Bank Loan Commitments Coomitment Fees Revolving Loans Monetary Terms Outline

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

  • $1.5Billion

• Facilities

  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 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”

         • 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 1.01)

         • Credit rating : Facility Fee (applicable percentage) Table

         • Level 1 (A/A2 or higher) 0.08%

         • Level 2 (A-/A3) 0.1%

         • Level 3 (BBB+/ Baa1) 0.15%

         • Level 4 (BBB/Baa2) 0.2%

         • Level 5 (Lower than Level 4) 0.25%

         • 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)

       • Available Amount

         • “… 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”

         • 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...

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