Three Top Tips
Here are three top tips to help you spot the key issues in a loan agreement. If you would like to read more free tips, or to access the free lesson or the free texts, these are available from the links on the right.
Top Tip 1.
Top of the list has to be to think about where the loan fits into the Group structure. Who is liable to repay the loan? Who else might have an impact on that person's ability to repay the loan? Who do the various provisions of the loan relate to? The free lesson and the free texts explain this in a lot more detail but a simple starting point is to look at the various borrower related definitions in the loan agreement. There might be definitions of "Obligors" (usually meaning the borrower and guarantors); "Company" (a named company, often either the ultimate holding company in the group or the highest company in the group which has any liability for the loan) and "Group" (the Company and its subsidiaries). There may be other definitions such as "Relevant Company" or "Material Company". A good first impression of the impact of the agreement can be obtained by looking at the undertakings and events of default and seeing which companies they relate to.
Top Tip 2.
Next tip is to try to avoid getting bogged down in detail. Take it step by step, starting simply and then going into further depth. There are lots of ways to do this, some of which are explained in the other free tips on this site. One simple example is to skip over the definitions clause to start with. That clause has lots of detailed definitions which are really quite meaningless when read alone. So start with the first clause after the definitions and go back to them when they become relevant.
Top Tip 3.
Have a look at the Events of Default and try to get a feel for the robustness of the loan agreement. From the Borrower's perspective, how high is the risk that, during the life of the loan, the lenders will be entitled to demand early repayment? From the Lenders' perspective, have all issues been addressed which could significantly increase the risk? Of course, this involves also looking at the rest of the loan agreement, to see what the undertakings, representations and repeated representations are, which could give rise to an event of default. Read the other top tips for more tips on reading those sections.
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