Loan Agreement Fundamentals and Best Practices AFP Annual Conference October 16, 2017

Hillary Patterson, Counsel Our Presenters Kim MacLeod, Partner Hunton & Williams LLP kmacleod@hunton.com 804.788.8529 Hillary Patterson, Counsel Hunton & Williams LLP hpatterson@hunton.com 804.787.8133 2

Goals for the Session Discuss typical credit agreement provisions Representations and Warranties Affirmative and Negative Covenants Events of Default Provide credit agreement best practices 3

Where do I start? Review Table of Contents, List of Schedules and List of Exhibits Structure Definitions Borrowing Mechanics, Fees and Tax Provisions Conditions to Closing Representations and Warranties Affirmative Covenants Negative Covenants Events of Default Agency, Notices, Amendments, Assignments and Confidentiality Flip through Definitions 4

Where should the business team focus its review? Financial covenants and related definitions, especially accounting terms (which often have negotiated, non-GAAP meanings) Terms used in calculating the borrowing base Representations and warranties, especially in facilities with revolving loans Affirmative covenants, including periodic and “occurrence-based” reporting obligations, and negative covenants Events of default, especially “hair trigger” events of defaults and any change- of-control triggers Borrowing mechanics Assignment and confidentiality 5

Representations and Warranties Factual statements made at a point in time used to diligence borrowers Disclosure schedules Must be refreshed (“brought-down”) when loans are made, letters of credit issued, amendments are signed 6

Typical Representations and Warranties Corporate organization and authority Location of offices, records and collateral Consents and filings Subsidiaries and corporate structure Solvency Financial data Accuracy of information Tax, ERISA, labor and environmental matters Litigation Title to assets; liens Investments Material contracts No defaults Government regulation Licenses and permits Affiliate transactions Investment Company Act FCPA, OFAC, PATRIOT Act and sanctions Use of proceeds 7

Covenants An affirmative covenant is a promise to take certain actions (including providing financial reports and notices of material events) Conversely, a negative covenant is a promise not to take certain actions A financial covenant is a financial calculation required to be tested, usually, monthly or quarterly 8

Typical Affirmative Covenants (“Thou Shall…”) Reporting – annually, quarterly, monthly and “occurrence-based” (defaults, litigation, termination of material contracts, casualties, etc.) and compliance certificates Corporate existence Maintenance of property Taxes Compliance with law Insurance Books and records; inspections; lender meetings ERISA and environmental Joinder of subsidiaries; additional collateral Further assurances 9

Typical Negative Covenants (“Thou Shall Not…”) Indebtedness Liens Investments, loans and joint ventures Guaranties Sales of assets Dividends/restricted payments Use of proceeds Accounting changes; fiscal year Amendments to material contracts Bank accounts Sale/leasebacks Affiliate transactions Negative pledges Changes to corporate form and organizational documents; mergers FCPA, OFAC, PATRIOT Act and sanctions 10

Default v. Event of Default Default – contract breach which has a notice requirement or cure period that has not expired. “Default” means any event that, with the giving of notice or lapse of time, or both, would become an Event of Default. Event of Default – contract breach with no cure period (i.e., hair-trigger” default) or other defined material event occurs. The only way to “fix” an Event of Default is to have it waived. 11

Typical Events of Default Payment (principal, interest and fees) Breach of affirmative, negative or financial covenants Breach of representations and warranties Bankruptcy (voluntary and involuntary) Judgments Cross-default to material debt Change of control Material adverse change Collateral; preservation of liens 12

Other Common Provisions Incremental facilities (aka “accordions”) Extension options Equity cure rights “Yank-a-Bank” and non-consenting lender provisions FATCA updates Dodd-Frank/ECP-related provisions 13

Recent Market Updates Sanctions “Bail in” Provisions Changes to Lease Accounting Rules Discontinuation of LIBOR in 2021 14

Best Practices – Pre-Closing Spend the time to negotiate a basic term sheet before engaging lawyers and moving to documents Give your attorney the opportunity to review your term sheet before it is signed The same is true for your loan documents if you are using standard bank forms in hopes of minimizing legal costs Negotiate key business points/“deal breakers” at the term sheet phase Forecast financial covenants on a rolling four quarter basis 15

Best Practices – Pre-Closing Tie as many reporting obligations to the timing of periodic financial reporting as possible so reporting details do not get lost or forgotten. Do not overlook the security documents Your security agreements and credit agreement should contain consistent covenants and reporting obligations Ensure that all reporting obligations are contained in the credit agreement Ensure that the credit agreement controls in cases where there are conflicts between the credit agreement and the security agreement 16

Best Practices – Post-Closing Create a compliance checklist. Review it monthly – or at least quarterly as part of quarterly close. Maintain a running list of compliance issues and dust it off before any amendment or refinancing discussions to address common or recurring concerns. 17

Common compliance inquiries The majority relate to reporting busts or issues with negative covenants. Late reports/failure to give notices Sales of equipment and other assets Investments/acquisitions Deposit accounts Joint ventures Amendments to organizational documents Corporate restructurings/internal reorganizations Must ensure that covenants work with business plan 18