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

2. Hillary Patterson, Counsel
Our Presenters
Kim MacLeod, Partner
Hunton & Williams LLP
Hillary Patterson, Counsel
Hunton & Williams LLP 2

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

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

15. 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

16. 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

17. 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

18. 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