Negotiating A Loan Agreement

BUSINESS BORROWING BASICSPremiere Date: January 17, 2017

This webinar is sponsored by: EisnerAmper 1

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MODERATOR

Tom O’Hare Marquette Business Credit

PANELISTS

Wade Kennedy McGuireWoods

Corrie Menary Kirtland Capital Partners

Matt Sloan MB Financial

MEET THE FACULTY

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SERIES SPONSORS

EisnerAmper

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ABOUT THIS WEBINAR

Like most other important business arrangements, the lending of money between a bank (or other lender) and a borrower is commonly governed by a written contract: the loan agreement. This is somewhat misleading, however, since the relationship between borrower and lender is commonly governed by a number of separate documents, with the “loan agreement” being just one. Others typically include a security agreement, a pledge agreement and a personal guaranty. Many lenders present the loan documents as “take it or leave it” propositions. Most lenders, however, are in fact willing to negotiate. The terms that a lender will agree to will depend on a number of factors, including the creditworthiness of the borrower, the nature of the borrower’s business and the level of competition among lenders. This webinar provides guidance on what terms are “market,” what terms are more easily negotiated, and strategies to negotiate loan terms.

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ABOUT THIS SERIESCash is the lifeblood of any business. While some companies operate solely with their own working capital, most must borrow money from time to time. Borrowing, of course, includes something as mundane as buying goods or services on credit (whether on credit terms or by using a credit card). But most companies of any significant size have a revolving line of credit or a term loan, or both, with a bank or other commercial lender. This webinar series explores where companies should look for business loans, how to negotiate them, and what to do if they default under them. Each episode is delivered in plain English understandable to business owners and executives without much background in these areas. Yet, each episode should be valuable to even seasoned professionals. As with all Financial Poise Webinars, each episode in the series brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. And, as with all Financial Poise Webinars, each episode in the series is designed to be viewed independently of the other episodes, so that participants will enhance their knowledge of this area whether they attend one, some, or all of the episodes.

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EPISODES IN THIS SERIES

EPISODE #1 Negotiating a Loan Agreement 1/17/2017

EPISODE #2 Alternative Financing-When the Bank Says “No” 2/21/2017

EPISODE #3 Financing a Business With Help From the Feds: 4/4/2017SBA Loans and Other “Special Programs”

EPISODE #4 Dealing with Defaults –What to Do and Not When Your 5/9/2017Company Violates its Loan Agreement

Dates shown are premiere dates; all webinars will be available on demand after premiere date

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OVERVIEW

1. General Strategies

2. Specific Provisions

3. Business vs. Legal points

4. Ambiguity in the Documents – good or bad?

5. Other Relevant Documents/Topics

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GENERAL STRATEGIES

• Borrower question: “When do I start negotiating?”

• Answer: “Immediately!”

• Term Sheets and Commitment Letters establish the framework for the borrowing arrangement and should be negotiated thoroughly before the formal agreements are drafted.

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GENERAL STRATEGIESNegotiate everything

1) Pros• Allows you to trade this for that• You may get more than you expected (worst they can do is say “no”)• Agreement is thoroughly vetted – nothing has been left to chance

2) Cons• Costs more on both sides• Can start relationship off on a sour note• Diminishing returns – most items are never going to come into play• Takes longer to get to closing• Agreement is thoroughly vetted – much less room for interpretation

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GENERAL STRATEGIESNegotiate only most important provisions

1) Pros• Saves you money in attorney fees• Starts relationship off on a good note• Fees being spent actually protect you on most important issues• Cuts down time to close• May have more ambiguity in the documents

2) Cons• There are marginal items that perhaps you could have improved to your benefit• Less to trade on with lender• May have more ambiguity in the documents

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SPECIFIC PROVISIONS

Definitions• Borrowing Base Calculation/Eligibility of Accounts Receivable and Inventory

Check eligibility time limits – ok to negotiate if business does not operate under standard net 30 terms

Inventory eligibility – negotiate if slow moving items are staples that can be sold at any time

OK to negotiate extension of eligibility time for historically slow paying customers that always pay in the same time period (customer for the last 5 years that has always paid A/R on the 100th day)

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SPECIFIC PROVISIONS CONT’D

Definitions Cont’d

• Financial Terms/Ratios – make sure definitions work; talk to borrower’s accountant to make sure

• Does “borrower” include subsidiaries? Should it?• How are “Liabilities” or “Obligations” defined? What else does it include?

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SPECIFIC PROVISIONS CONT’D

Covenants• How many do we really need?• Make sure they are consistent – i.e. the Fixed Charge Covenant implies one

level of performance where a Minimum EBITDA Covenant could imply a different level

• Test all financial covenants – make sure you understand them and can run them the same way as the lender

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SPECIFIC PROVISIONS CONT’D

Covenants Cont’d• Carve out debt limits

• Understand basis for setting levels (e.g. 80% of projections, etc.)

• Specific Real Estate considerationsNo requirement to replace if rehab is happeningAbility to contest taxesConsider dollar limitation requirement for lender’s consent to changes to the

property

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SPECIFIC PROVISIONS CONT’D

Defaults - be crystal clear• nonpayment - no cure, no notice vs. notice and cure; what is reasonable?• default in any other agreement with lender• default in any agreement with anyone else (materiality standard is appropriate here)• borrower or guarantor filed BK, ABC, receivership; if multiple guarantors, perhaps

carve out non-material guarantors

• involuntary BK - give 60 days to get out• change of control (see below)• death of guarantor - soft death (chance to replace within a certain time period)

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SPECIFIC PROVISIONS CONT’D

Change of Control

• Carve out for family• Carve out less than x%• Carve out inter-company• Particular individual

Material Adverse Change/Reasonable Insecurity

• Try to remove if you are a borrower• Tough to define up front• Tough to determine during active loan if this has occurred

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SPECIFIC PROVISIONS CONT’D

Representations and Warranties

• Knowledge qualifiers• Without further investigation qualifier• Environmental concerns• Specific Real Estate considerations

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SPECIFIC PROVISIONS CONT’D

Typical Boiler Plate Provisions

• Waiver of Jury – good for lender, bad for borrower; usually not negotiable• Venue and Jurisdiction – check to make sure they work for the borrower; lender may

control this though• Notices – make sure notice sections filled out with proper address• Service – what are implications?

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BUSINESS VS. LEGALBusiness Level

• Get on the same page with client regarding goals/most important elements• Understand client’s risk tolerance• Check with client to see what other options are available if loan falls through during

negotiations• Understand your client’s business and how it operates – for instance, does the

borrower send out bills when it ships, when the order is placed or some time after shipping as this could make a difference in a borrowing base definition of eligible receivables

• Review business terms of the loan as client understands them• Attempt to discover bank’s/individual loan officer’s reputation for negotiation

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BUSINESS VS. LEGAL CONT’D

Legal Level

• Get on the same page with client regarding goals/most important elements• Make sure client’s legal house is in order (operating agreement, standing with the state,

resolutions to borrow, authorized officers, etc.)• Read every word of every document – even the boiler plate; every word means

something• Check Venue/Jurisdiction to make sure it works for borrower• Make sure defined words (words that start with a capital letter) are actually defined

somewhere• Make sure definitions work for how business operates

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BUSINESS VS. LEGAL CONT’D

Legal Level (continued)

• Make sure business terms in documents match business terms in term sheet and borrower’s intent

• Go over representations and warranties with client to make sure they are true and accurate

• Make sure name of borrower matches official name with Secretary of State• Eliminate any section that is not applicable – many lenders use form documents that

contain provisions that do not apply to each deal• Check to make sure default, reps and warranties sections are consistent amongst all loan

documents• Check out other party’s counsel to determine ability and propensity to negotiate

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PROS & CONS OF AMBIGUITY

Pros:

• Ambiguous provisions of a loan agreement are generally construed against the drafter by courts/judges; this can work to a borrower’s advantage

• Ambiguity allows for a borrower to argue to its lender what was meant by certain provisions after loan officer is no longer at the bank

• Depending on the provision that is ambiguous, borrowers may be able to stretch the true intent of the parties to its advantage

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PROS & CONS OFAMBIGUITY CONT’D

Cons:

• Ambiguous terms can lead to long, expensive litigation that could result in ambiguity being decided in favor or opposing party

• Ambiguous provisions can lead to breakdown of long standing relationships between a borrower and its lender; inevitably you end up arguing over what was meant

• Uncertainty in lending atmosphere can lead to fewer loans

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OTHER RELEVANT DOCUMENTS/TOPICS

Other Documents to Consider

• Guaranty (ies)• Pledge Agreements• Intercreditor Agreements• Syndication Documents• Others?

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ABOUT THE FACULTY

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TOM O’HAREtom.ohare@marquette.com

Tom is currently a Senior Vice President/Business Development Officer at Marquette Business Credit, covering the Midwest region out of Marquette’s Chicago office. With over 25 years of professional experience in commercial and asset based lending, his extensive background includes experience from several companies such as American National Bank & Trust, Associated Bank, Wintrust Financial, Concord Financial Advisors and Transcap Associates (now Wells Fargo Trade Finance).

He is currently a member of the Turnaround Management Association and the Association for Corporate Growth. Tom received his Bachelor of Business Administration from Loyola University in Chicago, majoring in Accounting, and his MBA from the Kellogg Graduate School of Management at Northwestern University.

ABOUT THE FACULTY

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WADE KENNEDYwkennedy@mcguirewoods.com

Wade is a Partner at McGuireWoods. He is the head of the firm's asset based lending group. He focuses his practice on representing lead financial institutions in complex syndicated credits to asset based and leveraged borrowers. He has significant experience documenting asset based credit facilities in the context of sponsor-driven acquisitions, unitranche facilities and working capital, high yield/term debt and first lien/second lien transactions. In addition, his practice encompasses representing national financial institutions in single and multicurrency credit facilities, cross-border financings and other leveraged finance and cash flow transactions.

Wade is also a co-coordinator and instructor for the Banking and Finance department’s Associate Training Program. He is a regular presenter at various firm and client educational programs, including, most recently, “Current Developments in First Lien/Second Lien Intercreditor Agreements” and “Bankruptcy and Restructuring Issues in Asset Based Credit Facilities and Intercreditor Arrangements”.Wade also provides pro bono representation of various educational and environmental organizations in formation and financing matters and application for tax-exempt status.

ABOUT THE FACULTY

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Corrie Menary is a vice president at Kirtland Capital Partners in Cleveland, Ohio.

Corrie Menary joined Kirtland in the summer of 2004 as an intern and returned full-time in June of 2005. Prior to joining Kirtland, Corrie was an analyst in National City Bank's Debt Capital Markets group and worked in the bank's credit underwriting group.

She received her undergraduate degree from The Ohio State University and a master’s in business administration from Michigan State University.

CORRIE MENARYcmenary@kirtlandcapital.com

ABOUT THE FACULTY

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MATT SLOANmsloan@mbfinancial.com

Matt Sloan is a Senior Vice President at MB Financial Bank. He has been working with Chicago-based manufacturers, distributors/wholesalers and service based companies (payroll/HR firms, doctor groups, law firms, accounting firms, etc.) for the past 16 years as it relates to their commercial lending and banking needs. However, besides providing loans and accounts to these privately held, family-owned businesses, Matt takes a great deal of pride in helping his companies grow their businesses through introductions to new vendors and customers with the goal of saving them money and expanding their network. Wouldn’t it be nice for your banker to be an advocate and salesman for your company? That’s where Matt comes into play. From start-ups to 100-year old companies, Matt has worked with all types of business owners by providing them with the top notch excellent service they deserve.

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EisnerAmper LLP is a leading full-service advisory and accounting firm, and is among the largest in the United States. We provide audit, accounting, and tax services, as well as corporate finance, internal audit and risk management, litigation services, consulting, private business services, employee

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