Corporate finance documents: What to watch out for

In the rush of securing financing or refinancing for an existing facility, developers unintentionally overlook errors within the all-important corporate finance documents.

“Should I sign them?” is the number one question I get asked by clients regarding corporate finance documentation.

I have reviewed many finance documents and these are some of the key elements that need to be considered closely to ensure both the lender and the borrower are aligned under the facility documents. 

The undertakings

Reviewing the undertakings might be the most important action point when considering a facility agreement for development finance. The undertakings are the promises made to the bank regarding what the borrower will or won’t do during the term of the facility.

Familiarising yourself with these and adhering to them is the difference between complying and potentially being in breach of the facility documents.

The conditions

Making sure the conditions subsequent in the facility agreement are noted and key dates are diarised is essential. It is also important to consider whether these can be complied with — are they unachievable based on forecasts?

These conditions could include minimum plot sale volumes within a designated timescale and hitting specific deadlines for various stages of the development.

Putting a comprehensive plan in place on how to satisfy all conditions subsequent should be actioned prior to signing to ensure compliance.

Again, non-compliance with these can be an event of default normally meaning the facility is immediately due and repayable. 

Review the representations

Representations are statements the company is making about itself, the finances, properties, and insurance. While errors here can be minor it is always important that these are flagged with the lender from the outset.

Should these fall into repeating representations, you need to be mindful of what these are. 

Should any future matter make these representations inaccurate this should be flagged to the lender and where possible, corrected or consented to. 

Events of default

The standard events of default are most likely insolvency related, but a breach of undertaking can also trigger an event of default as can non-compliance with the repeating representations and any conditions subsequent.

A grace period will delay the enforcement of a lender’s security so there is time to rectify any such breach. However, this is not always included in the lender’s facility documentation, so it is important to consider negotiating this legal safety net.

A change of control of the borrower could amount to an event of default. 

While a change of control in a borrower isn’t unusual, the bank could care about the identity of this new controlling party.

A lender may not look to enforce a change of control as an event of default and call in the facility, but if a lender is struggling, it could still be relied upon nevertheless.

This sort of event of default can normally be negotiated to a middle ground that works for both parties. 

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