Business lending

Common terms in business loans

Commercial loan agreements are highly standardised and, since 1999, the Loan Market Association (LMA) has made available standardised forms for loan facilities. There are two main types of facilities: term facilities and revolving facilities. In the case of the latter, within an agreed period of time a business can draw funds as the need arises up to a certain amount, so that its actual indebtedness changes from time to time, as funds are drawn and repaid. Commercial loan agreements typically contain (i) conditions precedent - these are conditions applicable to the obligation of the bank to make available the funds so that if they are breached the bank does not have to make the funds available; (ii) representations and warranties - of law and of fact (e.g. corporate capacity, accuracy of accounts, etc.): any inaccuracy is treated as an event of default; (iii) covenants - these are undertaking by the borrower to do something or to refrain from doing something (e.g. to maintain certain financial ratios, to provide information to the lender and not to grant any security interest in its property to other parties, known as a negative pledge): any breach is treated as an event of default; and (iv) default clauses - these specify what constitutes an event of default upon

the occurrence of which the lender can accelerate the loan (demand the whole outstanding amount), and is not bound to make further advances. Cross-default clauses stipulate that any default of the borrower under another facility is deemed to be an event of default under the facility that contains the cross-default clause.[1]

Material adverse change (MAC) clauses stipulate that any MAC in the borrower’s financial position constitutes an event of default. MAC clauses have generated considerable litigation in recent years. It has been ruled that a borrower being investigated by a public authority, having its CEO arrested and its credit rating downgraded and being imposed a multi-billion tax bill clearly constituted a MAC. Likewise, a large arbitration award made against the borrower was also upheld as a MAC. In the latter case, the Privy Council clarified that for the event of default to be lawfully triggered the lender must be able to establish that it did in fact form the opinion that a MAC had occurred and the opinion must be honest and rational. Further guidance was provided by the High Court in Grupo Hotelero Urvasco SA v Carey Value Added Slf The burden of proof is on the lender. A state of affairs that existed at the time of the agreement and was known to the lender cannot give rise to a MAC. The borrower’s financial condition must be ascertained by reference to its financial statements and any evidence that it has ceased paying its debts but does not encompass general economic or market changes. An adverse change is material only if it is not merely temporary and provided that it significantly affects the borrower’s ability to perform its obligations.

Regarding the interest rate charged on business loans, it can be fixed, quasi-fixed or floating. The most common arrangement is for the rate to be quasi-fixed: it is agreed that the rate will consist of a specified spread plus the higher of LIBOR or a given floor. LIBOR stands for London Interbank Offered Rate and is a global benchmark that is broadly accepted by major financial institutions worldwide as the interest rate to lend to one another on a short-term basis. LIBOR is calculated on the basis of estimations provided by major banks and includes distinct rates for each of five major currencies (US Dollar, Euro, GB Pound, Japanese Yen and Swiss Franc) and for seven lengths of time ranging from overnight to 12 months. Until 2014, LIBOR was calculated by the British Bankers’ Association. As a result of the LIBOR scandal, which involved large fines being imposed on Barclays, RBS and UBS by UK and US authorities, LIBOR is now calculated by ICE Benchmark Administration (IBA), part of Intercontinental Exchange, a US company, under the regulation

Business and consumer lending 167 and supervision of the Financial Conduct Authority (FCA). The FCA has indicated that it is considering alternatives to LIBOR from 2022 onwards.[2] It is worth noting that LIBOR is not only used as a benchmark for commercial loans and interest rate swaps, but also for credit cards and mortgages. Its manipulation by large banks is an incident of problematic culture in the financial sector and has undermined public confidence in finance.

  • [1] For a discussion of events of default in financial contracts, see Alastair Hudson, The Law of Finance (2nd edn, Swett & Maxwell 2013) 558-560. 2 For a practical doctrinal analysis, see Travis Evens, ‘A Brief Overview of Material Adverse Change Clauses in Credit Documents’ (Lexology, 15 December 2016) (accessed 12 May 2020). 3 BNP Paribas SA v Yukos Oil Company [2005] EWHC 1321. 4 Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2016] AC 923. 5 Ibid., 950. 6 [2013] EWHC 1039. 7 Ibid., [348]-[363]. 8 Robert Arscott, ‘LIBOR Floors in Leveraged Loans’ (2018) available at SSRN: (accessed 18 June 2020). 9
  • [2] As indicated in a speech by the FCA’s CEO. See Andrew Bailey, ‘The Future of LIBOR’ (Bloomberg, London, 27 July 2017) (accessed 29 June 2020). 2 For an analysis of the LIBOR scandal from the perspective of social institutions theory, institutional corruption, and collective action problems, see Seumas Miller, ‘The LIBOR Scandal: Culture, Corruption and Collective Action Problems in the Global Banking Sector’ in Justin O’Brien and George Gilligan (eds), Integrity, Risk and Accountability in Capital Markets (Hart Publishing 2013) 111-128.
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