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02C. #2A Bank Loan Commitments - Coomitment & Fees; Revolving Loans (Monetary Terms)
C. Bank Loan Commitments, Types and Structure of Loans
Commitment and Fees; Revolving Loans
FMC Credit Agreement
Problem Set # 2A
Commitment and Fees
[FMC Credit Agreement, Section 2.01, 2.03, 2.04, 2.05(a), (b), 2.06(a)]
1. What types of loans or other extensions of credit are the Lenders committing to make?
What is the amount of Total Commitments?
Kahan: Revolving Loans, Swing Loans and Letters of Credit. Total Commitment is $1.5 billion.
Amount of Total Commitment
1. Revolving loan
- company can borrow and repay whenever it wants
- used by companies to borrow when it needs
2. Swing loan
3. Letters of credit
- company wants to buy something, seller ask the bank for a letter of credit,
stating that once seller deliver the goods to the company, if the company doesn't pay, the bank would pay
- the anticipation is that the company would pay - money will probably never change hand - but act as an extra protection for the seller
- not a loan, but a reimbursement
- Flow of money: bank pays to seller; company pays the bank (reimburse)
2. What fees do the Borrowers pay with respect to the various types of loans or other extensions of credit? Do these fees change if and when loans are made? When and to whom are these fees paid?
Kahan: The Facility Fee is payable to the Administrative Agent on account of the
Lenders. The aggregate amount is the Applicable Percentage times the Total
Commitment. The fee will not change as amounts are borrowed. The Applicable
Percentage varies with the credit rating. The Letter of Credit commission is payable to the Administrative Agent on account of the Lenders. The aggregate amount is the
Available Amount times the (Applicable Margin minus the Applicable Percentage).
Available Amount is the maximum amount available to be drawn under a LofC. The
Applicable Margin also varies with the cred it rating. The Letter of Credit fronting fee is paid to the Issuing Bank at a rate of 15 basis point of the Available Amount. All fees are generally payable quarterly
Facility Fee (2.05(a))
- "The U.S. Borrower agrees to pay to the Administrative
Agent for the account of each Lender a facility fee on the average daily amount (whether used or unused) of such Lender's Commitment from the Effective Date (in the case of each Lender), and from the effective date specified in the Acceptance pursuant to which it became a Lender (in the case of each other Lender), until the Termination Date of 1 02C. #2A Bank Loan Commitments - Coomitment & Fees; Revolving Loans (Monetary Terms)-o
such Lender, payable in Dollars in arrears on each
Quarterly Date during the term of such Lender's
Commitment, and on the Termination Date of such Lender, at a rate per annum equal to the Applicable Percentage in effect from time to time for facility fees."
Function of Commitment
Company is paying facility fee so that money would be ready to be delivered to the company on company's demand - or the bank may be able to refuse
If paying for fee for the bank to give you money demand, fee should only be charged on the unused portion of the commitment and not
"whether used or unused"
o facility fee is used on the used portion as well, even though economically speaking there should be no facility fee
usually only on 'unused' but here, used = already delivered = only interest and not fee non-correspondent between economic and legal purpose (can do so, but need to be careful)
Formula and Applicable Percentage
At a rate per annum equal to the Applicable Percentage in effect from time to time for facility fees
Multiply total commitment by applicable percentage (defined in
o Credit rating : Facility Fee (applicable percentage) Table
Level 1 (A/A2 or higher) 0.08%
o Level 2 (A-/A3) 0.1%
o Level 3 (BBB+/ Baa1) 0.15%
o Level 4 (BBB/Baa2) 0.2%
o Level 5 (Lower than Level 4) 0.25%
o As credit rating goes down, facility fee goes up
Rationale: risk to the lender by standing ready to lend company money is a function of how creditworthy are you
"On account of such Lender's Commitment" Each lender gets
Lender's Commitment x applicable percentage all lender's commitment together = total commitment (company need not know,
as they only pay total sum to the admin agent, who distribute according to each lender's commitment)
Why, when and to whom
To Whom: Paid by U.S. Borrower to the Administrative Agent
(similar to a representative of the group of banks - to receive payment and distribute it to the accounts of each lenders)
When: on each Quarterly Date during the term of such Lender's
Commitment. Payable in Dollars in arrears on each Quarterly - i.e. on account of the quarter that has just ended
Letter of credit compensation 2.05(b) [01:09]
- Available Amount x (Applicable Margin - Applicable Percentage)
2 02C. #2A Bank Loan Commitments - Coomitment & Fees; Revolving Loans (Monetary Terms)
"… on such Lender's pro rata share of the average daily aggregate Available Amount of
(A) all Standby Letters of Credit outstanding from time to time and
(B) all Documentary Letters of Credit outstanding from time to time, in each case at the Applicable
Margin (minus the Applicable Percentage) in effect from time to time for Eurocurrency Rate Loans"
o Max amount available to be drawn by the seller, when the letter of credit is issued
Letter of Credit issued by one bank, but all other banks would be liable
Times Applicable Margin
Depend on the definition of the credit agreement - based on credit rating
Use Eurocurrency Rate (as provided in s.2.05(b))
Minus Applicable Percentage
Rationale for deducting: already paid facility fee on both used and unused commitment need not pay twice
[But, if the facility fee is only paid on unused commitment
need not deduct applicable percentage]
Why, when and to whom?
(i) U.S. Borrower to pay to Administrative Agent
When: in arrears quarterly on each Quarterly Date and on the
Termination Date of such Lender, commencing on the first Quarterly
Date after the date hereof
Fronting Fee 2.05(b)(ii) - Not related to credit rating - only paid to 1 bank (not pro rata)
- Only the issuing bank gets the fee (other banks have no interest in fronting fee - not all banks are on the same boat here, unlike (i)).
- (ii) The U.S. Borrower agrees to pay to each Issuing Bank, for its own account
- (x) a fronting fee with respect to each Letter of Credit issued by such
Issuing Bank, and
payable quarterly in arrears on each Quarterly Date during which such Issuing Bank has acted in such capacity, and on the scheduled Termination Date of such Issuing Bank (if such Issuing
Bank acted in such capacity up to such date),
in an amount equal to the product of fifteen (15) basis points per annum of the average daily Available Amount of such Letter of
Credit multiplied by the actual number of days such Letter of Credit was outstanding in such period, divided by 360, as applicable, which amount shall be payable in Dollars and calculated based on the
Dollar Equivalent of any amount otherwise calculated in Euros on the date when such amount is payable,
3 02C. #2A Bank Loan Commitments - Coomitment & Fees; Revolving Loans (Monetary Terms)
(y) such customary fees and charges in connection with the issuance or administration of each Letter of Credit as may be agreed in writing between the U.S. Borrower and such Issuing Bank from time to time.
2.05(c), (d) defaulting lender fees, and other feeso
3. Why would the Borrower ever want to reduce the Commitment? How is a reduction effected?
Kahan: A reduction in commitments reduces the facility fee.
Why: Borrower may not need to borrow that much money less Commitment would reduce the facility fees
How: When total commitment reduce, all lender's commitment goes down pro rata
all lenders are in the same boat
2.06(a)(i) Commitment Reductions
- The Commitment of each Lender shall be automatically reduced to zero on the Termination Date of such Lender.
- In addition, the U.S. Borrower shall have the right, upon at least three
Business Days' notice to the Administrative Agent, to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Lenders, provided that…"
Section 2.01, 2.07(a), (e), 2.08(a)(i) and (iii), 2.10, 2.11(a)-(c), 2.14, 3.01
4. How does Borrower obtain funds under the revolving loan facility?
Kahan: Notice must be provided under section 3.01. Notice requirements differ with the type of loan.
Notice - 3.01(a) Making the Revolving Loan
- "Each Revolving Loan Borrowing shall be made on notice, given not later than
(x) 12:00 noon (New York City time) on the third Business Day prior to the date of Eurocurrency Rate Loan Borrowing, and
(y) 11:00 A.M. (New York City time) on the day of a Base Rate
- Eurocurrency Rate Loans
- Base Rate Loans
What currencies?3.01 Content of the Notice
(i) date of such Revolving Loan Borrowing (which shall be a
(ii) Currency and Type of Revolving Loan comprising such
Revolving Loan Borrowing,
(iii) aggregate amount of such Revolving Loan Borrowing,
(iv) in the case of a Revolving Loan Borrowing comprised of
Eurocurrency Rate Loans, the Interest Period for each such
Revolving Loan, and 4 02C. #2A Bank Loan Commitments - Coomitment & Fees; Revolving Loans (Monetary Terms)
Difference between Base Rate and Eurocurrency Rate Loan:
Euro have interest period
Base rate doesn't have interest period
(v) the name of the Borrower (which shall be the U.S. Borrower or a
5. In what Types and currencies can a Borrower obtain a revolving loan?
Q5,6 Kahan: Base Rate Loans are in dollar; Eurocurrency Rate Loans in euro or dollars; the
US Borrower can only borrow in dollars
2 types: Dollar Revolving Loan; Euro Revolving Loan
In what currency can the loan be made
- Base Rate loan Dollars
1.01 means a Loan denominated in Dollars which bears interest as provided in Section 2.08(a)(i)
- Eurocurrency Rate Loan Dollar or Euro
1.01 a Loan denominated in Dollars or Euros which bears interest as provided in Section 2.08(a)(iii).
Eurocurrency Rate Loan: the interest rate is governed by
Eurocurrency Rate (not that the currency must be Euro)
6. Who can borrow (in what currencies)? Can a Euro Borrower obtain a Base Rate Loan?
2.01(a) "Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Revolving Loans (i) denominated in
Dollars to the U.S. Borrower (each, a "Dollar Revolving Loan") and (ii)
denominated in Dollars or Euros to the Euro Borrowers (each a "Euro
Revolving Loan", and collectively with any Dollar Revolving Loans, the
"Revolving Loans") from time to time…"
Can only borrow in $ 2.01(a)
o Can borrow $ via Base Rate or Eurocurrency Rate Loan
Can borrow in $ and Euro 2.01(a)
o Can borrow $ via Base Rate or Eurocurrency Rate Loan
Can borrow Euro via Eurocurrency Rate Loan
Base Rate Loan
Yes in Dollars
Yes, in Dollars
Yes in dollars
Yes in both dollars and euros
7. In what amounts can a Borrower obtain a revolving loan? [1:40]
See section 2.01 and slides, we discussed the ambiguities.
o Amount of Loan: s.2.01
- Base rate in $
- Eurocurrency rate in $
- Eurocurrency Rate in Euros
- Use of term "Dollar Equivalent"
5 02C. #2A Bank Loan Commitments - Coomitment & Fees; Revolving Loans (Monetary Terms)
2.01(c) "Each Revolving Loan Borrowing shall be in an aggregate amount of not less than the Dollar Equivalent of $1,000,000 and integral multiples of the Dollar
Equivalent of $500,000 in excess thereof or, in the case of Eurocurrency Rate Loans denominated in Euros, the Dollar Equivalent thereof [,] (or, if less, an aggregate amount equal to the then remaining Unused Commitments of the Lenders participating in such Borrowing, as applicable)."
o (Excluding Swing Rate Loan), only Eurocurrency Rate Loan is in Euro would get
- But here, the use of "Dollar Equivalent" is peculiar (though not wrong)
The first 2 "Dollar Equivalent" are not needed only the 3rd "Dollar
Equivalent" is needed
With the first 2 "Dollar Equivalent", don't need the second part on
o Prima facie:
- If in Dollars: $1,000,000 or +$500,000 (i.e. 1M, 1.5M, 2M, 2.5M…)
- If in Euro Euro equivalent of those amount
But parenthetical adds other possibilities Does parenthetical/ bracket apply to
Dollar and Eurocurrency Loans; or only to Eurocurrency Loan in Euros?
- Structurally unclear, but should apply to both to make sense
- If you have less than 1M, why can you only be able to borrow it in Euro and not Dollar?
1. What does "if less" refer to"?
- Can borrow not in that interval only if the commitment is less than that
Structurally ambiguous, though may not cause much harm, it could go either direction Judge may not have dealt with credit agreements very often such ambiguity should be fixed if possible
If there is a ',' between 'thereof' and '(or, if less…)' would be clear that it applies to both Dollar and Eurocurrency Loan
- 1st 'not less than' refers to the $1M
- 2nd 'if less' refers to
$1M e.g. if borrower wants to take remaining $1.7M take $1M
and then $0.7M (remaining unused commitments) would still be able to take 1.7M but with unnecessary hoops
'integral multiples of $0.5' but any number can be less or more than integral multiple can mean any number
2. What is the function of "not less than"? [01:49]
- "Not less than $1M and integral multiples of $0.5M" wrong
Intends to say: 1M, 1.5M, 2M, 2.5M…
But, literally "not less than $1M" $1.25M is not less than 1M, but
$1.25M is not allowed
"Not less than integral multiples of $500k…" doesn't make sense
- The wording is drafted in the wrong way - it doesn't mean what it intends to say. Should not wait for the judgment to fix it
- 'Integral multiples of $0.5' but any number can be less or more than integral multiple can mean any number
3. What do the "thereofs" refer to?
- 1st 'thereof' refers to $1M
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