BKF 1 - Bank Lending PDF

00:00 Hi, good morning, everyone. Welcome to the bank lending module of the SILE Part B course. 00:10 Today we\'re just gonna cover bank financing. So we\'ll do an introduction to corporate financing, take you through types of bank lending, look through a sort of a generic facility agreement and...

00:00 Hi, good morning, everyone. Welcome to the bank lending module of the SILE Part B course. 00:10 Today we\'re just gonna cover bank financing. So we\'ll do an introduction to corporate financing, take you through types of bank lending, look through a sort of a generic facility agreement and talk briefly about taking security for loans. 00:33 Okay, we\'ll start with the introduction to corporate financing. Why raise finance? This slide just sort of sets out why companies would be interested in raising finance and essentially finance is there to fund companies\' working capital and CAPEX. Working capital being the funds that are used in a company\'s day-to-day operations, whereas 01:03 and maintain physical assets that the company has. 01:09 What influences a company\'s choice of finance? These are some of the factors that we\'ve set out in this slide. We won\'t go through all of these today, but this is just more for your noting. 01:29 So on the types of financing available to companies, we\'ve broken them down into simply debt and equity, right? Obviously, you could raise money either privately or through public markets, right? When a company raises money through debt, it borrows money from persons who are willing to lend to it. It can go to do this by going to banks or other corporate lenders and entering into loan agreements. 01:58 It can also go to the public and ask the members of public to lend to it. In this instance, where it goes to the public, it cannot enter into bilateral loan agreements with each individual lender. Instead, the company issues debt instruments. These are covered separately in the debt capital markets module. Where the company raises money through equity, it issues shares to persons who are willing to invest. 02:27 becoming shareholders. These persons may be approached privately or through the public via a stock exchange. Again, we won\'t go through these types of arrangements as they will be covered in the equity capital markets section of this module. 02:48 What are the main features and differences between equity and debt? When a company takes a loan that is accounted for as a liability on its accounts, where an investor subscribes for shares in a company, the amounts invested are accounted for as capital. In other words, it\'s an asset. Where monies have been borrowed, they will have to be repaid by the borrower, usually under a contractual specified date or sometimes on demand. 03:15 Share capital in a company, however, is not returned to shareholders in the ordinary course. So unless shareholders sell their shares, they usually keep their shares until the company is warmed up. There may be some limited circumstances where a company may return capital to its shareholders. For example, for Singapore companies, a company can take out a capital reduction if certain conditions are met. Right. 03:43 A person who has lent money to a company will usually receive interest payments and such interest payment dates that are specified in the loan agreement. The interest will accrue and payments will be made at such intervals as contractually specified. On the other hand, a shareholder may receive dividends from the company and these may be declared by the company if it has sufficient profits and at the discretion of the Board of Directors. 04:11 However, unlike a lender whose only option is to get back the amount that it has lent, regardless of how profitable the company is, shareholders may not only receive the dividends that they receive regularly, but they may also be able to sell their shares at a profit if the company has increased in value since the time that they subscribe for those shares. One final difference to note is that 04:40 if the company does not do well and becomes insolvent. Lenders that are unsecured will be entitled to a pro rata share of the distribution of the company\'s assets after the secured and preferential creditors have been paid. Shareholders are the last in line and will only be entitled to pro rata distribution if there\'s anything remaining after distribution to the secured and unsecured creditors. 05:08 So if a company is insolvent, the shareholders are likely to get nothing. 05:16 So now we\'ll just go through some of the different types of bank lending. Loans and loan facilities tend to be categorized by the various features relating to the terms and conditions under which the money is lent. Features that are typically used to categorize loans are the number of lenders, the duration of the loan, and whether the loan is secured. With relation to number of lenders, they are typically 05:45 two main types. A loan is either by a single lender, which is called a bilateral loan, or by a number of lenders, which is either a syndicated loan or if it\'s a sort of smaller group, a club loan. A bilateral facility is one where a single source lends to a company, involves a lender and a borrower. And of course, you may have other parties such as guarantors and security providers. Smaller term loans and overdraft facilities 06:15 tend to be bilateral in nature. In a syndicated loan, several banks act together and each provides a proportion of the loan on a several basis. Syndicated loans usually involve a lot of loans of large amounts. The larger the sum to be advanced, the more risk it carries for an individual bank to foot the entire amount. To minimize risk, the banks may group together in a syndicate to lend very large sums of money. All banks in the syndicate lend on the same terms and 06:44 conditions under one loan agreement and the banks deal with the borrower as a group through a agent, typically called the facility agent, rather than on one basis. If there\'s security to be taken, the security is also given in favor of the agent to hold on behalf of all of the lenders. 07:13 the duration of the loan, right? And in the market, we typically refer to loans as either term loans or revolving loans, right? These terms refer to the duration of the loan, of how the facility is available as well as the repayment mechanics, right? 07:40 In a term loan, the lender commits to lend to the borrower for a specified amount of money for a period of time from the date of drawdown to the end of the tenure of the loan. The loan may be repaid in one amount at the end of the term of the loan or in installments. The duration of a term loan is typically between one and five years. 08:07 Most term loans have a short availability period, for example, a period of up to three months. This refers to the period that the borrower may actually call on the lender to borrow those monies. This will typically be the case where the loan is available to be borrowed in one lump sum. Some loans may be drawn down in a number of smaller advances or in separate tranches. 08:34 In this case, the availability period is either extended or there is a separate availability period for each tranche of the loan. The borrower will typically pay commitment fees in respect of committed amounts during the availability period. Pre-payment of the loan may or may not be permitted but where permitted, the money prepaid will not be available to be reborrowed. Pre-payments are usually subject to a prepayment fee. 09:03 On the other hand, a revolving credit facility is a loan facility that provides for a specified maximum amount that may be borrowed over an agreed period. However, the availability period for a revolving loan extends to almost the entire life of the loan. So, for example, if you have a five year revolving facility, you will be able to borrow pretty much at any time during those five years. 09:28 So the borrower may draw and repay tranches up to the specified maximum amount whenever it chooses throughout the tenure of the loan. The borrower may take a tranche for an interest period and at the end of that interest period, decide whether to repay that tranche or roll over that tranche into the next interest period. The borrower must give a bank a drawdown notice and it must specify the chosen interest period. 09:56 Unlike with a term loan, if a revolving facility is repaid, the amounts will be available for reborrowing. 10:05 Finally, loans can either be secured or unsecured, but it is common for lenders to require a comprehensive and security and guarantee package from the borrower, as well as material subsidiaries of the borrower where the loan is secured in nature. We will discuss security in greater detail later. Now we go on to the overview of the facility agreement. 10:34 The fundamental terms of a facility agreement, there are four broad categories of clauses. One, the mechanics of the loan, which includes how the loan is to be drawn, the conditions precedent for drawing the loan, the repayment and prepayment mechanics. Secondly, the cost of utilization, including interest provisions and fees. 11:01 Third is general protection for the lenders. These include the representations, covenants, and events of default, which allow the bank to terminate and accelerate the loan early. And fourth is boilerplate, which includes a lot of the agency provisions and a number of other protections for the bank, including indemnities and transfer mechanics. 11:33 Okay, in terms of the mechanics, there will usually be a gap in time between the signing of the loan agreement and the borrower requesting for the funds to be advanced by the lender. This is done by the borrower giving the lender a drawdown notice. Any decision to lend to the borrower will have been made based on the lender\'s examination of the borrower\'s credit worthiness. For the lender, it will be important to ensure that it is likely to be repaid the monies it has lent. 12:02 Accordingly, facility agreements will usually specify drawdown conditions or conditions precedent that have to be satisfied before the lender is obligated under the agreement to advance the loan. Accordingly, on receipt of a drawdown notice, the lender will check whether these conditions precedent have been satisfied. Conditions precedent typically cover topics such as the power of the borrower, the authorisation of the signatories, accounting information, security documents, and legal opinions. 12:31 In addition, the lender will be keen to try to ensure that the circumstances of the borrower have not deteriorated since the lender\'s initial decision to make a facility available. Accordingly, the conditions precedent will normally also include confirmations by the borrower that the representations in the facility remain accurate and that there has been no material adverse change. 12:54 to the borrower since the date on which the original financial statements were provided and that there are no existing events of default and none would result from the borrowing under the loan agreement. If the conditions preceded are satisfied, the lender will be obliged to disburse the loan to the borrower. 13:18 loan facilities are repayable on a specified date or according to a general repayment schedule or at any time on demand by the lender. 13:30 A facility agreement will often include provisions which permit early repayment, often referred to as prepayment at any time or which require repayment in certain circumstances. In such an instance, lenders are frequently entitled to a prepayment fee. The justification for this is generally said to be that a lender requires compensation for the loss of future interest on the prepaid amount. 13:58 for a term loan does not include a provision entitling the borrower to make early repayment. The borrower normally has no right to make early repayment. 14:10 In return for lending the money to the borrower, the lender will charge the borrower interest. The rate of interest charged to a borrower in the case of a larger facility will usually be the aggregate of three elements. A basic rate, which reflects the cost to the lender of obtaining the funds to be provided under the facility agreement. And a great additional rate, generally referred to as the margin, which represents the profit to be made by the lender on the loan. 14:37 and an additional rate to cover the cost to the lender of complying with relevant banking regulations, typically called the associated cost rate or mandatory cost rate. Interests on amounts which have been borrowed and not yet repaid accrue at an interest rate fixed at the beginning for specified periods of time. Those periods are typically a certain number of months selected by the borrower. 15:04 typically one month, three months or six months. Accrued interest is normally payable on the last day of each of those interest periods. 15:15 Finally, a facility agreement may also provide for other fees such as a commitment fee or a repayment fee. Repayment fee, sorry. A facility agreement will normally also specify that interest accrues at an agreed higher rate if an event has occurred, which entitles the lender to demand early repayment under the agreement. The additional interest is usually called the default interest. Additional interest, 15:44 can, however, amount to an unenforceable contractual penalty in certain circumstances, and a lender needs to be careful when stipulating a higher rate in an agreement. 16:03 Next, we move on to the customary representations. A facility agreement will nearly always contain a number of these confirmations by the borrower in relation to itself, its business, its assets, and its liabilities. These confirmations are called representations and warranties. If any such confirmation is incorrect, the lender will typically be entitled to cease making further advances or to 16:31 call on the borrower to demand immediate repayment of the money is already advanced. Many of the matters dealt with in these representations and warranties will be important to the lender, not only at the start of the facility, but throughout the term of the facility. These slides show the types of representations that may be typically found in a facility agreement. We\'ve broadly categorized them as legal representations. 17:02 the ones you see below here. Information related representations, typically dealing with things like financial statements and confirming that no misleading information has been provided to the lender. Representations with respect to the state of the borrower\'s affairs, including that. 17:27 there have not been any breaches of environmental laws or borrower is up to date with its taxes. And lastly, with respect to the quality of the security or credit support, both in terms of ranking and as to good title to the assets being provided as security. 17:49 Next, we move on to covenants. What is a covenant? It\'s a promise by the borrower to do a particular thing that\'s a positive covenant or refrain from doing a particular thing, which is a negative covenant. Covenants in facility agreements protect the lender\'s position throughout the life of the facility. They would be particularly important for the lender, especially in a long-term facility. Sometimes we refer to them as undertakings. 18:17 Covenants, in particular, seek to ensure that the financial condition, business, and assets of the borrower remain within certain pre-agreed limits that the lender has set, which will have formed the basis of the lender\'s initial credit assessment. There are three categories of covenants commonly found in the facility agreements, general covenants, information covenants, and financial covenants. 18:47 General covenants relate to certain areas that the lender would have identified as important. This includes things like the ranking of the borrower\'s obligations under the facility agreement, the restrictions on the borrower making further acquisitions, investments, capital expenditure, and sometimes even restrictions on borrower repaying dividends until the facility has been repaid. 19:17 A negative pledge, which is a restriction on creation of security. Restrictions on incurring contingent liabilities such as guarantees. Restrictions to changes in the nature of the borrower\'s business or restrictions on incurring further indebtedness, basically restrictions on borrowing from any other third party. 19:44 In the course of preparing the credit proposals for the facility, the lender will also prepare financial projections in order to satisfy itself that the borrower should be able to pay and service interest and principal on the loan throughout the life of the facility. Financial covenants are essentially tests that are prescribed in the facility agreements to assess whether the performance of the borrower\'s business is living up to those projections. 20:11 These tests may include tests of liquidity, financial strength, profitability, cash flow, ability to service debt. These covenants require the borrower to carry out calculations throughout the life of the facility at regular intervals. These calculations are typically carried out at the same time as the financials are prepared. 20:35 and the figures will be provided to the lender and will essentially provide a good indication of the borrower\'s financial health. 20:50 Okay, next we move on to events of default. Events of default are events which would entitle the lender to require immediate repayment of an outstanding loan and to enforce security if the loan is secured and repayment is not forthcoming. They also allow the lender to stipulate that outstanding loans are repayable on demand. 21:13 meaning a further demand gets made by the lender. And they also allow the lender to cancel undrawn commitments and to prevent the lender from being required to make any further advances. Events of default normally compromise things like breaches by the borrower of its undertakings and representations and certain other events which might occur. 21:40 in relation to the borrower, including commencement of insolvency proceedings or substantial enforcement proceedings against the borrower by other creditors. 21:55 The breaches of certain undertakings or representations in a facility agreement constitute events of default only once a, and typically the borrower is given a chance to remedy the breach if it is remedyable and the borrower has failed to do so within a specified grace period. The agreement will usually specify which undertakings and representations fall within this category of remedyable undertakings. 22:25 The slide sets out the events of default that are typically specified in loan agreements. I won\'t go through them in detail, but I think some of them will be fairly self-explanatory. One maybe that I will touch on is cross-default and cross-acceleration, which essentially means other lenders of the borrower have either triggered defaults or events of defaults under their loan facilities or have 22:54 in the case of cross acceleration have actually demanded that the borrower repay those other loans. Lastly, these are the boilerplate provisions that are included in almost every loan agreement. These have been set out in a slide, but I won\'t go through all of these in detail. 23:19 Lastly, we will briefly discuss the taking of security for loan agreements. 23:29 Yeah, as we touched on earlier, a lender may make a loan on a secured and or unsecured basis. If a lender makes a loan on an unsecured basis and the borrower defaults and becomes insolvent, the lender will rank alongside the other creditors of the borrower, the other unsecured creditors of the borrower, and would therefore have to share in whatever distributions are available by the liquidator tool. 23:58 the pool of unsecured creditors. If however the lender has taken security for the loan, then the lender has a higher degree of protection on the borrower\'s insolvency. The lender will be able to enforce its security typically by selling the asset that has been secured in its favor and where the proceeds of the sale are equal to more. 24:24 or equal to or more than the amount owed by the lender, then the lender will be able to sort of recover in full. The excess or surplus sale proceeds will have to be returned to the borrower and then will be distributed to the other unsecured creditors. 24:52 So there are basically three types of security that can be created. There are actually a few others, but these are the three most common ones that you will see, at least in common law jurisdictions, and they are the mortgage, charge, and pledge. For the purposes of corporate borrowings, the security is usually by way of a mortgage or a charge. Pledge is more often used in things like trade finance, and we won\'t cover these in this module. 25:22 The key characteristics of a mortgage, in a mortgage the debtor transfers ownership or the mortgageor transfers ownership of the type either ownership or title to the secured asset to the creditor on the expressed or implied condition that the creditor will transfer it back to the mortgageor on discharge of the debt. The debtor usually retains possession of the asset. 25:50 So there are two types of legal mortgage. There are two types of mortgage, sorry. The legal mortgage is where the mortgageor transfers legal title to the secured asset to the creditor by way of security for the discharge of a debt. The creditor obtains legal title to the secured asset while the debtor retains a proprietary interest known as the equity of redemption. There\'s also 26:18 an equitable form of mortgage where the debtor retains the legal title in the secured asset but transfers the equitable or beneficial interest in the secured asset to the creditor by way of security for discharge of the debt. The creditor obtains an equitable proprietary interest. Typically, this distinction doesn\'t really have any material impact in practice, 26:48 use legal or equitable mortgages interchangeably. Key characteristics of a charge. A charge is an agreement between a creditor and a chargeor under which the particular asset of the chargeor can be appropriated by the chargee in satisfaction of a debt owed to it by the chargeor. A charge can be thought of as an encumbrance over an asset. It confers the chargee an equitable 27:16 proprietary interest in the charged property, giving the chargeee the right to appropriate the charged property and have the proceeds of sale applied in satisfaction of the debt. It doesn\'t automatically confer a full right of possession. 27:37 Charges can either be fixed or floating. A fixed charge attaches immediately to the charged asset, provided that that asset is or is capable of being ascertained and definite. It is important for the effectiveness of a fixed charge that the charged assets are identified as precisely as possible. Typically, a document under which a lender takes a fixed charge will give the lender the right to do the following. 28:03 prevent the charge or from disposing of the asset without the lender\'s consent, sell the asset if the charge or defaults in repaying the secure liabilities, require the charge or to maintain the asset while it remains in the charge or\'s possession, and claim the proceeds of sale in the charged asset prior in priority to other creditors so as to satisfy the purpose of taking security. I would add that although the charge or retains 28:33 possession of the asset upfront. Typically, your charge would include a provision which allows the chargee to take possession of that asset on the occurrence of a default. 28:49 A floating charge is one that hovers over a shifting pool of assets. It is a charge on a class of assets present and future belonging to a charge-all. That class of assets is one which in the ordinary course of the charge-all\'s business may fluctuate from time to time. Where a floating charge is created, it is contemplated that until a future step is taken, 29:18 those persons interested in the charged assets, the charger will carry on its business in the ordinary way in relation to the floating class of assets, including disposing of those assets from time to time without the consent of the charge holder. Upon the occurrence of a specified event of default, for example insolvency, then the floating charge will crystallize and become a fixed charge. Once the floating charge crystallizes, then the 29:48 the charge-walls ability to deal with the affected assets is restricted. 29:59 I mentioned earlier that the ability of the lender to rely on its security will depend on, among other things, whether or not the security has been properly registered or otherwise perfected. Perfection here means the mandatory steps which must be taken if the security is to be valid against creditors of the debtor and on the debtor\'s insolvency. Perfection usually involves registering the security in a specialist register. Examples of this include 30:27 For land, security of the land will need to be notified at the Singapore Land Authority and the mortgage itself will need to be separately lodged. For intellectual property rights, security will need to be registered at IPOS, the Intellectual Property Office of Singapore. For ships, a mortgage of ships will need to be registered at the Maritime Port Authority for priority. 30:58 And of course, in addition to all of these specialist registers, for a Singapore company, you would need to file the charge at ACRA under section 131 of the Companies Act. Any security that a company creates must be registered within 30 days. Otherwise, failure to file will mean that the charge may be void against the liquidator or other creditors of the company. 31:26 Okay, we\'ve come to the end of the session. Hopefully you found it useful, but if you have any questions, I would be happy to answer them during our separate session. Thank you. B24 BKF - 1\. Bank Lending - What influences a company's choice of finance? - Types of financing available (debt versus equity) +-----------------------+-----------------------+-----------------------+ |   | Equity | Debt | | | | | |   | | | +=======================+=======================+=======================+ | Private | Subscriptions from | Borrowing from banks | | | private investors | or other corporates | | | (e.g. venture | (e.g. term loan) | | | capital) | | | | |   | +-----------------------+-----------------------+-----------------------+ | Public | Offer of shares to | Issue of debt | | | the public or | instruments (e.g. | | | existing shareholders | notes or bonds) | | | (e.g., IPO) | | +-----------------------+-----------------------+-----------------------+ - Key features of loans - Different types of bank lending - 1\. Bilateral facility versus sydidcated loan - Syndicated loan only provided by Banks - 2\. Term loan (5 years) versus revolving credit facility - 3\. secured versus unsecured loans - Fundamental terms of a loan **[facility agreement]** - 1\. conditions precedent for drawing the loan - 2\. the cost of utilization, including interest provisions and fees. - 3\. general protection for the lenders - Representations - Covenants - Events of default - 4\. boilerplate - Taking security under Singapore law - 1\. mortgage - 2\. charge - Features of floating charge: invalid if created within 1 year from commencement of Judicial Management; The Creditor can choose the receiver and the business kept going - Charges must be registered at ACRA **[s131 Companies Act]** - 3\. pledge - trade finance. **[Enforcement]** of security - Private sale - Possession and Receiver - Grace Periods for power of sale - Interest on secured debts **[s223 IRDA]**