presents presents Negotiating Commercial Loan Covenants, Representations and Warranties Representations and Warranties Strategies for Lenders and Borrowers Drafting Loan Documentation A Live 90-Minute Teleconference/Webinar with Interactive Q&A Q& Today's panel features: Christopher G. Dorman, Partner, Phillips Lytle , New York Susan C. Alker, Partner, Reed Smith , Los Angeles Th Thomas Hemmendinger, Of Counsel, Brennan Recupero Cascione Scungio & McAllister , Providence, RI H di Of C l B R C i S i & M Alli t P id RI Wednesday, October 6, 2010 The conference begins at: The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 10 am Pacific P ifi You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions emailed to registrants.
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Negotiating Commercial Loan Covenants Negotiating Commercial Loan Covenants, Representations and Warranties Susan C. Alker – Partner Reed Smith LLP – Los Angeles, CA Ch i Christopher G. Dorman – Partner h G Phillips Lytle LLP Thomas S. Hemmendinger – Of Counsel o as S. e e d ge O Cou se Brennan, Recupero, Cascione, Scungio & McAllister LLP Presented via Webinar for Strafford Publications O t b October 6, 2010 6 2010 October 6, 2010 4
Introduction • Representations, Warranties, and Covenants in Commercial Loan Agreements g • Why are they important? – Risk allocation tools Risk allocation tools – Distant early warning October 6, 2010 5
Introduction • Representation – A statement of fact as of a point in time . . . • Warranty – A promise that a stated fact is true . . . • Covenant – A promise to do or not do something . . . . . . made to induce the lender to make the loan. October 6, 2010 6
Introduction • Impact of the credit crisis on loan documentation: – Fewer deals – Tighter covenants v. looser covenants Tighter covenants v. looser covenants – Small business and community lending – Mid-market Mid-market – Larger (often syndicated) deals October 6, 2010 7
Introduction • DDJ Management, LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 931 N.E.2d 87 (June , , ( 24, 2010) – Express reps and warranties mean something Express reps and warranties mean something – Fraud claim against insiders – Guidance on what makes for “justifiable” Guidance on what makes for justifiable reliance October 6, 2010 8
Representations and Warranties • Representations are statements of fact made to induce the lender to lend. • Warranties are guaranties that the statements made are true and correct statements made are true and correct. • The two are put together in loan agreements agreements. October 6, 2010 9
Representations and Warranties • Help Lender to elicit information • Effect Pricing Effect Pricing • Effect Structure • Back up credit analysis B k di l i • Encourage Self Audit • Allocate Risk October 6, 2010 10
Representations and Warranties • Misrepresentation or Breach constitutes default • Lender may need to show – materiality materiality – reliance October 6, 2010 11
Representations and Warranties • Borrower Concerns – amount of information – scope of representation – survival/continuing rep g p – materiality – knowledge – fact versus Law – the risk shift October 6, 2010 12
Representations and Warranties • Corporate Existence, Power and Authority B Borrower is a corporation duly incorporated, i i d l i d validly existing, and in good standing. Borrower has corporate power to make this Agreement and to borrow hereunder. The making and performance by Borrower of the Loan Documents have been duly authorized by all necessary y y y corporate action . Establishes who the Borrower is October 6, 2010 13
Representations and Warranties • Obligations Absolute The Loan Documents are the legal, valid and binding g g obligations of Borrower, enforceable against Borrower in - accordance with their respective terms. – Enforceability of Loan Documents Enforceability of Loan Documents – Carve-out for effect of Bankruptcy October 6, 2010 14
Representations and Warranties • No Violation Borrower's execution, delivery and , y performance of the Loan Documents do not: – Violate Law – Conflict with Borrower's Charter – Create any Security Interest, other than in favor of Lender – No Consents Required October 6, 2010 15
Representations and Warranties • Financial Condition The financial statements are complete and f p correct and fairly represent the financial condition of Borrower, its Subsidiaries and the Guarantors as at the dates of said financial statements and the results of their operations and financial activities for the ti d fi i l ti iti f th periods ending on said dates. – Materiality Materiality October 6, 2010 16
Representations and Warranties • Litigation There are no suits or proceedings pending or There are no suits or proceedings pending or (to Borrower's knowledge) threatened against or affecting Borrower any Subsidiary or any or affecting Borrower, any Subsidiary or any Guarantor. – Protects against contingent liabilities Protects against contingent liabilities – Materiality October 6, 2010 17
Representations and Warranties • ERISA and Tax Compliance Borrower and its Subsidiaries are in Borrower and its Subsidiaries are in compliance in all material respects with ERISA and the Internal Revenue Code ERISA and the Internal Revenue Code. – Failure to fund may lead to claims upon assets and penalties. October 6, 2010 18
Representations and Warranties Collateral and Property Matters – Ownership – No Encumbrances – Maintenance and Use – Insurance October 6, 2010 19
Representations and Warranties • Security Systems Borrower follows and shall continue to follow sound f f business practices to maintain the safety and security of its assets and business operations, including the accuracy, integrity and security of its records and the efficient and integrity and security of its records and the efficient and secure operation of its business and of its information and data systems. – Encourages self audit and promotes good business practices October 6, 2010 20
Affirmative Covenants • Financial Reports – Annual (audited) financial statements – Monthly/quarterly (certified) financial statements – Projections – Compliance certificates – For ABL deals: borrowing base certificates, monthly inventory payables A/R aging customer reports etc inventory, payables, A/R aging, customer reports, etc. – SEC filings October 6, 2010 21
Affirmative Covenants • Other Reports – Material events (material litigation, ERISA events, ( g Material Adverse Effect events) – Insurance policy changes – Notices from sub-debt holders i f b d b h ld – Collateral changes – Licenses/government investigations Licenses/government investigations October 6, 2010 22
Affirmative Covenants • Corporate Matters Corporate Existence, Etc. At all times preserve and keep in full Corporate Existence, Etc. At all times preserve and keep in full force and effect its and its Subsidiaries’ corporate existence, rights, franchises and licenses material to its business and those of each of its Subsidiaries; provided, however, that the corporate existence of ; p , , p any Subsidiary may be terminated if such termination is in the best interest of the Company and is not materially disadvantageous to the Lender. October 6, 2010 23
Affirmative Covenants • Legal Compliance Compliance with Laws, Etc. Exercise, and cause each of its Compliance with Laws, Etc. Exercise, and cause each of its Subsidiaries to exercise, all due diligence in order to comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, including, without y g y, g, limitation, all Environmental Laws, noncompliance with which counsel reasonably be expected to cause, either individually or in the aggregate, a Material Adverse Effect. October 6, 2010 24
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