ACC Europe’s 2007 Corporate Counsel University

This material is protected by copyright. Copyright © 2007 various authors, the Association of Corporate Counsel (ACC), and ACC Europe. Materials may not be reproduced without the consent of ACC.

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106 Understanding Financial Agreements Matthew Jolly Executive Director UBS AG, London Branch Corinne Schot Senior Associate Houthoff Buruma Annette M. Schüller Legal Manager Tetra Laval International - Legal and Tax

ACC Europe 2007 Corporate Counsel University 4-6 March 2006, NH Barbizon Palace Hotel,Amsterdam, The Netherlands

Key issues for banks in negotiatinginvestment grade loan facilities

Matthew JollyUBS Investment BankLegal and Compliance Dept.Loan and Real Estate Finance section

ACC EUROPE'S 2007 CORPORATE COUNSEL UNIVERSITY

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IntroductionTrends in the loan market

Key issues for banks and borrowers innegotiating loan agreements

ACC EUROPE'S 2007 CORPORATE COUNSEL UNIVERSITY

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ACC Europe 2007 Corporate Counsel University 4-6 March 2006 NH Barbizon Palace Hotel, Amsterdam

Trends in the loan marketStandardisation of terms under LoanMarkets Association (“LMA”) guidance

Consequences of low rates and increasedliquidity

Credit Default Swaps (“CDS”) and loanCDS, Collateralized Loan Obligations

Move to fully electronic loan transfers

ACC EUROPE'S 2007 CORPORATE COUNSEL UNIVERSITY

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ACC Europe 2007 Corporate Counsel University 4-6 March 2006 NH Barbizon Palace Hotel, Amsterdam

Types of loan facility

Revolving loans

Term loans

Letters of credit

Swinglines

ACC EUROPE'S 2007 CORPORATE COUNSEL UNIVERSITY

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Maturity of loanCapital consequences of 364 day facilities

Borrowers preference to fix for longer termin liquid market

Extension rights/options

Term outs

ACC EUROPE'S 2007 CORPORATE COUNSEL UNIVERSITY

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TaxWHT and grossing up provisions

Qualifying lenders

Risks for the borrower in a broad definition

Transfer restriction for lenders if too narrow

Favoured formulations

ACC EUROPE'S 2007 CORPORATE COUNSEL UNIVERSITY

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Important Representations and CovenantsUse as a drawstop

Importance of repetition

Undertakingsnegative pledge

debt restrictions

pari passu

ACC EUROPE'S 2007 CORPORATE COUNSEL UNIVERSITY

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ACC Europe 2007 Corporate Counsel University 4-6 March 2006 NH Barbizon Palace Hotel, Amsterdam

Events of DefaultUse as a drawstop

Cross default and cross acceleration

Restructuring (especially for certain legalsystems, e.g. Spain)

Insolvency

ACC EUROPE'S 2007 CORPORATE COUNSEL UNIVERSITY

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Transfer provisionsBanks desire for liquidity as againstborrowers desire to know who it is dealingwith

Impact of the growth of the CDS market

Other risk management strategies

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ConfidentialityImportance for both sides

Need to waive for transferees

Legal requirements

ACC EUROPE'S 2007 CORPORATE COUNSEL UNIVERSITY

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KYCRecent changes and tightening of theregulations

New borrowers

Changes to the regulations

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Managing Financial CounterpartyRisks in International Trade Finance

Dr. Annette M. Schüller

ACC EUROPE'S 2007 CORPORATE COUNSEL UNIVERSITY

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Risks in International TradeCountry risks

Foreign exchange risks

Counterparty risksPayment risk

Performance risk

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Instruments for financial managementof counterparty risks (1)

Three main categories of instruments:Modes of payment

Guarantees

Repartition of risks in underlying agreement

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Instruments for financial managementof counterparty risks (2)

Reliance on specific documentary evidenceinstead of underlying contract/actual goodsMost instruments standardised (ICC Rules)

Negotiation of instruments restrictedLink to underlying contract vitalNote: Clarify status of ICC Rules in local law

Use of instruments depends on situation andposition of user (exporter/importer)

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Payment ModesClean payments

Open Account

Advance Payment

Documentary collectionsDocuments against Payment

Documents against Acceptance

Letter of credit

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Letter of CreditDefinition

Undertaking by Buyer’s bank to pay Seller a stated sumof money against presentation of stipulated documentsrelated to certain goods within a stated time period.

L/C is international payment method

Main standard ICC Uniform Customs and Practicefor Documentary Credits (UCP and eUCP)

UCP 500, from 1 July 2007 UCP 600

Underlying relationships governed by local law

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Letter of Credit (2)

Seller(Beneficiary)

Buyer(Applicant)

Issuing BankAdvising Bank

Nominated Bank (Confirming Bank)

Underlying Transaction(providing for payment by L/C)

Buyer instructs IssuingBank (in Buyer’scountry) to issue L/Cin favour of Seller

Arrangement with bank in Seller’scountry to (i) advise Seller of opening ofL/C and to (ii) pay to Seller againstdelivery of stipulated documents.

Nominated Bank (i) informs Sellerof issuance of L/C and documentrequirements; (ii) pays to Sellerupon presentation of documents inaccordance with L/C (with orwithout own payment obligation;“Confirmation))

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Letter of Credit (3)Very versatile allowing risks to be finetuned

Confirmed or unconfirmedRevocable or irrevocableTime of Payment (sight, deferred, acceptancecredits, credits by negotiation)Advances to Seller (red / green clause L/C)Payee (Seller or third person throughassignment or transfer)Back-to-Back

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Forms of GuaranteesBid Guarantee

Advance Payment Guarantee

Performance Guarantee

Retention Bond

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Types of GuaranteesOn demand guarantee

Standby Letter of Credit

Guarantee/Surety

Comfort Letter

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On Demand GuaranteePrimary obligation for issuer of on-demandguarantee

Independent of underlying contract/proof ofbreach

Presentation of specified documents

Wording standardised by ICC UniformRules for Demand Guarantees (URDG)

Look out for: Unfair Calling Provision

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Standby Letter of CreditDespite name not payment method buy guarantee

Similar to On-demand guarantee

Genesis: U.S. banks not allowed to issue guarantees

Primary obligation independent of pursuit ofdefaulting party

Presentation of specified documents sufficient

Follow ICC standard UCP 500/600 (not URDG)

Irrevocable (rule) or revocable

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Guarantee/surety/garantie simpleSecondary obligation for guarantor

Proof of liability/breach of contract required

Principal’s defences can be evoked

Material change to underlying obligationsmay void guarantee

Standard available: ICC Uniform Rules forContract Guarantees

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Comfort LetterTwo types

BindingNon-Binding

Reasons for issuanceCommercial: Inability or unwillingness to procureguaranteeAccounting: not a contingent liability

Note: Binding Comfort letters by parent companycan be more onerous than guarantees as theyconfirm subsidiary’s general ability to meet itsobligations Restrict to facility in question

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ACC Europe 2007 Corporate Counsel University 4-6 March 2006, NH Barbizon Palace Hotel,Amsterdam, The Netherlands

Key issues for banks in negotiatingloan facilities

Corinne Schot

Banking & Finance

Houthoff Buruma NV

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IntroductionRole of the Lawyer

Termsheet involvement

Understanding the deal

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DealUS

Australia Russia

France

DutchHoldco

Spain Italy

Germany

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Transaction managementLegal issues

Operational issues

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Operational issuesTaking of security

Taking of board resolutions

Determining legal/tax issues

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Operational issues IIDisposals

Security

Negative pledge/pari passu

Debt restrictions

Financial ratio’s

Repetition

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ACC Europe 2007 Corporate Counsel University 4-6 March 2006 NH Barbizon Palace Hotel, Amsterdam

Legal issues IRegulatory issues (Netherlands: PMPRequirements)

Works council requirements

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Legal issues IIRestrictions on security / guarantees

Financial assistance

Ultra vires

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