4.2 Management of Risk: General Remarks 91quirements) to be shouldered by the borrower (increased costs clause, see the fol-
lowing section).^18
The parties may agree that the borrower has some discretion to choose the
length of each interest period during the term of the agreement.^19 For example, the
borrower will choose a short interest period if the borrower believes that interest
rates will fall, and a long interest period if the borrower believes that interest rates
will rise.^20
Representations, warranties, covenants, events of default. In a loan facility
agreement, the purpose of representations, warranties, and covenants is not to just
to form a basis for the pricing of the facility but also to allocate risk for particular
events. A misrepresentation typically entitles the lender to cease making further
advances and/or triggers an event of default.^21
Events of default are primarily designed to permit the lender (or, in syndicated
loans, the agent on instruction of the majority banks) to accelerate outstanding
debt and/or to enforce security prior to scheduled maturities. Furthermore, they are
designed to allow the lender (or, in syndicated loans, the agent) to place loans on
demand, cancel commitments, suspend further drawdowns and require cash cover
for letters of credit or other contingent liabilities of the lender (or the syndicate
banks).^22
Risk of default. In any agreement, breach of contractual obligations will trigger
remedies (representations and warranties are thus connected with imdemnities). In
a loan facility agreement, however, remedies are typically triggered by events of
default which have been defined in the agreement (representations and warranties
are thus connected with events of default and events of default are connected with
imdemnities). The risk of default depends on the terms of the contract, in particu-
lar on the definition of events of default (probability) and the remedies available to
the lender in the event of default (impact).
There are usually two kinds of events of default. Actual breach of any of the
obligations under the loan agreement typically constitutes an event of default. The
others are anticipatory events which usually mean that the borrower is about to
default on its obligations soon.^23
The following is a list of the events of default normally found in a loan agreement: (a) non-
payment; (b) misrepresentation; (c) breach of obligations; (d) cross-default; (e) insolvency;
(f) insolvency proceedings; (g) change of activity; (h) validity of agreement; (i) unlawful-
ness; and (j) material adverse change.^24
(^18) Buchheit LC, How to Negotiate Eurocurrency Loan Agreements. Euromoney Publica-
tion, London (1995) p 13.
(^19) For example, Clause 15 of the LMA Leverage Finance Facility Agreement.
(^20) See Diem A, Akquisitionsfinanzierungen. C.H. Beck, München (2005) § 12 number 41.
(^21) See Gayle C, Acquisition Finance – Syndication Best Practice, Int Comp Comm L R
13(8) (2002) pp 303–304.
(^22) Ibid, p 305.
(^23) Agarwal VK, Negotiation and Drafting Clauses in Loan Agreements: Events of Default,
UNITAR, DFM Document Series, Document No 15, Geneva (March 2001).
(^24) Ibid.