What do you need to know about facility agreements?
Previously, our banking and finance specialists released Part 1 and Part 2 of our step-by-step guide to facility agreements. Our guide walks you through the typical structure and the key provisions of a facility agreement, helping borrowers and lenders navigate these agreements and understand the drafting considerations for both parties. When an agreement is clearly drafted, all parties are better equipped to understand their obligations, potentially minimising the risks of disputes arising later in a transaction.
Key takeouts from Part 1 and Part 2
To bring you back up to speed, we have included the top takeouts from Part 1 and Part 2 below.
Part 1: Three things you need to know about drawdown mechanisms and conditions precedent
- The drawdown mechanism is the process that provides a borrower with the ability to access funds under a facility agreement on terms agreed with a lender. A loan may be drawn in one lump sum or in multiple instalments. In each case, it is important the drawdown mechanism is tailored to suit the needs of the borrower and the requirements of the lender.
- The core features associated with the drawdown mechanism found in a facility agreement are an ‘availability period’, a ‘drawdown notice’ and ‘conditions precedent’.
- A facility agreement will typically include a set of standard conditions precedent a borrower is required to fulfil prior to a lender agreeing to advance funds. However, the purpose of financing and the situation of the lender may require the inclusion of bespoke conditions particular to the deal.
Part 2: What do you need to know about representations, warranties and undertakings?
- Representations and warranties are provided by one party to induce another to enter into an agreement.
- A ‘representation’ is a statement of fact; a ‘warranty’ is a condition of an agreement; and a ‘covenant’, also known as an ‘undertaking’, is a promise to do or refrain from doing something.
- The representations, warranties and undertakings in a facility agreement will depend on the borrower involved and the particulars of the transaction. Generally, a lender will push for the inclusion of broad representations, warranties and undertakings of a borrower; whereas a borrower will often attempt to negotiate a narrower and more specific set of provisions.
- Representations and warranties are often repeated throughout the term of a loan at various intervals. For example, it is typical for a lender to require a borrower to repeat the representations and warranties contained in a facility agreement each time the borrower draws funds under a loan.
- If a representation, warranty or undertaking is breached, and the borrower does not remedy or cure this breach, the lender can potentially cancel their commitment and demand full payment of the outstanding loan.
We’re excited to announce that Part 3 of our step-by-step guide to facility agreements will be featured in the next issue of Fundamental. Be sure to keep an eye out for this upcoming instalment, where we will explore secured vs unsecured loans and security types, including the role of a security trustee and the practical considerations for a trustee entering into a facility agreement.
Reach out to a member of our HW Funds team if you have any queries in the meantime.
Contact
