4.3 Particular Clauses in Loan Facility Agreements 105In a syndicated loan, the arranger of the loan is usually paid an arrangement fee if
the parties sign a loan agreement. However, the arranging bank will try to ensure
that it will be paid at least a break-up fee or a similar fee in the event that its work
does not lead to a signed loan agreement. Agents such as facility agents, security
agents or security trustees will also be paid fees (agency fee, security trustee fee).
Other standard fees include waiver fees and transfer fees.^86
Increased costs, tax gross-up, and capital adequacy indemnity clauses. The
agreement tends to contain several clauses the purpose of which is to transfer risks
to the borrower.
If an unexpected cost were to arise during the terms of the loan (for example,
due to a change in regulatory requirements) it could swallow up the margin which
the lender is charging on the loan. The increased costs clause transfers this risk to
the borrower. Typical costs covered by the clause include the taxation of payments
receivable under the loan and costs caused by capital adequacy requirements.^87
The capital adequacy indemnity clause shares the same purpose. If the costs of
the lender increase during the terms of the loan because of a change in capital
adequacy requirements, the lender will want the increased costs to be borne by the
borrower.^88
The purpose of the tax gross-up clause is to shift to the borrower the risk that a
withholding tax might be imposed on payments due under the loan.^89
One of the methods used by borrowers to mitigate the risk of increased costs is,
in addition to a narrow drafting, to retain the right to prepay the loan in the event
that the lender wants to apply an increased costs clause or a similar clause.
Pre-payment. The right of pre-payment would decrease the borrower’s interest
rate risk. However, pre-payment would deprive the lender of interest earnings in
two ways. The borrower would no longer be liable for the interest, and the lender
loses interest so long as the funds remain unutilised (the fresh utilisation of funds
requires time). Therefore, some lenders do not permit pre-payment or they permit
the pre-payment after levying a penalty or premium.^90
Covenants: event risk. The lender may require covenants in order to manage
event risk. In bond issuings, typical event risks include: increased risk of non-
payment; a downgrade in the credit rating of the issuer; an adverse change in the
market value of the bond; an unacceptable change in the issuer’s business; an un-
acceptable change in senior management; or an unacceptable change of control.
Covenants: lender-shareholder conflict. Covenants can also be drafted to con-
trol conflicts between lenders and shareholders. There are five major sources of
conflict which arise between lenders (bondholders) and shareholders:^91
(^86) Diem A, op cit, § 26.
(^87) See Buchheit LC, op cit, pp 38–39; Diem A, op cit, § 20.
(^88) See Buchheit LC, op cit, p 43.
(^89) See Buchheit LC, op cit, p 64; Diem A, op cit, § 19.
(^90) See Agarwal VK, Negotiation of Specific Clauses of Loan Agreements, UNITAR, DFM
Document Series, Document No 10, Geneva (May 2000).
(^91) See Smith CW, Warner JB, On Financial Contracting. An Analysis of Bond Covenants,
J Fin Econ 7 (1979) pp 117–161 at pp 118–119 (four major sources of conflict).