USA Law and Practice Contributed by: Nicholas A Dorsey, Ryan J Patrone, Kelly M Smercina and Margaret R M Rallings, Cravath, Swaine & Moore LLP
credit facility, the representations and warranties will be made again on future borrowing dates. Affirmative covenants oblige the borrower to undertake certain actions, such as making necessary filings and registrations in order to maintain in effect material licences and other authorisations that are necessary to operate the business, and delivering financial statements and other financial information to the lenders at periodic intervals. Loans may also include one or more financial covenants. Financial covenants require the borrower to satisfy a financial test at specified dates, often at the end of each fiscal quarter. Common financial covenants include maximum leverage ratios and minimum interest coverage ratios. Of course, the credit agreement also requires the borrower to make interest, amortisation and principal payments on time. Negative covenants will also be included in a credit agreement. Negative covenants are “incurrence-based” , meaning they limit the abil- ity of the business to take certain actions and are evaluated at the time a company seeks to take such action. Examples of negative covenants include limitations on the incurrence of addition- al indebtedness, permitting liens to encumber assets or merging or consolidating with other entities. In addition to any required amortisation pay- ments, the credit agreement will also set forth the optional and mandatory prepayment terms, including any associated premiums or penalties. In the USA, term loan “B” financings typically include prepayment premiums if repaid within a specified (relatively short) period of time follow- ing closing, while term loan “A” financings are typically prepayable at par at any time. Manda- tory prepayment may be required with the pro- ceeds of certain securities offerings, insured
casualty events and asset sales. The borrower may also be required to make periodic prepay- ments of the term loan, depending on the level of the business’s “excess cash flow” . A US acquisition finance loan facility will usually follow the SunGard approach – in other words, there will only be limited conditions to funding. If the facility permits future borrowings, such as in the case of a revolving credit facility, the conditions precedent to future borrowings may be more onerous – for example, it may require that all (rather than only some) representations and warranties are accurate as of each date the revolving facility is drawn, subject to customary materiality qualifiers. Some facilities provide that the limited conditionality afforded by the Sun- Gard approach applies to future borrowings if used to finance an acquisition. The amendments section of a credit agreement describes what vote of the lenders is required to make specified changes (often a majority in interest, occasionally 66.6%). Certain changes will require the approval of the administrative agent, and certain fundamental changes will require the approval of all affected lenders. The credit agreement may include a so-called “yank-a-bank” provision, which allows the bor- rower to replace non-consenting lenders in cer- tain circumstances, such as when the consent of all affected lenders is required for a proposed amendment and the proposed amendment receives a minimum vote (such as a majority in interest). The events of default section will specify which events give the lenders the ability to accelerate the loans, including any required grace periods. Because lenders operate on “cost plus” model, the credit agreement will also include tax and cost provisions designed to ensure that each
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