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Bank Loan Commitments Relationship Among Lenders Lender Default Monetary Terms Outline

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02C. #2C Bank Loan Commitments: Relationship among Lenders, Lender Default (Monetary Terms)

Relationship among Lenders, Lender Default
FMC Credit Agreement ss. 2.01(d), 2.03, 2.04, 3.03(a), (b), (c) 3.04(b), (f), (g), 2.16(a)(b)(d), 2.05(c),

2.11(g)
Problem Set # 2C

1. How are different loans apportioned among Lenders? [1:04:00]Kahan: Revolving Loans are made pro rata. Lenders acquire pro rata share in LofC's per section

3.04(f). Swing Loan Lender can demand that other Lenders pay a pro rata share of any Swing
Loan as specified in Sections 3.03(b) and (c).Revolving Loans made ratable 2.01(d)
o 2.01(d) "Each Revolving Loan Borrowing shall (subject to Section 2.09(d)
consist of Revolving Loans of the same Type in the same Currency made on the same day by the Lenders ratably according to their respective Commitments."
o 1.01 "Commitment" means, "as to any Lender, (i) the Dollar amount set forth opposite its name on the signature pages hereof or (ii) if such Lender has entered into one or more Acceptances, the amount set forth for such Lender in the Register, in each case as the same may be increased or reduced as expressly provided herein (including, without limitation, pursuant to Sections 2.06, 2.15(c). 3.08 and 9.07).
LofC issued by Issuing Bank 3.04(b)
o When a drawing is made  issuing bank make 100% payment

Payments are not made pro rata

Upon issuance, LofC deemed assigned amongst Lenders

If Borrower fails to pay upon draw, other Lenders pay Issuing Bank - 3.04(h)2. What happens with respect to the Lenders other than the Swing Loan Lender upon the making of a Swing Loan?
- Swing Loans made by Swing Loan Lender 2.03

Swing Loans are funded 100% by a bank (not pro rata)
o 3.03(b) "The Swing Loan Lender may demand that each Lender pay such Lender's pro rata share of all or a portion of the Dollar
Equivalent of the outstanding Swing Loans"
o 'may demand'  may not be reapportioned, 100% funded by the Lender  then
Lenders would not be on the same boatPayment currency? E.g.:
o Day 1 Swing Loan Lender made $40M loan in Swiss Francs

Day 4 the Swing Loan Lender makes a demand  other "Lender pay in Dollars to the Administrative Agent… such Lender's pro rata share"  if only 2 banks (Swing Loan Lender + Bank B)  Bank B would need to pay
 50% of the loan at the time demand is made OR
 50% of the loan in Dollar Equivalent at the time demand is made?
 If Dollar Equivalent is $50M  the other bank would pay $25M
1 02C. #2C Bank Loan Commitments: Relationship among Lenders, Lender Default (Monetary Terms)

But if on day of demand, Dollar Equivalent is $48M?
o $24M or still $25M?
 This is not addressed in this section
Prof: 3 options for 40M SF loan to Borrower

1. Split loan: Borrower should repay 20M Swiss Franc (+SF rate interest) to
Swing Loan Lender + $24USD to Bank B (+ USD rate interest)
 Most rational option, as each bank funded in different currency
 But Bank B would have Base Rate; and Bank A would have SF
interest rate  Lenders no longer in the same boat
 When Borrower repay, Borrower has to pay Swing Loan upon maturity date in 10 days  BUT should Borrower also pay the portion converted into Base Rate Loan (which doesn't have maturity
 so why need to repay)?

2. Convert immediately
 When Bank A make the Swiss Franc Loan, should convert loan immediately into Dollars
 Becomes a US$50M loan + 3 days interest on the US50M
 After 3 days, Bank B pays 50% ($25M USD)  when due,
Borrower would repay $25M to Bank A and $25M to Bank B 
Dollar interest rate

3. Always a SF loan
 Always remains a SF loan between the Swing Loan Lender and
Borrower
 Borrow in SF, pay SF interest rate, repay in SF (40M SF)
 Ideally should be specified in the agreement  but not provided here

o

To what extent does the Borrower have proportionate obligations to all lenders (same boat)
and to what extent does it not?
- All Lenders in same boat except

Fronting fee - only Issuing Bank gets it

Extra payment if ECR Loan is paid before end of Interest Period
 If borrower repay Eurocurrency Loan early, the Bank can make demand for compensation, amount it entitled to is specified by the bank

Swing Loan Lender failed to demand payment

If SLL demands payment, payments by other Lenders become Base Rate Loans,

3.03(c), whereas original Swing Loan is …
 Base Rate Loan Lender in Dollars v. Swing Loan Lender in Alternate
Currency with different interest rate provisions
- Whether to draft to deal with contingencies when Lenders are not on the same boat

Since such drafting would be very complex, may have flaws

2 02C. #2C Bank Loan Commitments: Relationship among Lenders, Lender Default (Monetary Terms)

What happens with respect to the Lenders other than the Issuing Bank upon the issuance of a
Letter of Credit or the drawing under a Letter of Credit?
- Only one bank issue the LofC, Lenders are not on the same boat unless in certain circumstances
- 3.04(f) "Immediately upon the issuance by an Issuing Bank of a Letter of
Credit in accordance with the terms and conditions of this Agreement,
such Issuing Bank shall be deemed to have sold and transferred to each
Lender… to the extent of such Lender's pro rata share of the
Commitments…"
- LofC is issued to a supplier  Issuing Bank farm out pro rata share to other banks (note: no money change in hand)
- Immediately upon making a LofC, the obligation under the LofC are apportioned among all lenders [c.f. swing loan: optionally and at anytime]
- LofC: in Dolalrs and Euros  remain in relevant currencies = no currency issuesWhen Borrower fails to pay (a draw)
o 3.4(h) "In the event that any Issuing Bank makes any payment under any Letter of Credit and the applicable Borrower shall not have repaid the Dollar Equivalent of such amount to such Issuing Bank pursuant to clause (g) or any such payment by such Borrower is rescinded or set aside for any reason, such Reimbursement
Obligation shall be payable on demand with interest…
Issuing Bank shall promptly notify the Administrative Agent, which shall promptly notify each Lender of such failure, and each Lender shall promptly and unconditionally pay to the
Administrative Agent for the account of such Issuing Bank the amount of such Lender's pro rata share of such payment in Dollars (based upon the Dollar

Equivalent of such amount on the date of such payment) and in immediately available funds."
o When issuing bank make payment under letter of credit, Issuing Bank would first go to the Borrower  if Borrower fails to pay  notify Admin Agent to notify each
Lender of such failure  other Lenders should pay their pro rata share

All should automatically (or semi-automatically) happen

3

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