THE MEDIUM-TERM LOAN MARKET Medium-term euro-currency loans from banks, whether by syndication or on a wholly private basis, are now the largest source of international fmance for most major companies. In this book the authors, one of whom is a banker and the other a corporate treasurer, have pooled their experience of negotiating and operating loans in this market to provide a comprehensive guide to its many complexities. In an extended introduction the authors outline the history of the immensely flexible market and discuss its advantages and disadvantages from the standpoints of the borrower and the lender. The book then works logically through the various aspects of a loan, considering first its structure and scale before moving on to such matters as maturity, costs, repayment, covenants and default. The implications of multicurrency facilities are examined in depth as are the attitudes of the several parties to such contentious issues as ratio covenants, dividend constraints, negative pledges and material adverse change clauses. This book makes no attempt to conceal the differences of aim and attitude with which the two parties must inevitably approach the negotiation of a new loan. Rather, by exposing and evaluating them the authors seek to show where a sensible compromise may lie and how the agreement can be written to protect the interests of both borrower and lender.
J. A. Donaldson is Deputy Treasurer of Imperial Chemical Industries, the British multinational, which he joined after qualifying as a Scottish chartered accountant in 1954. After early experience in general accounting and data processing, in recent years he has specialised in eurocurrency fmance and international money management. A regular speaker at conferences in London and elsewhere, his first book, Corporate Cu"ency Risk, was published in 1979. T. H. Donaldson is Vice-President and. Area Credit Officer of the Morgan Guaranty Trust Company of New York, London. He was educated at Eton, the University of Cincinnati and Trinity College, Cambridge. In 1958 he joined the Empire Trust Company of New York. He was Assistant Secretary when he left in 1962 to join W. E. Hutton & Co., members of the New York Stock Exchange, as Securities Analyst. In 1963 he joined the Morgan Guaranty Trust Company of New York and was transferred to London. Mr Donaldson was appointed Vice-President in 1971 and Credit Officer in 1974. He was responsible for drafting the written evidence given by the American Bankers Association in London to the Diamond Commission for their report on dividend control, and was heavily involved in the preparation and presentation of ABAL evidence to the Wilson Committee. An Associate of the Institute of Bankers since 1966, he came first in England in the examination and won the Beckett Memorial Prize and the Hyde, Walker and Gwyther prizes. His first book, Lending in International Commercial Banking, was published in Macmillan's International Banking Series in 1979. He has had articles published in Euromoney and in the Institute of Bankers Journal, and has given talks to the Foreign Credit Interchange Bureau and the Institute of Credit Managers. He has lectured on banking to a management course for Barclays Bank Ltd and a postqualillcation course for the Institute of Chartered Accountants. He is the son of Lord Donaldson and Frances Donaldson.
THE MEDIUM-TERM LOAN MARKET J. A. DONALDSON and T. H. DONALDSON
J. A. Donaldson and T. H. Donaldson 1982 Softcover reprint of the hardcover 1st edition 1982 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission First published 1982 by THE MACMILLAN PRESS LTD London and Basingstoke Companies and representatives throughout the world ISBN 978-1-349-06244-7 ISBN 978-1-349-06242-3 (ebook) DOI 10.1007/978-1-349-06242-3
Contents Acknowledgements viii 1 Introduction 1 l.a Definition of subject 1 l.b Objectives 3 l.c History of the market 4 l.d Advantages and disadvantages for the lender 12 l.e Advantages and disadvantages for the borrower 14 l.f The structure and p.trpose of the loan agreement 19 2 The Amount and Type of the Loan 24 2.a How much should the banks lend? 24 2.b How much should the company borrow? 31 2.c The structure of the loan 37 3 Banking Structures 40 3.a A single bank 40 3.b Syndication 43 3.c Quasi syndication 49 3.d Open competition 51 4 Cost, Yield and Mechanics 4.a The marker rate 4. b The spread 4.c Commitment fees 4.d Front-end fees 4.e Agency fees 4.f Legal fees 4.g Stamp duties and other government fees 4.h Publicity costs 4.i Cancellation and prepayment 5 Repayment 5.a Amortisation 5.b Early repayment at the borrower's option 5.c The tax clause 5.d Changes of law 60 60 65 69 71 73 74 75 75 77 79 79 82 84 88 v
vi 6 Multicurrency Options 6.a Interest mechanics 6.b Draw-down and rollover arrangements 6.c Make-up payments 6.d Non-availability of funds 7 Ratio Covenants 7.a Introduction 7.b Definitions 7.c Possible forms of ratio 7.d The banks' position 7.e The companies' reaction 7.f Possible developments 8 Non-ratio Covenants 8.a Dividend restraint 8.b Negative pledges 8.c Upstream, cross-stream and downstream guarantees 8.d Guarantees 8.e Other covenants CONTENTS 93 93 97 101 103 108 108 110 113 118 120 124 127 127 129 133 135 139 9 Representations and Warranties 141 9.a Concept 141 9.b Power to borrow and where appropriate to guarantee 9.c Litigation 9.d Representation of financial condition 9.e Other warranties 143 145 146 151 10 Events of Default 10.a General 10.b Failure to pay 10.c Failure to perform other duties and obligations 10.d Material adverse change 10.e Bankruptcy 10.f Alienation of assets 10.g Cross default 10.h The implications and dangers of default 153 153 159 161 164 169 171 175 179
CONTENTS vii 11 General Administration ll.a Payment arrangements ll.b Governing law and jurisdiction ll.c Notices ll.d Assignment ll.e Administration of a syndicate 11. f Conclusion 182 182 183 187 188 190 192 Appendix I Sample Loan Agreement 193 Appendix II Example of Calculation of Average Life Appendix III The Main Ratios Index 222 223 226
Acknowledgements The authors wish to thank various of their colleagues for their helpful comments; Mrs Penny James for her help in typing part of the early drafts of the book; and to their families for their patience while the book was being written. While the authors have drawn on their experience, the views expressed are their own and should not be attributed to their employers. viii