Do you require a promissory note from the borrower when you make a loan under a syndicated credit facility? In syndicated deals, promissory notes — like bell-bottom pants and polyester suits with wide lapels — really seem to have gone out of style.
In a syndicated loan deal, the note is often just a very simple document with one or two paragraphs. It says what the amount of the lender’s loan is and that it is payable by the borrower “as set forth in the loan agreement” — meaning, go look at the loan agreement for all the actual deal terms, because you sure won’t find any of them here.
Though this was not the case a few years ago, these days issuance of notes in a syndicated loan deal is almost always optional, at the request of the lenders. Some lenders still request notes for their records, but most lenders don’t require them anymore. Instead, they rely on the loan agreement itself as sufficient evidence of the debt. Certainly, not having to keep track of notes (issuing new ones whenever new lenders come into the deal, making sure old ones are found and returned for cancellation, exchanging old for new when commitments are increased or decreased, etc.) is easier, saving time and money.
The role of a promissory note varies depending on what type of deal it is, though.
In smaller, simple deals, a promissory note itself might constitute the entire loan documentation, containing all of the deal terms. This is often the case with unsecured loans made by early-stage investors, and it’s particularly common if the note is supposed to be freely transferable to others. Bank loans, by contrast, would rarely be documented with a promissory note alone. In a deal involving a bank or other institutional lender, there is almost always a loan agreement that contains covenants, events of default and other terms generally applicable to the loan, regardless of how small the loan amount may be.
On occasion, you’ll see a hybrid approach, with some of the loan terms stated in a loan agreement and some in an accompanying note. This is an alternative method for drafting loan documents that is sometimes used in deals involving a single lender, if the lender prefers this form of documentation. In this case, the loan agreement will contain the representations and warranties, covenants, and defaults, and other general terms relating to the borrower, and the note will contain the loan amount, borrowing and repayment terms, interest rate information, and other terms specifically relating to the loan itself.
But in syndicated deals, where the note contains nothing new that the loan agreement does not already say, promissory notes are uncommon.