.
(^58) Buchheit LC, How to Negotiate Eurocurrency Loan Agreements. Euromoney Publica-
tion, London (1995) pp 21–24.