BLP (9)
Terms
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- What is the difference between a loan agreement and a security document?
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Loan agreement - main commercial terms of loan.
Security document - types of security and the control exercised over the assets - What is the main reason behind having a separate loan agreement and security document?
- To keep the commercial terms of the loan agreement confidential. The security document needs to be registered (subject public inspection)
- Of fixed and floating charges, which rank ahead?
- Fixed ahead of floating provided they are correctly registered.
- What are the benefits of a fixed charge for a lender?
- Able to exercise more control over the assets
- What will a borrower not be able to do with an asset that is subject to a fixed charge?
- Sell it
- What can seller's do with assets subject to a floating charge?
- Can do what they like with assets subject to a floating charge before the charge crystallises.
- What do you need to know in relation to overdrafts?
- Terms and conditions wise they are shorter than a term loan. They are also on demand - means can ask for the money to be repaid at any time.
- What commercial considerations need to be taken into account when debt finance is considered?
- Balancing between control for the lender and flexibility for the borrower's business to continue and grow
- What are the benefits of creating a separate legal entity to focus on one aspect of a business's work?
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- Keep certain business areas separate
- Isolating the risk
- Concentrating expertise - What is the best form of security in an ideal world and why?
- A pledge because it gives actual possession.
- What is the problem with a pledge?
- Lender doesn't want to own the assets and will also be responsible for keeping the assets safe.
- What kind of security would a lender wish to take over property?
- A charge (by way of legal mortgage)
- What kind of security would a lender wish to take over machinery?
- Fixed charge
- What kind of security would a lender wish to take over vehicles?
- Fixed charge
- What kind of security would a lender wish to take over stock?
- Floating
- What kind of security would a lender wish to take over petty cash?
- Floating
- What kind of security would a lender wish to take over contracts and shares?
- Fixed charge
- What must you be careful about if you see clause that states the borrower shall not create or permit to subsist any security over any of its assets except for security pursuant to the security document?
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1. Borrower can't grant any other securities
2. Would be in breach if other loans already have securities in place
3. Wording is generally too lender friendly - What are representations?
- Statements of fact
- What are undertakings?
- Promises to do or not to do something
- What must you take note of when considering any breaches of representations or undertakings?
- Could amount to an act of default by the borrower
- What is the main aim of the lender?
- To be repaid all the amounts owed (including interest and any principal amount).
- When considering whether representations made have been breached, what must you remember to do?
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Representations take place when said or repeated.
Must look to see when representations are said to repeat in the contract. - When considering whether a certain clause has been breached, what might be contained in the event of default clause that could assist your client?
- A grace period of a number of days (in which to tell the lender)
- What advice would you give to a client who either has or is about to breach the terms of a loan agreement?
- Tell the lender - more likely to helpful if the borrower is upfront and honest. This will also avoid future breaches.
- What can a borrower request from a lender in relation to the terms of the loan agreement?
- The borrower could request a waiver from the lender.
- What kinds of waivers can a lender provide?
- Permanent or for a specific period of time
- What can a lender often do if there is an event of default?
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- Cancel outstanding commitments
- Demand immediate repayment
- Put the loan 'on demand'
- Interest payable on default
- Lender could enforce its security
- Waive the default - What is likely to the case where a borrower does not pay an instalment due?
- Subject to technical or administrative errors, this is likely to be an immediate event of default