It is common practice for lenders to stipulate for a fee where a transaction is repaid earlier than its contractual due date. The fee is designed to compensate the lenders for the loss of anticipated income from the deal and is usually expressed as a percentage of the principal amount prepaid.
The facility agreement will define the circumstances under which the fee is payable. In practice, the fee will only be due where the prepayment is voluntary. It will not be payable where the prepayment is mandatory, e.g. where the lenders demand early repayment as a result of a default or because it has become illegal for them to maintain the facility.
In general terms, matters of this kind will be made clear by the terms of the facility agreement itself. But a recent decision of the English Commercial Court in Aston Hill Financial Inc v African Minerals Finance Ltd (31 July 2012) has highlighted a potential area of difficulty for lenders. It illustrates, in particular, that the borderline between mandatory and voluntary prepayments is not as clear as it may at first appear.
The African Minerals Facility Agreement
At the outset, it is necessary briefly to explain the background to the African Minerals facility agreement.
The facility agreement was executed on 4 February 2011 and provided for a loan of up to US$500,000,000 to assist in the development of phase one of the Tonkolili iron ore project in Sierra Leone. On 11 February 2011 the lenders advanced US$417,700,000 to African Minerals. By the time of the litigation, Aston Hill held some US$291,100,000 of the facility, partly through its initial participation as a lender and partly through the subsequent acquisition of the contributions of other lenders.
On 31 January 2012, it was announced that Standard Bank Group had agreed to refinance the original deal. The announcement described this as a "maturation from high cost debt to low cost facilities". A syndicated facility led by Standard Bank was signed on 3 February 2012. Drawdown occurred on 8 February 2012 and the proceeds were applied in prepayment of the Aston Hill facility.
At this point, reference must be made to the relevant provisions of the Aston Hill facility agreement:
- Clause 8.3 was headed "Disposal Proceeds and Finance Proceeds" and stated that "… The Borrower shall prepay… the Loans in an amount equal to the amount of Disposal Proceeds or Finance Proceeds promptly upon receipt [of such amounts]…". For these purposes, "Finance Proceeds" referred to the proceeds of any new equity or debt issued or raised by African Minerals;
- Clause 8.5 was headed "Voluntary Prepayment of the Loan" and stated that "… The Borrower, if it gives the Facility Agent not less than five business days prior notice… may prepay the whole or any part of the Loan (but, if in part, in an amount that reduces the Loan by a minimum of $100,000,000)…";
- Finally, clause 8.8(c) stated that, upon a voluntary prepayment pursuant to Clause 8.5, The Borrower should pay a prepayment fee of six per cent of the principal amount prepaid, if such prepayment occurred before the first anniversary of the closing date (that is, prepayment was made before 11 February 2012). After that date, no prepayment fee was payable.
A couple of observations may be made in this context.
First of all, it is curious that African Minerals elected to make the prepayment on 8 February 2012. Had it delayed for just a few days, then the prepayment would have fallen beyond the first anniversary of the original closing date and it would have been clear that no prepayment fee was due. There may have been reasons for the course of action adopted by African Minerals but they are not apparent from the judgment.
Secondly, the prepayment fee was due if the prepayment was made pursuant to Clause 8.5 (Voluntary Prepayment), but not if the prepayment was made under Clause 8.3 (Disposal and Finance Proceeds). It thus became crucial to determine which of these two clauses governed the prepayment at hand.
Commercial Court Decision
The court indicated that it found it difficult to reconcile the two prepayment clauses.
Clearly, the decision to refinance the Aston Hill facility was a voluntary decision on the part of African Minerals, especially since the Standard Bank facility was more competitively priced. The prepayment could not have occurred in the absence of refinancing arrangements contracted by African Minerals of its own volition. It is therefore attractive to categorise the prepayment as "voluntary", with the result that the lender would be entitled to the prepayment fee.
On the other hand, Clause 8.3 envisaged that African Minerals might issue new equity or incur new debt - necessarily, voluntary acts on its part but, having done so, the clause made prepayment mandatory to the extent of proceeds received by African Minerals.
The court adopted the latter interpretation and held that the prepayment was mandatory under Clause 8.3. The result was that no prepayment fee was due under Clause 8.8.
It must be said that the Commercial Court was faced with a very difficult decision based on the terminology of the facility agreement. For the reasons noted above, the distinction between a voluntary and a mandatory prepayment was not as obvious as may be immediately suggested by those two contrasting expressions. Yet the effect of the decision is unattractive, in the sense that it deprived the voluntary prepayment clause - and the intended and associated right to a prepayment fee - of any real effect. As noted earlier, Clause 8.5 provided for voluntary prepayments to be in a minimum amount of $100,000,000, and it is inconceivable that such an amount could be funded from the Borrower's ordinary cash flow. The need to fund a prepayment of such magnitude from other borrowings effectively deprived the lenders of a prepayment fee that they might reasonably expected to have received.
Nevertheless, the case highlights the need for clarity around prepayment provisions of this kind. As a matter of drafting approach, it is perhaps safer to state that every form of prepayment attracts the stipulated prepayment fee, and then to carve out or exclude those exceptional cases where this would not be appropriate. In the United Kingdom, this is the approach adopted by Clause 11.5 of the Loan Market Association's standard form of agreement for real estate transactions. Under the terms of that clause, prepayment fee will be due except where the prepayment results from:
- supervening illegality; or
- the exercise by the borrower of its right to prepay a lender who seeks tax gross-up or increased costs payments.
The decision in African Minerals may be said to vindicate this approach to the preparation of prepayment provisions.