The Closing Conditions
The closing conditions in a senior loan agreement spell out what hoops the borrower must jump through before it is able to draw down the loan proceeds. The first condition is that borrower must sign all the contracts diligently prepared by the bank’s lawyers to document and secure the transaction. In addition to the main credit agreement, the bank’s lawyers prepare the following documents:
- Promissory Notes. Different promissory notes reflect the different term loans and revolving credit facilities provided by the senior lender.
- Intercreditor Agreement. Where there are two or more lenders, as is usually the case in private equity transactions, the intercreditor agreement spells out the relative rights of the creditors with regard to the borrower’s assets in the event of a default.
- Guaranty Agreements. Each subsidiary of the borrower typically guarantees the credit facility, thus giving the lender a direct security interest in the assets of the subsidiary.
- Security Agreement. Borrower and its subsidiaries pledge and grant security interests in all of their assets to secure the loan. In the event of default, the lender can repossess this collateral under Article Nine of the Uniform Commercial Code.
- UCC Filings. As part of getting security interests in the borrower’s assets, the lender must file UCC instruments in the borrower’s state of incorporation.
- Mortgages. If real estate forms part of the collateral package, the borrower will sign real estate mortgage documents, giving the lender a first mortgage on the land. These are especially important where real estate forms the principal asset of the borrower, as with resource or agricultural companies.
- Pledge of certificates and accounts. Certain assets, such as stock certificates and bank accounts, are not covered by the UCC and separate arrangements have to be made to perfect security interests in these assets, usually by taking direct possession. Any other assets that are not covered by standard UCC security documents, such as ships, require their own forms of pledge agreements.
- Landlord Waivers. Where a borrower, such as a retailer, has significant leased premises, lender will require waivers from landlords that give the lender priority over collateral located at the premises.
- Opinion of Counsel. Borrower’s counsel will be asked to give legal opinions as to the validity and authorization of the credit documents and certain conditions of borrower such as good standing and litigation.
- Certificates of Insurance. Certificates from insurance companies certifying that the borrower maintains the prescribed levels of insurance, and naming the lender as an additional insured under the policies.
- Solvency Opinion. Lenders sometimes require an opinion from a valuation expert that borrower is technically solvent after incurring the debt, in order to address possible risks under bankruptcy law.
Finally, anything that borrower has specifically promised to do, such as deliver an audited financial statement, is a condition to closing.
