Lending Law Report : Corporate Finance Lawyer & Attorney : Reed Smith Law Firm : Lending Transactions, Secured Investments

This post was written by guest blogger Svetlana Attestatova, a partner in our financial industry practice group in San Francisco.

In today’s post we will discuss a common issue that comes up in secured deals: anti-assignment restrictions on collateral. 

Let’s start with a basic example:  Our company is a licensee of a valuable software license that is integrated into its products that would not work without it.  The licensor naturally wanted to control who held the license, so it prohibited any assignment of the license without the licensor’s consent.  Our company is borrowing money from a bank that wants to take a blanket security interest in all of the company’s assets as a condition to the loan.

The question for both the bank and the company is what can and should be done about the license that on its face cannot be assigned.  From the bank’s perspective, how important is the license to the bank? In other words, how critical is the bank’s ability to step into the company’s shoes and foreclose on the license?

In cash-flow deals,unless the license represents a very substantial part of the collateral, the bank is less likely to want to go an extra mile to ensure that the pledge of the license is fully buttoned up. In such deals, borrower’s counsel often requests (and gets) a carveout from the collateral grant excluding the collateral that cannot be freely pledged until the law overrides the restrictions on assignment or the licensor consents to the pledge (and still, banks sometimes may require the company to at least try to get the licensor’s consent). Such a carveout would protect the company from potentially breaching its promise to the licensor  not to assign the license without its consent. More on the legal overrides in our next post (we will try to keep you awake through that one!).

By contrast, in asset-based deals, the license may have played a critical role in the bank’s credit approval process. If that is the case, both counsel will need to analyze whether the license restrictions are invalidated by the legal overrides and to what degree.  We say both counsel because even if the company is willing to bear the risk of breaching its license terms, the company’s grant would not do any good to the bank if its critical objective of foreclosing on the license after default cannot be met.

To sum this up, if the license is a critical component of the collateral package, the bank is likely to require the company to obtain the licensor’s consent in order to protect the bank’s rights to foreclose on the license.

As we conclude, just for the fun of it, let's flip our example and have the licensor be the borrower of the loan.  Imagine that the license and the payment stream from it represent substantially all of the licensor’s assets. Now, even in a cash-flow deal, the bank may be especially interested in ensuring that it can foreclose on the license and the revenue stream.  The law, not surprisingly, treats different collateral differently, giving more protection to the bank if the revenue stream has been assigned (as opposed to the license itself).  We will cover this in more detail in our next post, but to avoid keeping you, our readers, in suspense, let’s just say that in this case the bank can rely (more comfortably than in the first example) on the law’s protections of its right to foreclose on the license and dispense with getting the licensee’s consent.

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This post was written by Svetlana Attestatova, a member of Reed Smith's financial industry practice group, addressing several intellectual property issues that have come up in our deals recently.  

Sometimes we get rather technical questions, and this post responds to one of those: if the collateral for your loan includes patents, trademarks or copyrights ("IP"), read on.

Searches.  In addition to regular lien searches, you may want to run specific IP searches on your borrower and guarantors, especially if valuable IP is part of your collateral.  A search will confirm who the owner of the IP is, and will reveal the existence of other liens.  If IP is central to your deal, beware of the timing gap issues discussed below and consider running some additional post-filing searches after the applicable time period lapses.

Disclosure Schedules.  Accurate schedules listing the IP are important -- and sometimes difficult to obtain.  The underlying representations in the credit and security agreements will determine what should be disclosed on the schedules.  Sometimes the list is limited to registered U.S. IP; other times, it is limited to material IP.  The schedules and your search results should be reconciled.

How to Perfect.  The steps required to perfect your security interest in IP vary for different types of IP.  We will spare you the extensive legal explanation here and just say that the preferred practice is to file a UCC-1 financing statement (as you typically would for most other collateral) and also to file a short-form security agreement with the U.S. Patent and Trademark Office for patents and trademarks, and with the U.S. Copyright Office for registered copyrights.  The short-form agreement is prepared solely for the purpose of making these filings and does not include the covenants and other detailed terms that would appear in the more comprehensive security agreement for the deal.  Even though a PTO filing may not be absolutely required for perfection of patents or trademarks, it is advisable in order to help protect your interests against a good faith purchaser of a patent or trademark.  However, please note that unlike patents and trademarks, a Copyright Office filing is required for perfection of your interest in registered copyrights.  As always, it is critical to get the collateral description, the IP identifying marks and other necessary  information right on these filings.

Timing Gap Issues. One potential timing gap issue arises when there is a discrepancy between the closing date and the date through which the searches have been run.  This is purely an issue of the PTO and Copyright Office records being up to date.  A longer gap in time here increases the likelihood of things being missing from the search results.  A second timing gap issue is the grace period provided by both the PTO and Copyright Office that permits an assignment that was signed before your security agreement filing but unrecorded at the timing of your filing to trump priority of your recorded filing, as long as the competing assignment is recorded within the grace period (even if recorded after your filing). This grace period is three months for patents and trademarks and one month for copyrights.  To help with this issue, the lender would usually receive representations from the borrower that  no competing assignments have been granted.  Post-closing searches should reveal the existence of any of these filings.

Other IP; Special Cases. “Intent-to-use” trademarks deserve a special mention.  Although a security interest can be taken in this type of IP, you should be aware that foreclosure may be problematic until the mark has been put to use in commerce and there is goodwill associated with it.  If the collateral includes mask works, you'll want to make both Copyright Office and UCC filings.  For trade secrets, UCC filings are advisable.  And, generally, if you have other unusual (and valuable) IP collateral -- for a company that develops software, or where software is embedded into machinery with accompanying accounts receivable, for example -- consult with counsel to be sure you are properly perfected.

After-Acquired IP. The credit or security agreement will usually require the borrower to deliver periodic updates listing any newly acquired or registered IP (including a requirement to inform the lender as soon as an unregistered copyright became registered).  UCC-1 filings can be structured to effectively cover after-acquired assets in the initial filing, but new filings with the PTO or the Copyright Office will be needed to cover each additional IP item.

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It's now been several months since Dodd-Frank was enacted, and the regulators have been busy.  There have been several proposed rules sent out for comment, and various agencies have produced studies, reports and final rules. 

All this activity would be too much for most of us to keep up with, but my colleague Michael Bleier, former general counsel of Mellon Bank and now a partner in our financial services regulatory practice here at Reed Smith, has been keeping a close eye on the developments in this area.  He's put together a handy summary of all the rulemaking.   If you've been following the developments in this area - or if you haven't been but want a chance to catch up now - you'll want to check it out.

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By now many of you will have heard about the recent decisions in the TOUSA (pdf) bankruptcy case.  There are several other write-ups out there that cover the many important elements of this case in detail, but here I wanted to just say a few words about one issue of significance to senior secured lenders.  The question of whether subsidiaries can properly guarantee a loan made to the parent company (without it being a fraudulent conveyance) sometimes comes up in loan transactions, and having an understanding of the issues here can be really helpful. 

You'll recall that the TOUSA case is about fraudulent conveyances.  As explained in our last post, in simple terms, a bankruptcy court can void (and claw back) payments made if the debtor was insolvent at the time of the transaction and if it received less than "reasonably equivalent value" for what it gave up in the deal.  Setting aside the question of solvency, then, here's our issue:

QUESTION:  If a subsidiary of the borrower guarantees the loan (and/or provides a lien or other support), do you have to show that the subsidiary received some of the proceeds of the loan in order to demonstrate that it got "reasonably equivalent value" in the transaction? 

SHORT ANSWER:  No.  Reasonably equivalent value can be received through intangible and indirect benefits as well as by direct benefits such as cash proceeds.  

The court in the TOUSA case explained that you can take a relatively broad view of what constitutes "value."   In TOUSA, the company's subsidiaries became co-borrowers on the loan and provided liens on their assets.  The loan proceeds were used to pay off a significant liability.  The court found that the subsidiaries had received value in exchange for this because they had received "indirect economic benefits" from the loan.  The benefits were, among other things, "the opportunity to avoid default, to facilitate the enterprise's rehabilitation, and to avoid bankruptcy, even if it proved to be short lived" (here, the companies ended up in bankruptcy anyway).  The court clarified that it is not just cash, but all kinds of interests in property -- including intangible things like "promises to act or forbear to act" and indirect or contingent benefits -- that can be considered.  

But was the value "reasonably equivalent" to the property rights that were transferred?  In this case, yes.  A "legitimate and reasonable" expectation that default could be avoided and the enterprise strengthened by the transaction can be enough value.  For the TOUSA subsidiaries, absent the loan transaction, there was a realistic risk that the companies would not have been able to continue to survive.  The value to the companies was their ongoing existence, and the court found that this met the standard for being reasonably equivalent to what they gave up in the deal.  It was not necessary to quantify the benefits and determine a precise dollar valuation in order to come to this conclusion. 

Of course, as with all things legal, the analysis can get rather complex and the conclusions will vary depending on the facts at hand (full disclaimers, no promises, your results may vary, don't try this at home, etc.).  A takeaway from the TOUSA case is that you can look at a lot of different things when considering if there was value received -- and showing that there was "reasonably equivalent value" may not be quite as difficult as it sometimes seems.

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First, let's get one thing clear.  A fraudulent conveyance, despite its name, doesn't necessarily involve fraud, and it certainly doesn't involve driving goods across the state in a wagon pulled by horses.  

Source: public-domain.zorger.com

OK, now that we have that out of the way . . . 

With all the news last week about the TOUSA case (pdf) (reversing a prior decision that said $420 million paid to lenders was a fraudulent conveyance), I thought I'd take a moment to talk about fraudulent conveyances generally today, and then get into the details of the TOUSA case in a separate post.

So, what is a fraudulent conveyance (or fraudulent transfer), and why should you care? 

Most lenders care a lot about this issue, because if a court finds that you received money (for example, repayment of a loan) in a fraudulent transfer, the court can order you to return the payment under the avoidance powers provided in the U.S. Bankruptcy Code.         

There are two important things to be aware of.  First, as mentioned, a fraudulent transfer doesn't necessarily involve what you and I would normally think of as fraud.   Under Section 548 of the U.S. Bankruptcy Code, a fraudulent transfer can be found if:

1.  there is a transfer of  "an interest of the debtor in property" (not necessarily just money), and
2. the debtor received "less than a resonably equivalent value" in exchange for the transfer of its property, and
3. the debtor was "insolvent" when the transfer was made ( or became insolvent as a result, or had unreasonably small capital, or intended to incur debts beyond its ability to pay).

If these things occur - and the question as to whether they did indeed occur is usually what's debated in these cases - then there is "constructive fraud" in the transfer.  (Of course, if there is actual fraud ("actual intent to hinder, delay or defraud" creditors), that would also qualify.  It's just a bit more unusual to see actual fraud in deals involving corporate debtors and sophisticated financial institutions as creditors.)

Often, there will be serious questions about whether the company was insolvent at the time it made the payment.  It isn't always easy to figure out exactly when the company crossed the line into insolvency, as compared with just being in some financial trouble.  

There may also be questions about what value was exchanged in the transfer.  In a simple loan deal, it may be fairly easy to demonstrate that value was exchanged -- the company got the loan proceeds and was just paying them back.  It gets more complicated when the company's subsidiaries, sister companies, or other affiliates make payments on the loan or transfer collateral to support the loan -- and, indeed, this was an issue in the TOUSA case. 

If the court finds that a fraudulent transfer took place as defined in Section 548, the court can order that the transfer be  "avoided" -- taking the money or other property back from whoever got it, and adding it to the assets in the debtor's estate in bankruptcy. 

Next up, we'll see how these rules were applied in the TOUSA case and talk about what that decision might mean for you and your loan deals.

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This post, by my colleague Svetlana Attestatova, follows up on our last post on this topic.  Last time, we pointed out that it's often the case that a borrower can certify that it's not in default (and can borrow money) if the quarter has not yet ended and there is still enough time for the company's performance to improve.  This post describes the cautionary tale of a case that went the other way -- where the court found that the borrower should not have certified that it wasn't in default, even though the quarter had not yet ended.

In our last post, we talked about the borrower making "no default" representations in borrowing notices.  In this post, we would like to tell you a bit more about an important case on this topic -- The Chase Manhattan Bank v. Motorola, Inc. (pdf).  That case highlighted the factors and processes to be considered when deciding whether to certify to no default, and, because of some unusual circumstances, came to a different conclusion than might normally be reached.

First, a bit of background.   The borrower in this case had entered into an $800 million bridge facility with a syndicate of lenders.  The collateral package included the borrower's pledge of a Memorandum of Understanding ("MOU") that it had received from its former parent company.  (Several years earlier, the parent company had created this company and spun it off, but continued to maintain and operate a network for it.  Under the MOU, the former parent company agreed to provide up to $300 million to the borrower to support its loan obligations.)  The credit documentation executed in favor of the lenders required the former parent company to make the cash infusion required under the MOU upon the occurrence of a triggering event -- i.e., an event of default under the loan, or the failure of the borrower to achieve certain financial targets.  Conversely, the former parent company's obligations could be released and terminated if things were going well -- and if the borrower certified to the lenders that there was no default, that it had met certain requirements for its network systems, and that it had obtained committed funding to meet projected costs.  The borrower determined that these conditions had been met and delivered this certificate 17 days before the next test of the financial targets (the non-performance of which would have triggered a requirement for the former parent company’s performance of the MOU obligations).  The lenders accepted the certificate and agreed that the former parent company could be released from its obligations.  Seventeen days later, as of the financial covenant test date, the borrower failed to meet its financial covenants.  Indeed, the borrower's business continued to decline, and it filed for bankruptcy a few months later.

The lenders demanded reinstatement and performance of the former parent company's obligations, questioning the borrower's good faith in issuing the certificate and saying that they considered the certificate to be materially inaccurate.  The former parent company claimed that its obligations terminated when the lenders accepted the certificate from the borrower.  

The court sided with the lenders and emphasized several facts.

Impossibility.  First, the gap between the required revenues as of the financial covenant test date and the actual revenues for the borrower around the time the certificate was issued was 25 times.  With a gap like that, the court found that the borrower simply could not have achieved the required revenues.  In addition, the court found that the borrower could not have met the other requirements under the credit agreement to maintain its systems in line with projections (the needed equipment was substandard and unavailable, and the distribution channels were inadequate).  Unlike the situation we see more often, where there may still be a reasonable possibility of meeting the covenants by quarter end, the court found that conditions existing at the time this certificate was delivered would inevitably have become events of default under the loan agreement.

Lack of Good Faith.  Second, the court thought that management’s behavior was problematic. The court found that the borrower's CFO failed to perform significant due diligence to determine whether it could make the required representations, while knowing that the actual results were substantially below targets -- and to the court this showed lack of good faith.  

Voluntary Certification; Not a Borrowing Notice.  Third,  the court noted that the borrower was not obligated to issue the certificate, but merely exercised its right to do so in order to terminate the former parent company's obligations.  Arguably, this situation is somewhat different from a borrower that has to draw on a revolving line of credit to stay in business.

The lessons learned from this case are the three "D's": due diligence, documentation and disclosure.   This case serves as a reminder that if the borrower’s performance is substantially short of targets, significant due diligence should be done - and documented - to confirm the borrower’s ability to comply with its financial covenants at the future test date.   Due diligence and documentation are even more critical in the case where a borrowing notice is given after the quarter end but before the financial statements are delivered, because the covenants are tested as of the (earlier) quarter end date and the financial statements "speak" as of the quarter end.  In that case, the company should consider whether it would benefit from disclosing the possibility of default to the lenders.  From the lenders' perspective, of course, lenders would rather know about a potential default than be misled into thinking all is well.  From the company's perspective, in some cases disclosure can build goodwill with the lenders, and if the lenders are likely to grant a waiver, could be considered as a viable option.

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This post was written by guest blogger Svetlana Attestatova, one of my colleagues in the financial industry group here at Reed Smith.  She answers a question that often comes up at this time of year, when year-end financial statements are being prepared.   

Let’s talk about borrowing money under revolving lines of credit.  Sometimes it's not entirely clear whether the borrower is in default, and there's a question as to whether they can borrow money.  Here are our facts: 

1. The company needs to draw on its revolving line of credit, and it’s three weeks before the end of the fiscal quarter.
2. Based on the numbers in hand, the CFO thinks the company may go into default on its financial covenants at the end of the quarter.
3. The required “notice of borrowing” under the credit agreement requires the company to certify that there is no default at the time of the borrowing.

Can the company borrow the money?

The answer is an all too frequent “it depends.”   It would be helpful to know more.  What if the CFO learns that the company is expecting additional sales that will result in more revenue, and that revenue is expected to come in before the end of the quarter?  Once the revenue is in, the financial covenants would be met and there would be no default.  In that case, the answer is that it’s probably OK for the CFO to certify that there is no default.  If the quarter has not yet ended (assuming the financial covenants are tested only as of the last day of the fiscal quarter, as is typical for many corporate loan agreements), there is still time for the company's performance to improve, and the CFO's belief that there is no default would appear to be reasonable and in good faith.  

Now, let’s change our facts.  What if it’s three weeks after the quarter end.  The CFO has financial data for the quarter that indicates a default occurred at the quarter end, but the financial statements have not yet been completely finalized or delivered to the lenders.  The answer here is that the CFO probably can’t certify that there is no default, and the company probably can't borrow the funds.

A word of caution:  One court found the company to be in breach of its credit agreement when it certified to the lenders that there was no default even before the financial covenant test period ended (similar to our first set of facts).  This was in the "Motorola" case (The Chase Manhattan Bank v. Motorola, Inc., 184 F. Supp. 2d 384 (S.D.N.Y. 2002) (PDF)).  But, in that case the outlook for meeting the covenants was very bleak.  We'll talk about the rather unique Motorola facts in our next post.

And, of course, not every case is as clear as these sample fact patterns -- often, there are many factors that should be considered and weighed (i.e., call your lawyer).   Also, note that most financial covenants need to be tested monthly or quarterly (at the month-end or quarter-end date), rather than being tested on an ongoing basis.  A continuous requirement to comply with financial covenants would change the analysis.  

More on this next time.

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Are things going to get better in 2011?   Recent increases in corporate lending may give us a reason to start the new year feeling optimistic. 

Last week there was a positive article on the front page of the Wall Street Journal titled "Banks Open Loan Spigot".  In the article, Ruth Simon reported that after nearly two years of declines in corporate loan numbers, there was actually an increase in commercial lending in the fourth quarter of 2010.   Though the increase was small, and lending rates remain nowhere near the levels we saw in 2008, bankers from major institutions such as Wells Fargo, Bank of America, JPMorgan Chase, PNC and others are quoted as saying they expect corporate lending will continue to increase in 2011.  

Some of the growth may be expected in specialized areas such as asset-based lending and retail finance.  And, though some companies remain cash-rich, some small growth may appear in credit usage rates, which also rose toward the end of the year at some institutions.

What does this mean for all of us?  Certainly, we would all hope that the trend continues - and grows.  An increase in the volume of corporate loans can generate not only greater opportunities for the lenders and businesses involved, but also (eventually) opportunities for growth in the economy as a whole.  Here's hoping for a very happy 2011!

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Like the New York Giants, equity cures have made a comeback here in the fourth quarter -- even without the help of Eli Manning. 

Source

An equity cure right is a provision that's included in the loan agreement for a sponsor finance deal, giving the private equity sponsor that owns the borrower the right to put in additional cash to cure a default under a financial covenant.  So, for example, if the company breaches its leverage ratio for the quarter (either because it has too much debt or too little EBITDA), the sponsor can make a cash contribution to the company after the quarter-end, and that cash will be added to the company's EBITDA number for that quarter (as if it represented actual earnings), to put the company back into compliance with the covenant.  Once the cash is contributed, the financial covenant default is considered cured.

Back in the day (remember 2006, anyone?) an equity cure right might have contained relatively few limitations on the sponsor's ability to exercise it.  It was not unusual for there to be a very large cap (or sometimes none at all) on the amount that could be contributed, with relatively long periods of time in which to put in the money.  Though there were often restrictions on the number of cures that could be made (both in the aggregate and the number per year), these were often negotiated to permit very frequent cures.  We also sometimes saw permission to put the cash in as subordinated debt rather than equity, and other bells and whistles, depending on the size and type of the sponsor.  All of this was heavily negotiated.

When the credit markets tightened up, we didn't see equity cure provisions in new deals very often.  Now we're seeing them again all over the place -- but with somewhat more restraint in what's permitted.  Though there are a few outliers, it's often the case that the cash must be contributed as equity, within a few days of the quarter-end financials being produced.   There is almost always a cap on the number of cures permitted -- often one per fiscal year and/or three over the life of the deal.   There may sometimes even be a requirement that the cash be used to pay down the amounts outstanding under the loan, rather than just treating the cash as additional EBITDA and keeping it on the books.  Though there's definitely willingness to allow equity cures again, lenders seem to be a bit less eager to permit very broad rights.

I'd be interested to know if any of you are seeing even more flexibility in equity cure provisions these days, and whether you think we'll end up with similar terms to what we saw in 2005-2006.  Email me or post  a comment here with your thoughts. 

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I've just finished reading Andrew Ross Sorkin's excellent book Too Big To Fail (Penguin, 2009).  If you haven't read it yet, put it on your list, because this one is really worth it.  The book tells the gripping tale of the financial crisis, beginning with the downward slide of Bear Stearns and Lehman and continuing through to adoption of the TARP program.   With particular focus on Tim Geithner, then President of the Federal Reserve Bank of New York, and Hank Paulson, then Secretary of the Treasury, who - along with many others in government and the private sector - worked tirelessly to try to fix a seemingly unending parade of problems, Sorkin captures the intensity of the times and offers insights into why things happened the way they did.   It's a real page-turner, and suprisingly so given that the primary elements of the story are already well known.

As we now try to figure out how to deal with the Dodd-Frank Act (pdf) and its potential impact on financial institutions, it's helpful to look back at what happened in 2008, as described in Sorkin's book.  It's striking to see how similar certain provisions of the Act (and the language used in the congressional committee's report about the Act) are to the ideas expressed by people in government during the crisis itself. 

In particular, concerns about moral hazard (the idea that undue risk-taking is promoted when managers and shareholders know they can be insulated from negative consequences) and about the real need for an alternative to the bankruptcy process for large financial institutions, were often voiced.  As quoted in Sorkin's book, both Paulson and Ben Bernanke, Chairman of the Federal Reserve, expressed on multiple occasions the need for the government to have authority to resolve or wind-down complex financial institutions outside of bankruptcy.  Bernanke also spoke of the need to mitigate moral hazard  "by allowing the government to resolve failing firms in a way that is orderly but also wipes out equity holders and haircuts some creditors."

And sure enough, in adopting Dodd-Frank, Congress explained that the "too big to fail" provisions address both of these issues front and center.  The Act provides for "orderly liquidation authority" if the Secretary of the Treasury (in consultation with the President,  and with the wrritten recommendation of two additional  federal regulators) finds that liquidation is necessary to mitigate "serious adverse effects on financial stability" in the nation.  The liquidation is to be carried out in a manner that "minimizes moral hazard," with costs being borne first by shareholders and unsecured creditors -- and protecting taxpayers from these losses.

Several other provisions of Dodd-Frank can find their beginnings in the events of 2008 as well --  short sales, hedge fund regulation, derivatives, rating agencies, etc.  Turns out that Sorkin's book, though likely not intended for this purpose, provides a fascinating background story and explanation for much of the content of the Dodd-Frank Act.

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I live in California, which (among many other things) is a state known for having some unusual laws.  One oddity that comes up from time to time when negotiating loans is the fact that jury trial waivers - which are standard in most corporate loan agreements - are generally unenforceable in California. 

This is old news to several of you, I know, but I received some questions about this recently, so I thought it might be helpful to offer up an explanation.  In a nutshell, what this means for you is that if your borrower is located in California, if California law is the governing law for your loan agreement, or, if neither of those things is true, but there is nonetheless some possibility that you could end up in a California court, you may want to choose an alternative to a straight-up jury trial waiver provision (unless, of course, you actually want a jury . . . ).

Back when this became law in California (because of the decision in Grafton Partners v. Superior Court (pdf), where the California Supreme Court determined that pre-dispute jury trial waivers violate the state's constitution) there was initially some confusion as to how best to get around the prohibition on these kinds of waivers.  But now, there are well-established practices for what to do.

Many lenders in California have chosen to use judicial reference provisions in their loan agreements.  Judicial reference is generally accepted as a valid alternative to jury trial waivers, using the Grafton case analysis (as is arbitration, under many circumstances).  Judicial reference is a special process established in the California Code of Civil Procedure (Section 638, et seq.), and, as a practical matter, it can be rather similar to arbitration.  It gets you out of the regular courtroom and into separate proceedings that don't involve a jury, where the case can be decided by a referee chosen by the parties.  The general rules for judicial reference are provided for directly in the California statute. 

Here's one example of how some lenders have added judicial reference to the waiver provisions in a loan agreement (there are certainly more complicated ways to do this too):

 To the extent the foregoing waiver of a jury trial is held to be unenforceable under applicable California law, the parties hereby agree to refer, for a complete and final adjudication, any and all issues of fact or law involved in any litigation or proceeding (including but not limited to all discovery and law and motion matters, pretrial motions, trial matters and post-trial motions), brought to resolve any dispute between the parties hereto (whether based on contract, tort or otherwise) arising out of or otherwise related to this Agreement or any other Loan Document to a judicial referee who shall be appointed under a general reference pursuant to California Code of Civil Procedure Section 638, which referee's decision will stand as the decision of the court.  Such judgment will be entered on the referee’s statement of judgment in the same manner as if the action had been tried by the court.  The parties shall select a single neutral referee, [who shall be a retired state or federal judge] [with at least five years of judicial experience in civil matters]; provided that in the event the parties cannot agree upon a referee, the referee will be appointed by the court.

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I'm delighted to announce the publication of my book Corporate Credit -- A CFO's Guide to Bank Debt and Loan Agreements.  

First of all, let me just say that after many months of preparation, it sure feels good to finally have it in print!   Becoming a published author was both more fun and more difficult than I thought it would be -- especially while working (more than) full time on other things, as those of you whose deals I worked on during the last year can attest.  (And if you're ever thinking of writing a book yourself, let me know, as I've got a whole lot of advice to offer on this topic now too.)

Anyway, if you enjoy reading this blog, you'll probably enjoy the book too.  In many ways, the book is an extension of the blog, covering some of the same kinds of topics in a different format.  

The book is intended to be a helpful guide for corporate borrowers and lenders alike, explaining in plain and easy-to-understand language what the terms of a corporate loan agreement mean.   There are chapters on things like representations and warranties, interest rates, financial covenants, events of default, reporting requirements, syndication, security interests, guarantees, and how to get ready for a closing.   Pretty much all the basics you'll need to know to understand your loan agreement and work your way through the loan process.

For those of you on the lender side, don't let the title throw you off -- this is not a how-to manual for CFO's to learn to beat up on lenders in tough negotiations!   (Sorry, CFO's.)  Instead, there are explanations about why certain provisions of a loan agreement are important for both sides, to help everyone have a better understanding of the terms and how to consider negotiating them.  Both lenders and borrowers will find this useful.

Corporate Credit was published on October 1, 2010 and is available for purchase on Amazon.com.

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Several of us spent some time at the annual ACG business conference in Los Angeles this week.   Having attended this conference for the past few years, it was nice to see a bit more optimism in the crowd this time than, say, last year and the year before.  

I was particularly interested to hear a panel of lenders talk about what they think the loan market will be like in the coming months.  Everybody agrees that we're not back to where things were in 2005-2007 (and in some ways, that could be a good thing).  Still, things definitely seem to be loosening up a bit, and there seems to be - for lack of a better term - cautious optimism about the future of the lending world.  We've been seeing it in our practice here, and so have the lenders on the panel. 

One of the panelists mentioned that more lenders are getting back in the game, particularly CLO's.  Another described the general trend of leverage levels moving slowly up, and pricing moving down.  There's also some loosening of terms and structure -- some of us are even seeing dividend recap deals again.  As usual, the middle market remains more active than the upper end.

Predicting the future is really tough, though.  Some economists think we're headed for a double-dip.  Others think we can ride it out.  Lenders see some opportunities in refinancing credit facilities that will mature in 2011 and 2012, and in expected (hoped for, anyway) expansion of the acquisition market.

What do you think the next few months will look like?

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What issues have you faced most often when trying to negotiate covenants in a loan agreement?  Do you find that many of your negotiations are about the tension between maintaining appropriate limits vs. providing sufficient flexibility for the business?  Do specific issues arise in setting baskets for other debt, liens and investments?    Permitting acquisitions?   Dealing with subsidiaries?   Agreeing on appropriate levels for financial covenants? 

For the borrower, it's often the case that a large part of the process involves thinking through what the company needs in order to maintain and grow its business.  This includes figuring out what the company will need during the entire life of the loan - looking ahead up to three or even five years and taking an educated guess. 

On the other side of the table, the lenders need to know that things at the company won't change in a way that adds an unacceptable level of risk - for example, that the company will maintain reasonable financial performance and won't get rid of revenue producing assets (well, at least without paying down the loan). 

If, for example, the borrower wants the ability to make significant acquisitions during the term of the loan, but the lenders think that for this company the acquisitions would create an unacceptable level of risk, these two differing viewpoints can lead to lengthy discussions.  If all goes well (as is often the case), these negotiations result in creative solutions being crafted that meet the needs of all the parties.  At the end of the day, there may be a few things can't be determined in advance that are set aside for later, with the lenders saying that the borrower should request consent if the anticipated event ever does occur.  But usually the parties try to keep as many items off this list as possible.

On October 6, I'll be speaking on the topic of negotiating covenants in this program.  Agreeing on the covenants is one of the most important - but also one of the most difficult - parts of a loan transaction.   If you let me know what issues you've faced, I'll try to cover those in the October 6 program and in future blog posts.  As always, you can post responses in the comments below or email me at salker@reedsmith.com.  Thanks for your input!

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