Basic Principles of Lending and Security; Loan Agreements Commercial Law Programme Craig Owen White Hahn Loeser & Parks LLP cowhite@hahnlaw.com © 2011 by Craig Owen White All Right Reserved

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CLASSES OF MONEY MOM MY OWN MONEY OPM OTHER PEOPLES’ MONEY

DEBT A specified sum of money owing to one person from another, including not only the obligation of the debtor to pay but the right of the creditor to receive and enforce payment.

RISK RISK V REWARD ALLOCATION OF RISK RISK SHIFTING GREATER RISK = HIGHER PROBABILITY OF LOSS & LOWER PROBABILITY OF RECOVERY DEBTS REPAID FIRST (LOWER RISK, LOWER REWARD − PRINCIPAL PLUS INTEREST) EQUITY PAID LAST (HIGHEST RISK, HIGHEST REWARD − MULTIPLES OF ORIGINAL INVESTMENT) ALLOCATION OF RISK RISK SHIFTING MORAL HAZARD AND RISK

CREDIT RISK That Obligor will become financially unable to perform its payment obligations as and when required.

Some Types of Long Term Debt Term Loans Principal and interest paid according to a schedule over a period of time Revolving Credit Lines Repeated Lending Arrangement to Meet Company’s cash needs Mortgages Loan Secured by a lien on real estate Notes and Bonds Principal is usually repaid at maturity; interest might be paid on a different schedule

Priority of Claims Against Assets Senior Secured Loans Secured but Subordinated Loans (Mezzanine) Unsecured Loans High yield financings (Junk Debt) Equity

Public v Private Debt Liquidity Standardized Terms Third Party Intermediaries Liquidity Limited or Nonexistent Terms Customized to Deal Lenders and Borrowers Deal Directly

Unsecured v Secured Debt Unsecured Debt Borrower’s IOU No Preferred Claim On Company’s Assets Shares Ratably With Other Unsecured Creditors Secured Debt A priority claim on the Company’s assets in advance of using those assets to repay others Highest RISK Interest Rate Magnitude of the Credit Risk

Bonds (due ten (10) years +) Term Debt Short Term (due within 365 days) Long Term (due 365 days +) Bonds (due ten (10) years +)

Term Loans Specific, fixed amount due on specific date or dates (Maturity Dates) Use of loan proceeds generally restricted Repayment promise is typically secured by liens on borrower’s assets and other assets

Term Loans Continued…. Disadvantages: Advantages: Fixed interest rate Flexible terms and amortization gives borrower the ability to structure financing to its specific circumstances Generally loan only recalled if there is a default Disadvantages: Loan amount typically limited to a percentage of the value of asset(s) being financed Prepayment restrictions/penalties Use of loan proceeds restricted

Revolving Loans Borrower granted a line of credit they can access up to a predetermined limit Generally can access credit as often as desire Allows a purchaser to charge purchases against an account each period The balance: Can be paid in full each month; or Can be paid in installments over the course of time

Revolving Loans Continued…. The outstanding balance accrues interest Interest rate often tied to floating rate such as Prime (U.S.) or LIBOR [DO WE WANT TO TOUCH ON INTEREST RATE SWAPS?] Interest may be paid in a lump sum at the expiration of the term or periodically Generally, there is a minimum payment amount based on the size of the debt This is in contrast to a term loan in which a fixed amount is loaned to a client and a fixed payment is expected over a pre-set period of time

Revolving Loans Continued…. Advantages: Can spend up to the line of credit Minimum payments based on the debt Disadvantages: Outstanding balance accrues interest No set payment amount Interests rates may vary

Basic Lending Cycle Loan Agreement Promissory Note Mortgages Term Sheet Loan Agreement Promissory Note Collateral to Secure Repayment Repayment and Release of Collateral Funding of Loan Loan Agreement Promissory Note Mortgages Security Agreements and Perfection Filings Credit Enhancements - Guaranty from Bobby

Execution of Transaction Loan Life Cycle Preparation Understand Client Objectives Develop Deal Strategy Draft Confidential Memorandum Identify Key and Deal Terms, Issues and Objectives Selection of Lender Identify Potential Lenders Preliminary Meeting with Prospective Lenders Assemble Company Information Select Lender Term Sheet/Commitment Letter Execution of Transaction Lender Due Diligence Finalize Loan Documents Resolve Open Issues Close the Deal Post-Closing Checklist

Loan Agreement Main document evidencing the specific agreements between the borrower and the Lender relating to a loan Ancillary agreements: Promissory Note Mortgage or other security instrument Assignments of rights Guarantees

Key Documents in Loan Transaction Term Sheet/Commitment Letter Loan Agreement Due Diligence Request List Promissory Note Legal Opinions Mortgages Security Agreement Guaranty Agreement Officer’s Certificates Disbursement Letter

Loan Agreement Continued…. Typical Structure/Provisions: Introduction Definitions Terms of loan/credit Conditions precedent Representations and Warranties Financial Information of Borrower Affirmative Covenants

Loan Agreements Continued…. Typical Structure/Provisions Continued…. Negative Covenants Term Events of Default; Rights and Remedies Miscellaneous

Typical Affirmative Covenants Financial Reporting Use of Proceeds Conduct of Business Taxes Insurance Maintenance of Properties Environmental Compliance

Typical Negative Covenants No Merger or Sale of Assets No Sale or Leaseback No Acquisitions or Investments No Dividends or Distribution of Assets No Salary increases No Liens on Assets No Borrowing

Financial Performance Covenants Minimum Net Worth Leverage Ratio No prepayment of debts

The Primary Players Lender Borrower Accountant Investment Banker/Agent/Advisor Guarantor Investors Lawyers Appraiser

Financial Performance Covenants Minimum Net Worth Leverage Ratio No prepayment of debts

Lenders’ Rights and Remedies Deny Additional Funding Accelerate Maturity Date Divert Receivables and Liquidate Assets

Waivers, Amendments and Payoffs Waiver without prejudice (for a fee) Amend or change terms (for a fee) Prepayment Penalties (in full or part) (for a fee)

Preamble and Definitions Who are parties to the agreement ? Parties must match signature page

Signature Page

Preamble and Definitions Key Definitions for the Agreement

Definitions Transaction Checklist Items: Opportunity to Assist the Client

Governing Law Provision

Checklist Items

Representations and Warranties

Undertakings to the best of the Borrower's knowledge and belief (having made due enquiry) Material: Possible Definitions or Common Understanding?

Added Transaction Cost: Bobby has to retain and accountant Calendar Item

Undertakings: Affirmative Covenants Calendar Item and Referral Opportunity NEGATIVE COVENANTS

Undertakings: Negative Covenants

Events of Defaults Access to Company’s Piggy Bank is now limited

Events of Defaults: Cures Borrower’s Right to Cure Certain Breaches

Events of Defaults: Consequences Lender’s Rights in Default

Relationship to Other Agreements Checklist Item – Impact on Other Agreements

Contract Integration Provision

Transaction Cost – Borrower’s Pays the Bank’s Costs and Legal Fees plus its own

Signature Page

H a h n L o e s e r + P a r k s L L P Attorneys at Law Thank You Craig Owen white 200 Public Square Suite 2800 Cleveland, OH 44114-2301 direct dial cell phone main fax e-mail 216.274.2231 216.338.1065 216.274.2531 cowhite@hahnlaw.com H a h n  L o e s e r  +  P a r k s  L L P Attorneys at Law