A Step-By-Step Guide to Facility Agreements – Part 1
By Emma Donaghue and Kate Dart
We have put together a step-by-step guide to assist borrowers and lenders demystify facility agreements.
Our team walk you through a typical loan facility structure and the key provisions of a facility agreement so that you are well placed to understand the drafting considerations relevant to both borrowers and lenders. When an agreement is clearly drafted, all parties are better equipped to understand their obligations and the risk of disputes arising later in a transaction are potentially minimised.
Part 1: Three things you need to know about drawdown mechanisms and conditions precedent
In Part 1, we kick off by explaining the key features of drawdown mechanisms and the importance of accurately describing conditions precedent in a facility agreement.
- The drawdown mechanism, the process by which a borrower can access funds, needs to be tailored to suit the needs of the borrower and the requirements of the lender.
- Whilst facility agreements generally include a standard set of conditions the borrower is required to fulfil prior to the lender agreeing to advance any funds, the purpose of the financing and the situation of the lender may require the inclusion of bespoke conditions particular to the deal.
- Borrowers must carefully review the conditions precedent provisions to make sure they fully understand their obligations relating to the drawdown mechanism and can satisfy the conditions precedent in full.
Under a facility agreement, the drawdown mechanism is the process which provides a borrower with the ability to access funds under a loan on terms agreed with a lender. Although these clauses are not often contentious, it is essential they are accurately captured in the drafting and should be tailored to take the specific circumstances of the loan into account, including the purpose for which the financing is being provided and the nature of the lender.
A facility may be drawn in one lump sum or in multiple instalments. For example, a construction loan facility is often drawn in multiple instalments linked to certain construction milestones. This arrangement provides a borrower with access to funds as and when they are required, while also providing the lender with a degree of protection and oversight of the project by requiring additional conditions precedent which may consist of works authorisations for milestone events, related invoices, or updated valuations.
It is also important for a lender to ensure the borrower undertakes that the funds loaned are to be used for the agreed purpose which should be clearly set out in the facility agreement.
Some of the core features associated with the drawdown mechanism found in facility agreements are:
- Availability period—the period a lender agrees for the facility to remain available for drawing by a borrower. A borrower may only request a drawing during this period.
- Drawdown notice—the notice to be provided by the borrower to the lender requesting a drawing and providing the details of the drawing.
- Conditions precedent—conditions that need to be fulfilled by a borrower to the lender’s satisfaction or otherwise waived by the lender prior to any drawing being made.
To access funds, the borrower generally needs to provide the lender with a notice within the prescribed period setting out the proposed date and the amount of the drawing. The drawdown notice typically includes confirmation from the borrower that—
- no default subsists or will occur as a result of the drawing, and
- the representations and warranties made under the facility agreement remain true in all material respects and are not misleading as at the date of the drawdown notice and the actual drawdown date.
Where the lender needs to raise funds to provide a drawing, it is important the notice period for a drawing is sufficient to allow for the funds to be raised.
A facility agreement usually sets out detailed conditions a borrower is required to fulfil prior to a lender advancing any funds. Certain conditions may apply to the initial drawing, and other conditions to subsequent drawings under a facility. The conditions precedent will vary depending on the type of loan and the parties involved. For example, for debt funds it is common for each drawing to require approval from an investment or for the funds to be raised which should be captured under the conditions precedent.
There are two categories of conditions precedent—documentary and general conditions.
Examples of ‘documentary conditions precedent’ include provision of—
- the original signed facility agreement and relevant security documentation
- certified copies of the borrower’s constitution and other corporate authorisation documents
- an independent valuation of the security property if applicable
- if required by a lender, a legal opinion to the capacity and power of the borrower and any third party security provider entering into the transaction and opining on the enforceability of the transaction documents.
Examples of ‘general conditions precedent’ include:
- No event of default has occurred or will occur as a result of the lender advancing the loan to the borrower.
- The borrower has not misled or made any misrepresentation to the lender.
- Depending on the parties involved, there has been no material adverse change in the financial condition or the business of the borrower or any third party security provider.
If certain conditions precedent to the loan are not fulfilled by a borrower to the lender’s satisfaction, the lender may withhold funds from the borrower until the conditions are met to their satisfaction or are otherwise waived by the lender. For this reason, borrowers must carefully review the facility agreement to ensure they fully understand their obligations relating to the drawdown mechanisms and the satisfaction of conditions precedent. Similarly, it is critical for lenders to ensure the conditions precedent are adequately tailored to the transaction to best safeguard their interests.
Part 2: What do you need to know about representations, warranties, and financial covenants?
In Part 2 of our Step-by-step Guide to Facility Agreements, we will look at the differences between representations and warranties and how lenders may utilise financial covenants as monitoring tools.
Later, we will explore the likes of—
- events and consequences of default
- secured vs unsecured loans and security types, including the function of a security trustee
- practical considerations for trustees entering into a facility agreement.
Reach out to us
If you are considering entering into a facility agreement or would like more detail relating to the standard provisions seen in the market, reach out to our specialists for strategic advice and practical assistance with your transaction.
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