I’ve read a fair few corporate finance documents over the last few weeks. A work stream that I’ve found myself enjoying more and more.
However, all too often I’m told by property colleagues “the client doesn’t want advising on these, they just want to sign them, but I’m not too sure they should…” So I thought I’d share with any businesses out there going through financing or even refinancing an existing facility my top 6 tips when reviewing finance documentation:
1) Check the key commercial terms. I have seen it whereby those terms agreed in the term sheet haven’t necessarily been drafted correctly into the facility agreement. Things such as the facility amount, the margin and the arrangement fee. This is a simple check to do but a key one.
2) Review the representations and warranties. These are statements the company is making about itself, the finances, any property and insurance. I have seen some that note there are no employees of the company and this has been incorrect or that a property is not elected to VAT where it is. If any of these are untrue then a discussion needs to be had with the bank.
3) Beware repeating representations. These will either be detailed in a separate clause or listed out as a defined term and are usually representations made by the company on every day of the term of the facility. Should any of these become incorrect during the lifetime of the facility then there will be notification requirements within the facility agreement that the company must comply with.
4) Review the undertakings. These are things you promise to the bank the company will or won’t do during the term of the facility. Make sure you are familiar with these and adhere to them, as often, a breach of these will amount to an event of default which leads me to…
5) What are the events of default? You will expect to see your standard ones such as anything amounting to an insolvency event. But you will also likely see a breach of undertakings as an event of default. We would always hope to see a grace period when it comes to a breach of undertaking so that the company is permitted a short period to rectify any such breach (it is a “continuing breach”) before the bank can claim it as an event of default and enforce their security. This is not always included in the bank’s facility agreement so do check.
6) Fixed and floating charges. Make sure that any assets the company needs to be able to deal with freely such as components for finished products or cash in a general account are not captured under a fixed charge but are instead secured under a floating charge. If you think of a floating charge as a net floating above the assets of the company and you can continue to deal freely with those assets (subject to anything within the warranties, representations, and undertakings) until that floating charge crystallises.
If you have any questions, our Corporate and Commercial team will be happy to help.