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

2. In compliance with requirements imposed by the US Internal Revenue Service, we inform you that any Federal tax advice contained in this communication (or any handouts or downloads associated herewith) is not intended to be used, and cannot be used, for the purpose of (i) avoiding any penalties under the US Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
Nothing contained in this presentation is to be considered as the rendering of legal advice for specific cases, and attendees are responsible for obtaining such advice from their own legal counsel.
This presentation is for educational and informational purposes only. The views of the presenter should not be construed as gospel or the views of Hahn Loeser & Parks LLP or any of its individual partners. Anyone who says differently is itching for a fight.

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

4. 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.

5. 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

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

7. 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

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

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

10. 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

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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

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

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

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

24. 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

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

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

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

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

29. 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)

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

31. Signature Page

32. Preamble and Definitions
Key Definitions for the Agreement

33. Definitions
Transaction Checklist Items: Opportunity to Assist the Client

34. Governing Law Provision

35. Checklist Items

36. Representations and Warranties

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

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

39. Undertakings: Affirmative Covenants
Calendar Item and Referral Opportunity
NEGATIVE COVENANTS

40. Undertakings: Negative Covenants

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

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

43. Events of Defaults: Consequences
Lender’s Rights in Default

44. Relationship to Other Agreements
Checklist Item – Impact on Other Agreements

45. Contract Integration Provision

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

47. Signature Page

48. 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
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Suite 2800
Cleveland, OH
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H a h n  L o e s e r  +  P a r k s  L L P Attorneys at Law