The vast majority of companies have bank debt to provide either working capital or facilities for specific corporate purposes. The terms on which those facilities are made available are detailed in facility agreement and security documents.
Most loan agreements contain undertakings where the borrower promises to do or refrain from doing certain activities. These undertakings give the lender a degree of control over the borrower to prevent the borrower’s financial condition and assets altering significantly from its position when the lender first made the loan available.
Below is a non-exhaustive list of some of the most common activities a lender may seek to curtail:
- Entering into joint ventures
- Making distributions
- Opening bank accounts with another financial institution
- Disposals of assets or land
- Incurring financial indebtedness
- Granting security over assets
- Creating new subsidiaries
The starting point is an absolute prohibition of an activity. In some circumstances certain events may be permitted, e.g. an acquisition provided the consideration is less than £X. If what you are proposing to do is permitted, you still need to ensure that you meet any associated conditions e.g. delivery of copies of due diligence reports. Failure to satisfy associated conditions will result in breach of the facility agreement.
If an activity does not fall into an exception then lender consent is needed and you need to factor in:
- The time it will take. A lender will need sufficient information to understand the implications on the business and its facility of any particular course of action and an amendment to the loan agreement may be necessary.
- Potential costs, e.g. legal fees, arrangement fees or increased cost of borrowing if the lender considers its risk has increased as a consequence of the proposed activity.
- The terms of any confidentiality undertakings that might apply to the particular activity.
If there is more than one lender this can add extra complexity, time and costs to the consent process.
If you fail to get lender consent when it is required the consequences can be severe. An event of default can trigger payment of default interest, immediate repayment of the loan and enforcement of the lender's security. It may also trigger defaults in other contracts the business is party to.
In conclusion it is worth investing time in reviewing your banking documents to ensure you do not inadvertently trigger an event of default.