At a glance: the terms of loan documents in Canada
Loan document conditions
Standard forms and documentation
What standardized forms or terms are commonly used to prepare bank loan documentation?
There is no well-established literature on market facilities in Canada for secured loan transactions. For smaller transactions (typically less than C $ 10 million) with Canadian chartered banks and non-bank financial institutions, standard bank or financial institution documentation would generally be used. For medium-sized and larger transactions, loan documentation is tailored to each transaction and negotiated on a case-by-case basis.
Pricing and interest rate structures
What are the typical pricing or interest rate structures for bank loans? Do pricing or interest rate structures change if the bank loan is denominated in a currency other than the national currency?
Syndicated loans in Canadian dollars are generally offered to a borrower based on a bank prime rate or a floating market rate, such as LIBOR, at the borrower’s option.
Generally, interest on loans denominated in Canadian dollars is calculated based on the Canadian prime rate, which is usually defined in bank lending documents as the higher of the lender’s or administrative agent’s prime rate for loans made in Canada to Canadian borrowers and the 30 daily offered rate in Canadian dollars (CDOR) plus 1 per cent.
Loans in Canadian dollars are also commonly available to be drawn in the form of bankers’ acceptances. Rather than interest-bearing loans, bankers acceptances consist of drafts issued by the borrower and accepted by the lenders, with a face amount and a specified maturity date. Drafts are purchased by lenders at a discount to their face value, and the borrower receives the discounted proceeds as a loan. The discount rate at which lenders buy drafts is generally based on the CDOR rate, a screen rate published for various terms to maturity of bankers’ acceptances in a manner similar to LIBOR. On the bankers ‘acceptances maturity date, the borrower must pay the full face amount of the bankers’ acceptances to the lenders.
The interest rates applicable to loans denominated in a currency other than the Canadian dollar will be determined based on the currency of the loan.
Have procedures been adopted in the documentation of bank loans in your jurisdiction to replace LIBOR as the benchmark interest rate for loans?
LIBOR is not published for Canadian dollars. However, to the extent that loans in Canada are made in US dollars, for example, and can bear interest based on LIBOR, the Canadian market has developed similarly to the US market on this point. Credit agreements now generally provide for an amendment mechanism whereby the borrower and the administrative agent can endeavor to agree on a replacement rate for LIBOR, upon the occurrence of certain triggers, with the amendment taking effect. after being sent to the lenders, unless the majority lenders veto the amendment.
Other determinants of loan returns
What other determinants of bank loan yield are commonly used?
Bank loans are generally not issued with an original issue discount. It has become quite common for interest rates to have floors; for example, CDOR is often defined with a floor of zero, and the Canadian prime rate is generally defined as the higher of the administrative agent’s prime rate for loans made in Canada to Canadian borrowers and the 30-day CDOR plus 1 percent (effectively resulting in a 1% floor on the Canadian prime rate).
Yield protection provisions
Describe any yield protection provisions typically included in bank loan documentation.
Bank loan documentation will typically include provisions that require the borrower to compensate the lender for increased costs resulting from changes in the law, mark-up clauses that require the borrower to indemnify the lender against the withholding tax applicable to loan payments (subject to negotiated waivers) and provisions requiring the borrower to pay termination fees associated with early repayment of LIBOR loans, as well as broader indemnification and reimbursement provisions. While alternative lenders typically charge a prepayment premium as part of the prepayment of a term loan, this feature is less common in a bank loan.
Accordion arrangements and sidecar financing
Do bank loan agreements generally allow additional debt that is secured on a pari passu basis with senior secured bank loans?
Depending on their credit profile, the borrower may be able to negotiate the possibility of accessing an accordion or incremental facility. Typically, the additional facility would consist of an increase in the revolving facility to a maximum authorized amount, and the facility would generally not be committed when the bank loan agreement is entered into. A bank loan can also allow unsecured subordinated debt; however, secure sidecar installations would generally not be considered.
Financial maintenance commitments
What types of financial sustaining covenants are typically included in bank loan documentation, and how are these covenants calculated?
Financial covenants included in bank loan documentation typically include a subset of a tangible equity ratio, a leverage ratio, an interest coverage ratio, a debt service coverage ratio, or a debt service coverage ratio. fixed charge coverage ratio, a minimum working capital clause and, potentially, maximum capital expenditure covenant or a minimum EBITDA covenant (earnings before interest, taxes, depreciation and amortization).
While the types of financial covenants included in bank loan documentation are quite common, the covenants themselves tend to be heavily negotiated both in terms of the level of covenant to be maintained and the method of calculating the covenant. EBITDA, in particular, can be traded to exclude the effects of a multiplicity of different types of accounting and transactions, depending on the borrower’s bargaining power.
A leverage ratio to offset debt liquidity (a net debt ratio) is not the usual norm and will generally only be provided to a borrower with significant bargaining power. The same would apply to a right of recourse in equity.
Describe any other covenants restricting the operation of the debtor’s business typically included in the bank loan documentation.
Bank loan documentation will generally include restrictive covenants restricting the ability of the debtor (and generally the ability of its subsidiaries) to:
- reorganize or make fundamental changes to its corporate existence;
- have other debts;
- have other privileges over its assets;
- enter into transactions with its affiliates;
- change the nature of its activity;
- pay dividends or other equity payments;
- make investments or acquisitions or form subsidiaries;
- enter into hedging agreements;
- transfer its assets or enter into sale-leaseback transactions;
- change your exercise;
- modify its constitutive documents or material agreements; or
- prepay certain types of debt.
What types of events typically trigger mandatory prepayment requirements? Can the debtor reinvest the proceeds from the sale of assets or a loss in his business instead of prepaying bank loans? Describe other common exceptions to mandatory prepayment requirements.
Mandatory prepayments may be required in connection with the receipt of cash proceeds by the borrower or its subsidiaries upon a disposal of assets, events giving rise to insurance proceeds, indebtedness or debt. issuance of equity. De minimis cash proceeds may not give rise to a prepayment requirement, and, provided that no default occurs, disposition proceeds may not be required to be used for prepayment of loans if the product is supposed to be and is reinvested in the business within a period of time (often 180 days). Loss proceeds can also be reinvested in the business as long as they do not exceed an agreed threshold.
Lenders may also require that excess liquidity (calculated in accordance with the loan agreement) be charged against loans or that a revolving credit facility be “reduced” to a certain level for a certain number of days during the course of the loan. a given period. A change of control may also give rise to an early repayment obligation.
As long as no defaults persist and mandatory prepayments are applied to revolving loans, revolving commitments would generally not be permanently reduced by the amount of prepayments (except in the event of a change of control).
Compensation of the debtor and reimbursement of costs
Describe generally the obligations to indemnify and reimburse the debtor’s expenses, with reference to any common exceptions to these obligations.
The debtor will generally be required to reimburse lenders for reasonable expenses associated with the preparation, negotiation and administration of loan documents, including syndication, if applicable, and expenses associated with the protection or enforcement of lenders’ rights under loan documents. Generally, the debtor will also indemnify the lenders and their related parties for claims arising from the performance, delivery and performance (or non-performance) by the parties of their obligations under the loan documents. . Claims resulting from gross negligence or willful misconduct of lenders and claims between indemnified parties are often excluded from this indemnity. Tax and environmental indemnities are also commonly obligations of the debtor.
Declaration date of the law
Give the date that the above content is correct.
May 22, 2020.