Drafting Engagement Letters with the Lead Bank for a Syndicated Loan

In my last post I began discussing the process of organizing and closing a syndicated commercial loan with a focus on selecting the lead bank.  In this post I will provide details on the first document in the syndication process: the engagement letter between the company, referred hereafter as the “borrower,” and the lead bank, referred to hereafter as the “primary lender.” The engagement letter typically covers several key issues and will be accompanied by a detailed summary of terms and conditions (to be discussed in my next post) reflecting negotiations between the primary lender and the borrower leading up to the execution of the letter. First of all, the engagement letter should refer to the size and type of credit facility, such as a revolving credit facility in a maximum amount of $100 million. The primary lender will make it clear that the letter is not intended to be a binding commitment and that the summary of terms and conditions should not be relied on as the definitive description of the terms and conditions that would be included in a legally binding credit agreement. At best, the primary lender can only advise that it intends to seek credit approval for that portion of the total amount of the revolving credit facility that it intends to underwrite on its own. The remainder of the commitment would need to be underwritten by other financial institutions interested in joining the loan syndicate and entering into the credit agreement.

The second issue that will be dealt with in some detail in the engagement letter is the activities that will be undertaken by the primary lender with respect to syndication of the credit facility. The primary lender will serve as the lead arranger of the credit facility and will assume management and control over all aspects of the syndication, including decisions as to the selection of proposed syndicate members (and any titles offered to proposed lenders such as “co-lead”), when commitments will be accepted, and the final allocations of the commitments among the lenders. The primary lender would have exclusive rights to act on behalf of the borrower during the period that the engagement letter remains in effect. While the language generally provides that the primary lender will have the right to form the syndicate, as a practical matter, the borrower will generally have the ability to veto any proposed members and will also have the ability to provide input to the primary lender regarding other banks that the borrower would like to have included as part of the syndicate. In fact, the engagement letter or the terms and conditions will include a statement that the members of the syndicate must be “reasonably acceptable” to both the primary lender and the borrower.

The primary lender will receive a fee for acting as the lead arranger and the terms and conditions of payment of this “agent’s fee” are often laid out in a separate fee letter executed at the same time as the engagement letter. In addition, the primary lender will generally also have the right to act as the “administrative agent” for the credit facility once it is in place. The administrative agent manages all aspects of the credit facility, including communications with members of the syndicate to coordinate the fulfillment of their obligations under the credit facility. The administrative agent is also entitled to a separate fee for such services on top of the interest and commitment fees that must be paid to all members of the syndicate on a pro-rata basis in relation to their commitment.

The third, and related, issue is the obligations of the borrower during the syndication process. Obviously, the cooperation of the borrower is crucial to the success of the syndication, and the engagement letter will usually set out several general duties and responsibilities for the borrower, including assistance in preparing an information memorandum to be circulated to potential syndicate members and making its senior officers and managers available to participate in due diligence meetings during the period that negotiations are being conducted to fill out the syndicate. As with any deal and memorandum process, the primary lender will deliver a due diligence checklist to the borrower that will describe the items the primary lender needs for the memorandum and preparation of the credit agreement. The primary lender will also prepare a calendar of activities that will establish milestones leading up to a projected closing date. The target closing date is generally thirty days prior to the termination of the engagement letter to allow for unforeseen delays in filling out the syndicate and/or finalizing the credit agreements.

Finally, the engagement letter will include several representations and warranties from the borrower for the benefit of the primary lender and other prospective lenders as well as an undertaking to indemnify the beneficiaries of the representations against damages they may suffer in the event that the representations turn out to be untrue. Obviously, the borrower will be required to represent that all information, financial or otherwise, provided to the primary lender and the prospective lenders was complete and correct in all material respects and did not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein not materially misleading under the circumstances. In addition, the borrower should confirm that there are no other fees or payments owed to any third party with respect to the completion of the syndication process. The indemnification rights will survive termination any closing of the credit facility.

The content in this post has been adapted from material that appeared in Business Counsel Update (October 2006 and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

3 thoughts on “Drafting Engagement Letters with the Lead Bank for a Syndicated Loan

  1. Tips by Ning Club

    I know through time, space, compassion and attention I will come through this grief recovery process with the wonderful memories of my mom, with her estate wrapped up in a teal bow and with closure for her amazing life.

    Reply

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