Impediments to a Successful Loan Closing Aaron B. Johnson Baird Holm COUNSELOR’S CORNER I have represented lenders and borrowers in CRE and C&I loan transactions for over two decades. The goal of outside counsel is always to accurately reflect the “business” deal of the parties, properly allocate risk and get the transaction closed as efficiently as possible. Of course, there are a number of variables that come into play in any given transaction, which can result in closing delays and/or post-closing headaches. Nonetheless, I have noticed a few basic issues which come up with some frequency: 1. Lack of Specificity at Term Sheet/ Commitment Letter Stage: Key facility terms and covenants, financial or otherwise, should be reflected with specificity on the front end to avoid extended negotiations and delays on the back end. For instance, a commitment letter for an ABL facility may provide for a borrowing base of 85% eligible accounts receivable plus 50% eligible inventory without a substantive definition of all components of eligibility. While several of these components are pretty standard, the list varies a bit across lenders, and there are often nuances based on the borrower’s business. Historic borrowing base calculations should be run based on the lender’s eligibility categories, and these calculations should be shared with the borrower and any outside counsel engaged by lender to ensure the loan documents accurately reflect borrowing base terms. Similarly, at the term sheet stage, the financial covenants may be presented somewhat generically, without any definition around the various inputs. The parties need to understand any adjustments to GAAP definitions that are to be used in connection with these covenants. For an EBITDA-based covenant, what additional add-backs and adjustments are intended? Will the borrower be making permitted acquisitions during the term of the credit facility that need to be addressed? What other non-recurring gains or losses may need to be reflected? Again, historic and pro forma covenant calculations run as part of lender underwriting should be shared with outside counsel for use in drafting. 13 Nebraska Banker
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