The UK Loan Market Association's Pre-Export Finance Facility Agreement - Financial Services

INTRODUCTION

On 20 September 2012, the Loan Market Association (the "LMA") issued its recommended form of facility agreement for pre-export finance transactions (the "PXF Document").

The PXF Document was stated to have been prepared in response to an increased demand, particularly amongst lenders, for a form of standardised loan document for use in English law pre-export finance transactions.

The approach adopted by the LMA when producing the PXF Document was to base it to the greatest extent possible on the Leveraged LMA loan document (the "Leveraged LMA Facility"). As a result, many of the 'boilerplate' clauses in the Leveraged LMA Facility, for example the indemnities and increased costs, have been incorporated into the PXF Document.

The purpose of this guide is to identify and explain some of the key features of the PXF Document that will be relevant to lenders and borrowers alike when approaching this document (though this is not, and should not be regarded as, a definitive guide as to whether those provisions are appropriate to any particular transaction).

The guide has been broken down into the following sections:

1. Assumed Structure and Basis of Preparation

2. Clause 1.1: Material Adverse Effect

3. Section 2: The Facility

4. Section 4: Repayment, Prepayment and Cancellation

5. Section 5: Costs of Utilisation

6. Section 6: Additional Payment Obligations

7. Section 8: Representations, Undertakings and Events of Default

8. Section 9: Changes to the Parties

9. Section 10: The Finance Parties

10. Section 12: Governing Laws and Enforcement

11. Schedule 2: Conditions Precedent

12. Summary

Where relevant, cross-references to the applicable clauses of the PXF Document have been included to assist the reader.

In preparing this guide, we have assumed familiarity with the Leveraged LMA Facility and therefore have not included any commentary on those provisions that are common to both the Leveraged LMA Facility and the PXF Document.

Terms defined in the PXF Document, unless they are defined in this guide or the context otherwise requires, shall have the same meaning in this guide.

COMMENT

It remains to be seen whether the PXF Document will be accepted and taken up by lenders and borrowers to the same extent that the other standard form LMA documents have been. Established borrowers in particular are likely to resist some of the more restrictive covenants and extensive representations that are included in the document and may well insist that future deals continue to be documented using the form that they have become accustomed to.

The extent to which the PXF Document will be used where new borrowers enter the market will likely depend upon how closely the PXF Document reflects the structure of the deal that is to be documented. In particular, there are a number of assumptions upon which the PXF Document is based which, if not true, may well lead to the PXF Document requiring heavy amendment before consideration of the commercial terms begins:

1. As described more fully below, the PXF Document is based on one of many structures that are found in PXF transactions, whereas the PXF market is far from homogeneous the borrower can be based anywhere in the world and the Product itself can differ greatly;

2. The exclusion of hedging counterparties from any security and from the PXF Document (including voting rights) itself suggests that the PXF Document is drafted on the assumption that hedging is unlikely to be required as part of the deal;

3. The assumption that no security will be taken over the Product itself (and therefore no concepts of collateral managers, trust receipts etc); and

4. Although it is not explicitly stated, the PXF Document appears to have been drafted upon the assumption that there will be very few Sales Contracts as there is little materiality embedded within, and very little flexibility with regards to, the representations and undertakings that pertain to the Sales Contracts.

If new capital providers (other than banks) are to be attracted to the PXF market, then it could be argued that the PXF Document may ease that process if it is in a form (with the same structure and general boilerplate provisions) that such capital providers have seen in other sectors. It is interesting to note, however, that the transfer provision in the PXF Document, although slightly more permissive than those contained in the Leveraged LMA Facility, are not as widely drawn as the transfer provision in the recently launched LMA Real Estate Facility Agreement (this sector has a similar desire to attract alternative capital providers) which allows transfers to be made to "any person".

ASSUMED STRUCTURE AND BASIS OF PREPARATION

The PXF Document assumes a structure whereby a limited liability company (the "Parent") is the 100 per cent shareholder of a limited liability company which is the producer of the commodity (referred to in the PXF Document as the "Product") and is also the borrower (the "Borrower"). The Borrower is also assumed to be the seller of the Products under the various Sales Contracts. It is assumed that the Parent and various subsidiaries of the Borrower will provide guarantees (the Parent, the Borrower and each such subsidiary are each referred to as an "Obligor").

This structure will be appropriate for some pre-export transactions, but by no means all. A wide range of alternative structures are commonly found in the sector, for example it is sometimes the case that the borrower group will have a specific trading entity based in a tax friendly jurisdiction and/or to mitigate any perceived country-risks which produces a double-decked structure, with a sale from the producer to the trading entity and then an additional layer of sales contracts to third party off takers. In such cases, it may be that the trading entity will be the borrower.

The other general characteristics of the PXF Document (and assumptions upon which it is based) include the following:

(a) it provides for a single-currency term loan facility;

(b) it assumes that:

no equity investment or other layers of debt will form part of the capital structure;
each Obligor will provide unlimited guarantees but not security; and
where the loans are fully or partially hedged, the hedge providers will not be party to the PXF Document, nor will they benefit from the security package; and

the Sales Contracts and Sales Contracts L/Cs;
the Collection Account into which the payments under the Sales Contracts are to be made; and
the Debt Service Reserve Account into which the monies standing to the credit of the Collection Account are to be swept.

Lenders should note that the PXF Document does not envisage the taking of other forms of security which are sometimes encountered if the credit worthiness of either the Group (or indeed the Buyers) is deemed not to be sufficiently strong. Such other security may consist of:

(i) a pledge or other security interest in the Product itself (including the use of collateral managers and trust receipts); and/or

(ii) security taken in respect of the insurance arrangements relating to the Product1.

Further features of the PXF Document:

(a) approach taken with respect to Sales Contracts:

it is assumed that certain Sales Contracts will be approved upfront, but there is also flexibility to introduce additional Sales Contracts in the future (see Clause 25.9 (Additional Buyers and Additional Sales Contracts) - referred to in Section 8 below);
there are two options relating to Additional Sales Contracts:
the Majority Lenders will decide at the time whether any proposed sales contract should qualify as a Sales Contract; or
there is a pre-agreed Eligibility Criteria (and if a proposed sales contract does satisfy such criteria, the Finance Parties have no further right to approve its terms).
the Eligibility Criteria is:

"...in relation to any contract for the sale and delivery of Products entered into by the Borrower as seller, that:

(a) the counterparty to that contract is a Buyer;

(b) it has or will have, as at the date it becomes subject to the security constituted by the Sales Contracts [Pledge/Assignment] Agreement, a minimum remaining tenor of not less than [∙ ] months beyond the Termination Date;

(i) paid in [insert currency];

(ii) paid directly to the Collection Account;

(iii) paid within no more than [thirty (30)] days from the date of delivery; and

(iv) made without any withholding, counterclaim, deduction or set-off whatsoever (save to the extent expressly permitted under the terms of that contract as specifically approved by the Agent on the instructions of the Majority Lenders);

(d) it complies with any payment or other conditions that were imposed by the Agent when confirming the designation of the counterparty to that contract as a Buyer;2

(e) it is capable of being freely assigned by the Borrower without any further consent of the relevant counterparty or, where such consent is required, this has been or will be obtained and presented to the Agent prior to such contract becoming subject to the Transaction Security constituted by the Sales Contracts [Pledge/Assignment] Agreement;

(f) it is expressed to be governed by English law or the law of another jurisdiction acceptable to the Agent on the instructions of the Majority Lenders;

(g) it provides for disputes to be submitted to arbitration in or to the courts of a jurisdiction acceptable to the Agent on the instructions of the Majority Lenders; and

(h) [∙];"3

(b) approach taken with respect to Buyers:

it is assumed that certain Buyers will be pre-approved and that there is also flexibility to introduce additional Buyers in the future (see Clause 25.9 (Additional Buyers and Additional Sales Contracts)). Note that the Lenders retain discretion whether to accept any new Buyer and can impose whatever conditions they consider appropriate;
- Buyers are either approved as:
- 'Invoice Buyers'- who are considered sufficiently credit worthy that they are permitted to buy Products on open account terms; or
- 'LC Buyers' - who are only acceptable if a bank considered sufficiently credit worthy provides a documentary letter of credit in respect of that Buyer's payment obligations; and
- the Majority Lenders retain discretion as to whether any company can become an Additional Buyer.

Where the structure for a particular transaction does not reflect the PXF Document's assumed structure, lenders will need to decide whether to use the PXF Document as a starting point for documentation.

THE PXF DOCUMENT

Clause 1.1: Material Adverse Effect

This is an important term, as it is used as a qualifier for a number of the representations, undertakings and Events of Default (as well as to trigger an Event of Default in its own right) and therefore the parties must carefully consider this definition.

The PXF Document defines a 'Material Adverse Effect' as:

"[in the reasonable opinion of the Majority Lenders] a material adverse effect on:

(i) the business [including the production and export capacity], operations, property, condition (financial or otherwise) or prospects of [any Obligor] [or] [the Group taken as a whole]; or

(ii) [the ability of an Obligor to perform[ its obligations under the Transaction Documents]/the ability of the Obligors (taken as a whole) to perform [their obligations under the Transaction Documents]; or

(iii) the validity or enforceability of, or the effectiveness or ranking of any Security granted or purporting to be granted pursuant to any of, the Finance Documents or the rights or remedies of any Finance Party under any of the Finance Documents.

The likely negotiating points include whether:

the reference in paragraph (i) to "operations, property" is appropriate, given the focus on the production capabilities of the Borrower;
the reference in paragraph (i) to "prospects" is appropriate (this may be seen as a metric too subjective to quantify, particularly if paragraph (ii) is included);
the Borrower is likely to argue that the correct option in paragraph (ii) should be "the Obligors taken as a whole", given that the cross-guarantee means that each Obligor is liable for the indebtedness of every other Obligor under the PXF Document but this will depend upon the composition of the Obligor group;
paragraph (ii) should be limited to payment or financial obligations only; and/or
the second part of paragraph (iii) is appropriate, as this includes all rights and remedies of a Finance Party, no matter how immaterial or theoretical.

Section 2: The Facility

(a) Clause 3.1: Purpose

The facility made available under the PXF Document is a single currency term loan facility, the purpose of which is not specified (though the accompanying note recognises that such facilities are often used to fund production or operating costs associated with the production of the Products).

(b) Clause 4: Conditions Precedent

The specific documents required to be delivered as conditions precedent under the PXF Document are considered below in the section relating to Schedule 2.

Section 4: Repayment, Prepayment and cancellation

(a) Clause 6.1: Repayment of Loans

The PXF Document provides for either bullet repayment or amortising repayment.

(b) Clause 7.3: Right of cancellation and repayment in relation to a single Lender

The PXF Document retains the general right for the Borrower to prepay a single Lender that is seeking to claim amounts under the tax gross-up, tax indemnity and/or increased costs provisions. The alternative right available to borrowers under the Leveraged LMA Facility to replace a 'Defaulting Lender' has been removed. As a result, a 'Defaulting Lender' would still have voting rights in respect of the PXF Document. The Lenders and the Borrower may consider if they wish to reinstate the 'Defaulting Lender' concept.

As per the Leveraged LMA Facility, the PXF Document requires mandatory prepayment upon illegality or change of control. In respect of the latter, however, mandatory prepayment is not automatic, but rather at the option of each individual Lender or the Majority Lenders (the Leveraged LMA Facility simply has automatic mandatory prepayment of all Loans in full).

Section 5: Costs of utilisation

(a) Clause 11: Interest Periods

The PXF Document provides optional wording to ensure that the Interest Period for each Loan would end at the same date. This is driven by concerns relating to the ability to perform the calculations for the Cover Ratios (see Section 8 below for more detail) and also aids the administration of the Loans.

Section 6: Additional payment obligations

(a) Clause 14: Tax gross-up and indemnities

The PXF Document simply has a requirement that each Obligor will need to gross-up any payment where a deduction or withholding applies (though the footnotes recognise that the clause will need to be considered on a case-by-case basis).

Borrowers will therefore need to check whether they would have to deduct tax from interest payments to any member of the initial syndicate. Assuming that this is not the case, some Borrowers may try to seek to introduce a concept of 'Qualifying Lenders' i.e. Lenders to whom a Borrower is able to pay without deduction at the outset (which is reflected in the Leveraged LMA Facility). If this starting position is agreed, the market position is generally that Borrowers take change of law risk (such that if an entity which was a Qualifying Lender at the outset ceases to be as a result of a change in law, the Borrower will be required to withhold and gross up), but that a Borrower should not have to gross up if a Lender ceases to be a Qualifying Lender other than as a result of a change in law (e.g. because of action taken by that Lender) or if a transfer is made to an entity which is not a Qualifying Lender.

This provision therefore is likely to see significant amendment and negotiation.

Swiss Borrowers

In the situation where there is a double-decked structure of producer and separate trading company and the latter is the Borrower, it is the tax situation of the trading company which is likely to be most relevant. Often such companies are incorporated in Switzerland which has:

"20 non-bank rule": A Swiss Borrower who owes interest bearing debt to more than 20 "non-banks" under any agreement (including under certain circumstances intra-group loans, i.e. not only the Lenders under the PXF Document will count) will re-qualify the Swiss Borrower as a bank for Swiss withholding tax purposes meaning that all interest payments of such Swiss Borrower will become the subject of Swiss withholding tax (currently at a rate of 35%) which must be deducted (i.e. a mere notification procedure is not available).

"10 non-bank rule": If there are more than 10 lenders (and, under certain conditions, sub-participants, swap counterparties etc.) under the PXF Document who are not banks, the facility will be re-qualified as a "bond" for Swiss withholding tax purposes which again triggers Swiss withholding tax (and possibly Swiss transfer stamp duty on assignments and transfer with respect to loan tranches). Therefore, the PXF Document should contain restrictions that prevent that more than 10 non-banks becoming involved in relation to a facility agreement with a Swiss Borrower.

The above rules are even more problematic, as pursuant to art. 14 of the Swiss Withholding Tax Statute, grossing-up for Swiss withholding tax is not permitted. Therefore, a PXF Document with a Swiss Borrower must include appropriate language to reduce the risk of a breach of these rules.

Many other jurisdictions impose some form of withholding tax so the parties should take appropriate advice for each deal.

Section 8: Representations, Undertakings and Events of Default

Because the PXF Document uses the Leveraged LMA Facility (as opposed to the Investment Grade LMA Facility) as the starting point, the representations, undertakings and Events of Default are likely to be more extensive than large trading houses and corporates are used to seeing in their documentation and therefore may be subject to extensive negotiation as to both scope and substance.

(a) Clause 20: Representations

The PXF Document contains a typical set of general representations relating to, amongst other things, the status of the Obligors, the binding nature of the various obligations incurred, non-conflict with other obligations, power and authority, validity and enforceability in evidence, and governing law and enforcement. These will need to be considered on a case-by-case basis and amended to suit the actual transaction and Obligor group structure.

Many representations in the PXF Document refer to the 'Transaction Documents' rather than the Finance Documents. The term 'Transaction Documents' encompasses a wider range of documents than just the Finance Documents and includes all Sales Contracts, all Sales Contract LCs and [all Material Contracts]4.

Given that any misrepresentation will trigger a drawstop and/or result in the occurrence of an Event of Default, the parties should consider whether it is appropriate, or even possible, to give such representations in respect of all Transaction Documents. Whether or not this is appropriate is likely to depend upon the relative importance of such documents so that, for example, in a structure with only one or a very small number of Sales Contracts, each one is likely to be material and therefore the Lenders are likely to insist that they be covered by the representations. Conversely, if there were many Sales Contracts, the Borrower may argue that no one contract is sufficiently material to warrant triggering an Event of Default. Similar arguments will apply in respect of Sales Contract LCs.

Below are some further representations to which specific consideration should be given.

(a) Clause 20.10: Deduction of Tax

The representations relating to payments and deduction of tax should be carefully reviewed. Specific tax advice is recommended in this respect.

(b) Clause 20.11: No Default

The PXF Document contains a standard 'no Event of Default' representation but also seeks confirmation from the Obligors that no Event of Default might reasonably be expected to result from "the entry into, the performance of, or any transaction contemplated by, any Transaction Document". It may not be possible for the Obligors to provide this confirmation if, for example, a Sales Contract 'contemplates', but does not necessarily require, a number of possible transactions (for example, the sale of a Product) in circumstances where such actions would not necessarily be permitted by the Finance Documents. Due diligence should obviously highlight any such issues.

A new representation has been added as compared to the LMA Leveraged Facility that "Each member of the Group has conducted its businesses in compliance with applicable anti-corruption laws and has instituted and maintained policies and procedures designed to promote and achieve compliance with such laws."

Borrowers will note the absolute nature of this representation (and the fact that it extends to the entire Group rather than being limited to the Obligors) and the lack of materiality or thresholds. However, anti-corruption is an area that lenders are particularly focussed on and upon which there is sometimes little room for negotiation given internal compliance policies.

(e) Clause 20.25: Sales Contracts

"(a) Capability: Each Obligor is fully capable of performing and complying with its obligations under each Sales Contract to which it is a party, and possesses all technical and financial means required for this purpose.

(b) Sales Contracts in effect: each Sales Contract is in full force and effect and any condition precedent to its coming into force was satisfied (or waived, with the prior written consent of the Agent on the instructions of the Majority Lenders) by the date on which such condition precedent was due to be satisfied under the terms of that Sales Contract and the payment obligations of the Buyer under the Sales Contract are legal, valid, binding and enforceable obligations and do not and will not conflict with any applicable law or regulation.

(d) Sales Contracts in form provided: Except as the same may be amended after the date of this Agreement in accordance with Clause 25.3 (Dealings with counterparties):

(i) each Sales Contract is in the form supplied:

(A) (in the case of the Original Sales Contracts) to the Agent prior to the execution of this Agreement; or

(B) (in the case of any Additional Sales Contract) to the Agent prior to the date on which that contract became an Additional Sales Contract,

other than, in each case, in respect of amendments permitted to be made under this Agreement and notified in writing to the Agent in accordance with Clause 25.3 (Dealings with counterparties);

(ii) there are no contracts, agreements or other arrangements in existence (other than any Finance Document) that amend, modify, vary or otherwise relate to that Sales Contract, other than those notified by the Borrower to the Agent in writing:

(A) (in the case of the Original Sales Contracts) prior to the execution of this Agreement; or

(B) (in the case of any Additional Sales Contract) prior to the date on which that contract became an Additional Sales Contract,

or, in each case, any amendments permitted to be made under this Agreement and notified in writing to the Agent in accordance with Clause 25.3 (Dealings with counterparties).

(e) No breach or repudiation: No party to a Sales Contract is in breach of any payment, delivery, or other material obligation thereunder or has repudiated or done or caused to be done any act or thing evidencing an intention to repudiate that Sales Contract.

(f) No notice of inability to perform: No Obligor has received or given any notification (written or otherwise) of a failure or inability by any party to a Sales Contract to comply with its obligations thereunder.

(g) No force majeure or early termination event: No event or circumstance has occurred that gives rise or might reasonably be expected to give rise to a right to terminate early, suspend performance under, repudiate or cancel any Sales Contract.

(h) No claims or liabilities: There are no claims, liabilities or obligations in existence between any Obligor and a Sales Contract counterparty or any other person that are or might reasonably be expected to be materially detrimental to the rights of any Finance Party under that Sales Contract or the Finance Documents.

(i) Arm's length terms: It has entered into each Sales Contract on arm's length terms."

The PXF Document envisages that this representation will be periodically repeated on an on-going basis. If that is the position reached after negotiation, the parties should ensure that there is consistency between the representation and the on-going covenants. For example, Clause 20.25(a) is wider in its application (requiring each Obligor to be "fully capable of performing and complying with its obligations under each Sales Contract") whereas Clause 25.1(a) only requires the Borrower to "comply in all material respects with its obligations under each Sales Contract".

The likely negotiating points include whether:

is it appropriate to represent that each Obligor represents to being "fully capable of performing and complying with its obligations under each Sales Contract" , or whether this should be limited to material, payment or delivery obligations;
all of the representations should be repeated; and
Clause 20.25(f) should also have a reference to material, payment or delivery obligations rather than "its obligations".

Negotiations will be influenced by whether the representation is required to be repeated and upon the profile and materiality of the Sales Contracts as previously noted. Borrowers and Lenders alike will want to ensure that an Event of Default is not triggered as a result of a technical (but in the context of the deal as a whole, immaterial) breach under any particular Sales Contract. Lenders will, however, be keen to ensure that the mechanism through which their loans will ultimately be repaid is intact. The parties should note that, if any representation listed in this clause is not true, in respect of a particular Sales Contract, that Sales Contract may be excluded from the calculation of the Cover Ratios.

(g) Clause 20.28: No immunity and Clause 20.29: Private and commercial acts

["In any proceedings taken in its jurisdiction of incorporation in relation to the Finance Documents to which it is a party, it will not be entitled to claim for itself or any of its assets immunity from suit, execution, attachment or other legal process".]

["Its execution of the Finance Documents to which it is a party constitutes, and its exercise of its rights and performance of its obligations thereunder will constitute, private and commercial acts done and performed for private and commercial purposes".]

Both the above clauses will be required where there is some doubt as to whether the Obligors are privately owned and/or benefit from form of sovereign or statutory immunity.

Clause 21: Information Undertakings

The PXF Document contains a set of fairly standard information undertakings relating to, amongst other things, provision of and requirements as to financial statements and Compliance Certificates, notification of Default, and details of litigation.

The only PXF-specific addition in this context is the requirement to provide the Agent with fairly extensive information relating to the Sales Contracts as follows:

(a) Clause 21.6: Information: Sales Contracts

"The Borrower shall:

(a) permit each of the Agent and the Security Agent and any of its officers and agents to have access to and examine at reasonable times and on reasonable notice its minute books and other corporate records, and books of account and financial records, in relation to each Sales Contract to which it is a party, [but no more than once every calendar year unless a [Default]/[Event of Default is continuing or the Agent reasonably suspects a [Default]/[Event of Default] is continuing or may occur;]

(b) promptly supply to the Agent copies of all documents relevant to its material obligations and rights under the Sales Contracts (including all its delivery obligations and the payment obligations of any Buyer), and notify the Agent of the price of any delivery under the Sales Contracts promptly after such price has been determined;

(c) keep the Finance Parties (via the Agent) regularly informed of all material developments and material progress under the Sales Contracts to which it is a party;

(d) notify the Agent of any default, breach, termination or suspension of any Sales Contract or of any dispute or claim in relation to a Sales Contract and deliver to the Agent a copy of all notices received or given by it in connection with any Sales Contract promptly upon receipt or dispatch thereof (including without limitation any notice of default, termination, dispute or claim made against it under any such Sales Contract together with details of any action it proposes to take in relation to the same);

(e) (without prejudice to its obligations under Clause 25.3 (Dealings with counterparties)), promptly provide the Agent with a copy of any documents that amend, waive or otherwise vary the terms of any Sales Contract to which it is a party;

(f) from time to time on request, promptly provide the Agent with such other information relating to the Sales Contracts to which it is a party (and its ability to perform its obligations thereunder) as the Agent may reasonably require;

(g) promptly on becoming aware of them, provide the Agent with details of:

(i) any event or circumstance which is or may be a force majeure event under any Sales Contract to which it is a party; and

(ii) (without prejudice to its obligations under Clause 25.3 (Dealings with counterparties)), the invocation of indemnity provisions by it or any Buyer;

(h) [promptly on becoming aware of them, provide the Agent with details of any claim made under:

(i) any cargo insurance policy relating to a Sales Contract where the claim is for a sum in excess of [ ] [(before deductibles)];

(ii) any business interruption insurance policy relating to any Obligor, where:

(A) the claim affects a Sales Contract;

(B) [events giving rise to the claim continue for more than [ ] days;] and

(i) deliver to the Agent, promptly upon receipt or dispatch thereof, a copy of any notice relating to:

(i) the exercise by a Buyer of any rights it may have to reduce the quantities of Products to be delivered to it; and

(ii) the exercise by a Buyer of any rights it may have to suspend or reject deliveries;

(j) deliver to the Agent, in relation to each delivery of Products made under a Sales Contract to which it is a party:

(i) no later than [5] Business Days after each such delivery is made, a copy of the final commercial invoice issued in respect of such delivery;

(ii) no later than [5] Business Days after any such delivery is made, copies of all applicable Delivery Documents (including, but not limited to, all bills of lading and preliminary invoices as required under the terms of that Sales Contract); and

(iii) promptly on request, such other certificates or documents required in connection with the sale or delivery of Products under that Sales Contract as Agent may reasonably request; [and]

(k) deliver to the Agent, no later than the first Business Day of each calendar month a schedule of planned deliveries under the Sales Contracts for that calendar month[.] / [; and

(l) deliver to the Agent on the first day of each calendar [quarter]/ [month] (or, if such day is not a Business Day, on the immediately following Business Day), a duly completed Contracts Report5 for the preceding calendar [quarter]/ [month].]"

The Borrower should ensure that all such information can actually be provided to the Agent (and that all necessary internal procedures are implemented to ensure that these requirements are complied with). Furthermore, depending on the number of Sales Contracts, the parties may well feel that it is administratively easier for some of this information to be swept up with the Contracts Report which is periodically delivered and for only very material issues to require on-going notification.

(b) Clause 21.9: Cover Ratios Certificate

"On [the first Business Day of each month]/[each Test Date]/[other], [the Borrower]/[the Parent] shall supply to the Agent a Cover Ratios Certificate setting out (in reasonable detail) computations as to compliance with 23.2 (Cover Ratios) and Clause 23.4 (Look Back Test) as at [the Test Date falling in that month]/[that Test Date]".

The parties will need to agree what is the appropriate testing period for the Cover Ratios.

Clause 22: Financial Covenants

The PXF Document includes three general financial covenants, namely:

a Leverage test - Clause 22.2(a);
an Interest Cover test - Clause 22.2(b); and
a Net Worth test - Clause 22.2(c).

The parties should note that the Net Worth covenant is a 'maintenance covenant' and therefore must be complied with at all times rather than only on those dates when it is tested. These financial covenants aim to measure the financial health of the whole group rather than just the Borrower. The appropriateness of these covenants and the levels at which they are set will need to be considered on a case-by-case basis.

The PXF Document does not include any cure or remedy rights in respect of these financial covenants.

Clause 23: Cover Ratios

The PXF Document states that the Cover Ratios are only a suggested form and that the detail of the Cover Ratios will be a matter of negotiation between the parties. It is envisaged that the Cover Ratios will be tested monthly and on each Utilisation Date.

(a) Clause 23.2(a): Debt Service Cover Ratio

This is a forward looking ratio which measures, for each relevant period, the Sales Value under Assigned Sales Contracts against the amount of Debt Service Obligations falling due during that period. It effectively measures whether the Borrower is producing sufficient cash to service its payment obligations under the PXF Document. Particular points to note are:

Calculation of Sales Value

Sales Value is determined by multiplying the quantity of Products to be delivered under Assigned Sales Contracts during the relevant period by the applicable Reference Price.

In order to qualify as an Assigned Sales Contract:

(A) the relevant Sales Contract must continue to be subject to the Transaction Security; and

(B) the Security Agent must have received:

(I) a copy of the notice of assignment delivered to the relevant Buyer;

(II) an acknowledgement of notice of assignment signed by the relevant Buyer (substantially in the form of acknowledgement required under the relevant security document); and

(III) a copy of the Irrevocable Payment Instructions, issued to and acknowledged by the relevant Buyer.

The PXF Document does not attempt to define the Reference Price for the Product as this will vary depending upon the nature of the commodity, whether it is traded and the methodology for ascertaining the price payable under the Assigned Sales Contracts themselves. Lenders may also consider whether it is appropriate to discount the rate used in the Sales Contracts.

Debt Service Obligations

Debt Service Obligations include any amortisation of principal, together with interest, fees, costs or expenses payable to the Finance Parties under the PXF Document during the relevant period.

(b) Clause 23.2(b): Loan Life Cover Ratio

This is a forward looking ratio which measures the Sales Value under Assigned Sales Contracts against the amount of Debt Service Obligations falling due until the Final Maturity Date. It effectively measures whether the Borrower is likely to produce sufficient cash to service its ultimate payment obligations under the facility. The methodology used is the same as for the Debt Service Cover Ratio.

This clause permits the Borrower to cure any deficiency in the Debt Service Cover Ratio or the Loan Life Cover Ratio by any of:

(i) prepayment of Loans;

(ii) increasing sales under existing Assigned Sales Contracts;

(iii) entering into new Assigned Sales Contracts; and/or

(iv) depositing cash into the Debt Service Reserve Account (see reference to Clause 26: Bank Accounts below for details).

The parties will want to carefully consider the ability to cure the Cover Ratios, in particular the frequency that any such cure may be used.

(d) Clause 23.4: Look Back Test

In addition to the forward looking tests contained in Clauses 23.3(a) (Debt Service Cover Ratio) and 23.3(b) (Loan Life Cover Ratio), the PXF Document also contains a test which measures the amount actually received under the Assigned Sales Contracts as against the Debt Service Obligations paid over two separate periods:

(i) the Look Back Test Period (effectively [three] months); and

(ii) the previous month.

In order to add any protection to the Lenders beyond that already contained in the PXF Document, this ratio would need to be set at a higher level than that required to merely meet the Debt Service Obligations for that period. This provision effectively gives the Lenders additional comfort that, not only did the Borrower meet its payment obligations, but that there was additional headroom having done so (i.e. a financial 'buffer' is incorporated). How much headroom (if any) is appropriate is likely to be heavily negotiated. Borrowers are likely to argue, that if they have made all payments as required and are in compliance with the forward looking cover ratios, they should not be put into default.

There are no cure rights relating to this test.

Clause 24: General Undertakings

As with the representations, the general corporate undertakings have, to a large extent, been based on the Leveraged LMA Facility (though, as with the representations, certain references in the Leveraged LMA Facility to 'Finance Documents' appear in the PXF Document as references to 'Transaction Documents').

There are a number of additional undertakings that will need to be particularly considered on a case-by-case basis.

(a) Clause 24.5: Anti-corruption law

"(a) No Obligor shall (and [the Borrower]/[the Parent] shall ensure that no other member of the Group will) directly or indirectly use the proceeds of the Facility for any purpose which would breach the Bribery Act 2010, the United States Foreign Corrupt Practices Act of 1977 or other similar legislation in other jurisdictions.

(b) Each Obligor shall (and [the Borrower]/[the Parent] shall ensure that each other member of the Group will):

(i) conduct its businesses in compliance with applicable anti-corruption laws; and

(ii) maintain policies and procedures designed to promote and achieve compliance with such laws."

As with the representation relating to anti-corruption, this is a widely drafted provision which extends to the whole Group and Borrowers will need to ensure they are able to comply.

(b) The PXF Document follows the form of the LMA Leveraged Facility in carving out activities which will not be prohibited by the negative covenants such as Clause 24.9: (Acquisitions), Clause 24.12: (Negative Pledge) and Clause 24.13: (Disposals). The detail of these provisions is beyond the scope of this guide and the parties will therefore need to carefully consider the definitions of:

(i) Permitted Acquisition;

(ii) Permitted Disposal;

(iii) Permitted Financial Indebtedness;

(iv) Permitted Guarantee;

(v) Permitted Loan;

(vi) Permitted Security; and

(vii) Permitted Transaction,

in each case to ensure that the carve-outs accurately reflect the needs of the Group. Note that many of these undertakings apply to the whole Group which a Borrower may argue is not acceptable unless a breach by a non-Obligor negatively affects an Obligor.

Clause 25: Sales Contract Undertakings

The PXF Document contains a number of undertakings that are specific to the Sales Contracts. Given the importance of these agreements in providing the revenue necessary to repay the facility, it is no surprise that the Lenders will wish to exert tight control over such contracts. However, the majority of the undertakings will require some consideration to ensure that they are applicable and appropriate for each particular transaction. In particular, the Lenders will not want to impose such tight constraints on the Sales Contracts that the Borrower is not able to run its business efficiently without constantly requiring waivers. As before, the number of such Sales Contracts will have an effect on both how operationally difficult this is likely to be for a Borrower and whether some level of materiality beyond that envisaged in the current drafting is required.

(a) Clause 25.1: Compliance with Sales Contracts

"The Borrower shall:

(a) comply in all material respects with its obligations under each Sales Contract in the manner and at the times provided for therein; and

(b) use its best efforts to procure that each Buyer duly complies in all material respects with its payment and other material obligations under that Sales Contract in the manner and at the times provided for therein (and in accordance with the directions of the Agent or the Security Agent from time to time given pursuant to the terms of the Finance Documents); and

(i) any default on any of its payment, delivery and other material obligations under a Sales Contract;

(ii) any right to terminate a Sales Contract becoming exercisable by the Buyer; or

(iii) any counterclaim or right of set off arising under a Sales Contract other than any set-off under a Sales Contract that occurs prior to an Event of Default that is continuing, and in the ordinary course of trading as part of the settlement of final invoices for deliveries made thereunder".

The likely negotiating points include whether:

compliance must be to all obligations or just to material or payment or delivery obligations;
it is appropriate to require the Borrower to use its "best efforts to procure that each Buyer duly complies...". Given the ability of the Borrower embedded in the PXF Document to substitute Buyers and Sales Contracts, it could be argued that expending resources chasing a Buyer who has defaulted may, depending on the importance of the relationship and the circumstances, be counter-productive; and
the correct threshold for paragraph (c) is something that 'might' result in any of the listed items.
(b) Clause 25.2: Pursuit of remedies

"Subject to any provision of the Finance Documents to the contrary, the Borrower shall diligently pursue any remedies available to it in respect of any breach or claim arising in relation to each Sales Contract."

The parties will note the overlap with Clause 25.1(b) above. The Borrower may also wish to exclude from this obligation any requirement to take uneconomic or disproportionate actions in respect of immaterial breaches.

"The Borrower shall not without the prior written consent of the Agent:

(a) in respect of any matter under a Sales Contract that, pursuant to the terms of that Sales Contract, falls to be decided by mutual agreement of the parties thereto, negotiate or agree such matter except in accordance with the instructions of the Agent or the Security Agent, other than in respect of any minor administrative or technical matters or matters required by the parties thereto to improve the practical performance of their obligations under a Sales Contract, provided further that:

(i) such matters do not relate to the financial obligations of the parties under that Sales Contract or vary or have the effect of varying any of the Eligibility Criteria; and

(ii) the Agent or the Security Agent is notified of such matters as soon as reasonably practicable;

(b) rescind, amend, vary or waive (or agree to or permit any amendment to, or variation or waiver of) any term of a Sales Contract except as required or as expressly allowed by the Finance Documents, provided that the parties thereto may agree to immaterial amendments to and waivers of a Sales Contract where such amendments or waivers relate to minor administrative or technical matters or matters required by the parties to such Sales Contract to improve the practical performance of their obligations under that Sales Contract, provided further that:

(i) such matters are not prejudicial to the interests of the Lenders under the Finance Documents and do not relate to the payment obligations of the parties under such Sales Contracts (other than amendments in relation to [ ]) or vary or have the effect of varying any of the Eligibility Criteria; and

(ii) such amendments or waivers are notified to the Agent or the Security Agent as soon as reasonably practicable;

(c) consent to the transfer by a counterparty of any of its rights, title or interest in, or its obligations under, a Sales Contract;

(d) consent to any act or decision by a counterparty that might constitute a breach of a Sales Contract or otherwise adversely affect any rights of the Finance Parties thereunder or in relation thereto;

(e) make or agree to any claim that a Sales Contract is frustrated or permit or agree to the cancellation, suspension, rescission, repudiation or other termination of a Sales Contract or accept any material breach thereof or default thereunder as repudiatory; or

(f) seek relief from performance of its payment, delivery or other material obligations under a Sales Contract whether under any force majeure, time limit for claims or any other provision."

Where there are a large number of Sales Contracts, the restrictions above (particularly the limit to only making amendments which relate to 'minor or technical' matters) may ensure a steady stream of waiver requests being made to the Lenders and lead to an unnecessary burden (and time delays) on the day-to-day operation of the Borrower's business.

(d) Clause 25.4: Payments under Sales Contracts

"The Borrower shall ensure that each payment made to it under a Sales Contract is made in [insert currency of Facility] and (unless specifically approved by the Agent on the instructions of the Majority Lenders) free and clear of any set off, deduction, counterclaim or condition."

The parties will note that, if a payment under any Sales Contract is subject to any set-off or other deduction, it would not meet the Eligibility Criteria and may trigger a recalculation of the Cover Ratios under Clause 25.7 (Sales Contract Failure). In this regard, the whole of the payments made under that Sales Contract would be disregarded, not just any amount withheld.

(e) Clause 25.5: Deliveries under Sales Contracts

"The Borrower shall:

(a) make all deliveries under each Sales Contract directly to the place specified for such deliveries in that Sales Contract (or in directions given pursuant to that Sales Contract), and in accordance with the delivery schedule set out therein; and

(b) ensure that the aggregate quantities of Products delivered and scheduled to be delivered under the Sales Contracts are at all times sufficient to ensure that the obligations under Clause 23.2 (Cover Ratios) are complied with".

(f) Clause 25.6: Fair market price

"The Borrower shall ensure that the price (including any applicable discount) charged and payable for each delivery of Products under a Sales Contract pursuant to the terms thereof is on arm's length terms and reflects and will reflect the fair market price for Products".

Clause 20.25(i) (Sales Contracts) already contains a repeating representation that all Sales Contracts are on arm's length terms. The addition in this clause of requiring the Products to be sold at a 'fair market price' is likely to be very difficult to test other than in respect of flagrant (possibly fraudulent) breach. Given the alignment of interest of the Borrower and the Lender in ensuring the best price is paid for the Products, and, provided that the Cover Ratios are being complied with, it is likely to be only in such instances that this clause becomes relevant.

(g) Clause 25.7: Sales Contract failure

"(a) If:

(i) on any date any Sales Contract ceases to satisfy the Eligibility Criteria;

(ii) the representations set out in Clause 20 (Representations) in relation to a Sales Contract are not true; or

(iii) the Borrower is in breach of its obligations in relation to any Sales Contract under Clause 25.1 (Compliance with Sales Contracts) to (and including) Clause 25.6 (Fair market price) or otherwise under the Finance Documents,

[the Borrower]/[the Parent] shall, immediately upon becoming aware of the same, notify the Agent.

(b) If the Agent receives notice from the [the Borrower]/[the Parent] under paragraph (a) above or otherwise becomes aware that any of the matters referred to in paragraph (a) has occurred in relation to a Sales Contract, the Agent may and shall, if so instructed by the Majority Lenders, notify [the Borrower]/[the Parent] in writing that such contract has ceased to be a Sales Contract, whereupon:

(i) that contract shall immediately cease to be a Sales Contract; and

(ii) the Cover Ratios shall be retested on the date of such notice from the Agent, treating the date of retesting as a Test Date for the purposes of testing the Cover Ratios. For the purpose of such retesting, the Debt Service Obligations as at the most recent Test Date shall be used, but the applicable Sales Value shall be reduced by the Sales Value under each such contract that has ceased to be a Sales Contract".

This clause gives the Majority Lenders the ability to disregard the value attributed to any Sales Contract where, amongst other things, a breach has occurred in relation to such Sales Contract. Depending upon the nature of the breach, the Borrower may feel that this is too draconian. Borrowers should note that if a breach of the Cover Ratio follows any such recalculation, the Borrower may still cure any such breach using the mechanism, set out in Clause 23.3 (Top-Up).

(h) Clause 25.8: Buyer failure

"(a) If in relation to any Buyer:

(i) it defaults on its obligations under a Sales Contract, its acknowledgement of the Sales Contracts [Pledge/Assignment] Agreement or its acceptance of the Irrevocable Payment Instructions in respect of that Sales Contract[, unless, in the case only of a Sales Contract, such default does not relate to a payment obligation, is otherwise technical in nature and is remedied within [ ] Business Days];

(ii) an Insolvency Event has occurred and is continuing;

(iii) it rescinds or repudiates any Sales Contract to which it is a party or does or causes to be done any act or thing evidencing its intention to rescind or to repudiate any Sales Contract to which it is a party; or

(iv) it otherwise ceases to be sufficiently creditworthy or capable of performing its obligations under a Sales Contract, as determined by the Agent on the instructions of the Majority Lenders and notified to [the Borrower]/[the Parent],

[the Borrower]/[the Parent] shall, immediately upon becoming aware of the same, notify the Agent.

(b) If the Agent receives notice from [the Buyer]/[the Parent] under paragraph (a) above or otherwise becomes aware of the existence or occurrence of any of the events and circumstances described in paragraph (a) above in relation to a Buyer, the Agent may notify [the Borrower]/[the Parent] in writing that such person has ceased to be a Buyer, whereupon:

(i) such person shall immediately cease to be a Buyer;

(ii) each Sales Contract to which such person is a party shall immediately cease to be a Sales Contract; and

(iii) the Cover Ratios shall be retested on the date of such notice from the Agent, treating the date of retesting as a Test Date for the purposes of testing the Cover Ratios. For the purpose of such retesting, the Debt Service Obligations as at the most recent Test Date shall be used, but the applicable Sales Value shall be reduced by the Sales Value under each such contract that has ceased to be a Sales Contract".

The effect of any Buyer losing such status is that any Sales Contract to which it is a party is disregarded for the purpose of the calculation of the Cover Ratio if the Agent so decides (not the Majority Lenders as per Clause 25.7 (Sales Contract Failure)). Given the seriousness of the events listed in sub-paragraphs (i) to (iii), it would be hard for a Borrower to argue that is inappropriate, though there may be some discussion of the ability of the Majority Lenders to subjectively determine that a Buyer has ceased to be 'sufficiently creditworthy'.

(i) Clause 25.9: Additional Buyers and Additional Sales Contracts

"(a) [The Borrower]/[The Parent] may request in writing that additional persons [that are not members of the Group or an Affiliate of the member of the Group] (a "Proposed Buyer") be designated as Buyers in accordance with paragraph (b) below.

(b) A Proposed Buyer may be designated as a Buyer in accordance with the following procedure:

(i) [the Borrower]/[the Parent] shall deliver to the Agent a written request providing all relevant details of the Proposed Buyer and specifying whether such person is to be an Invoice Buyer or an LC Buyer;

(ii) within [ ] Business Days of receiving such request (or, if later, within [ ] Business Days of receiving such additional information as the Agent may have required), the Agent on the instructions of the Majority Lenders (and each Lender may, without limitation, have regard to whether the Proposed Buyer is incorporated in or trading from any country subject to legal sanctions which affect that Lender) will confirm to [the Borrower]/[the Parent] whether or not such person is acceptable as a Buyer, including any conditions applicable to the designation of that person as an Invoice Buyer or an LC Buyer; and

(iii) if the Agent has confirmed under sub-paragraph (ii) above that the Proposed Buyer is acceptable as a Buyer, with effect from the date of that confirmation, that Proposed Buyer shall become a Buyer for the purposes of this Agreement.

(c) [The Borrower]/[The Parent] may request in writing that any contract for the sale and delivery of Products between the Borrower as seller and a Buyer as buyer (a "Proposed Additional Sales Contract") be designated as an Additional Sales Contract in accordance with paragraph (d) below.

(d) A Proposed Additional Sales Contract may be designated as an Additional Sales Contract in accordance with the following procedure:

EITHER

(i) [the Borrower]/[the Parent] shall deliver to the Agent:

(A) a written request providing a copy of the Proposed Additional Sales Contract and confirming that the Proposed Additional Sales Contract satisfies the Eligibility Criteria; and

(B) all of the documents and other evidence listed in Part II of Schedule 2 (Conditions precedent);

(ii) the Agent shall notify [the Borrower]/[the Parent] and the Lenders promptly upon being satisfied that it has received all of the documents and other evidence listed in Part II of Schedule 2 (Conditions precedent) in form and substance satisfactory to it; and

(iii) if the Proposed Additional Sales Contract satisfies the Eligibility Criteria and the Agent has received all of the documents and other evidence listed in Part II of Schedule 2 (Conditions precedent) in form and substance satisfactory to it, then with effect from the date of notice by the Agent under paragraph (ii) above, the Proposed Additional Sales Contract shall become a Sales Contract for the purposes of this Agreement.

(i) [the Borrower]/[the Parent] shall deliver to the Agent a written request providing a copy of the Proposed Additional Sales Contract;

(ii) within [ ] Business Days of receiving such request (or, if later, within [ ] Business Days of receiving such additional information as the Agent may have required) the Agent on the instructions of the Majority Lenders will confirm to [the Borrower]/[the Parent] whether or not the Proposed Additional Sales Contract is satisfactory as a Sales Contract;

(iii) if the Agent on the instructions of the Majority Lenders has confirmed that the Proposed Additional Sales Contract is satisfactory to it, the [the Borrower]/[the Parent] shall deliver to the Agent all of the documents and other evidence listed in Part II of Schedule 2 (Conditions precedent);

(iv) the Agent shall notify [the Borrower]/[the Parent] and the Lenders promptly upon being satisfied that it has received all of the documents and other evidence listed in Part II of Schedule 2 (Conditions precedent) in form and substance satisfactory to it; and

(v) if the Proposed Additional Sales Contract is satisfactory to the Agent on the instructions of the Majority Lenders and the Agent has received all of the documents and other evidence listed in Part II of Schedule 2 (Conditions precedent) in form and substance satisfactory to it, then with effect from the date of notice by the Agent under paragraph (iv) above, the Proposed Additional Sales Contract shall become a Sales Contract for the purposes of this Agreement".

To read this article in full together with its footnotes please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

United States: The UK Loan Market Association's Pre-Export Finance Facility Agreement

INTRODUCTION

COMMENT

ASSUMED STRUCTURE AND BASIS OF PREPARATION

THE PXF DOCUMENT

Swiss Borrowers

Clause 23: Cover Ratios

Calculation of Sales Value

Debt Service Obligations

Login to Mondaq.com

Why Register with Mondaq

Your Organisation