What Debt Finance Is

1.1Debt finance in one paragraph

A company can raise money in two ways: it can sell new shares, or it can borrow. A lender gets its money back with interest, but it gets no share of the company. This workbook follows one loan agreement under English law, in which three banks lend to a listed payments group. You are a trainee solicitor in a banking team, and you will see how such a deal runs.

1.2Why companies borrow instead of selling shares

The reason for a loan shapes the loan. Companies borrow for four main reasons:

• To buy a business. The buyer needs a large sum on a fixed day, and it must arrive.
• To pay the bills. Wages are due every month, but customers pay when they pay.
• To build. A new plant or platform is paid for out of the profits it later earns.
• To replace an old loan with a cheaper or longer one. This is called a refinancing.

Debt is usually cheaper money than shares. Lenders are repaid before shareholders if the company fails, so they take less risk and charge less for it. The owners also keep the whole company and all its future profits.

The catch is that interest falls due in bad years as well as good ones. So too much debt can sink a company that shareholders' money alone would have carried through a bad year.

1.3The deal in this workbook

Atlas Payments Group plc is a payments group listed in London. It has agreed to buy Solaris Digital Assets Europe Limited, an Irish crypto-asset firm, for €42m. The deal's code name is Project Sunrise. Atlas will pay €35m of the price with borrowed money, and the rest from its own cash.

Atlas also wants a reserve for the enlarged group's everyday needs. So it asks for two things in one agreement: money for the price, and a further sum it can dip into when it needs to.

Three banks share the loan. Pellhaven Bank plc set up the deal and runs it for the other banks, and it lends as well. The agreement is governed by English law (clause 29.1), as many large loans in Europe are.

1.4Term loans and revolving credit facilities

One agreement can hold several facilities. A facility is a promise to lend up to a fixed amount on agreed terms. Sunrise has two, and they work in different ways. Clause 2.1 sets up both in one sentence:

Facility A is a term loan. Atlas draws it at completion and repays all of it on the fifth anniversary of the agreement. One repayment of the whole loan at the end is called a bullet. Money repaid under Facility A cannot be borrowed again (clause 6.2).

Facility B is a revolving credit facility (RCF). It is a ceiling, not a lump sum. Atlas can draw, repay and draw again, as often as it needs, until the facility ends.

Each facility may pay only for its own purpose. Under clause 3.1, Facility A pays for the purchase and its costs. Facility B pays for the group's general and working capital needs, but never towards the price. The banks agreed to lend for one purpose, and the clause holds Atlas to it.

1.5How several banks lend under one agreement

A loan from one bank is a bilateral loan. When a sum is too large or too risky for one bank, several banks share it. In a syndicated loan, each bank takes a slice of the same facility, and all of them sign one agreement. A small group of banks, like the three on Sunrise, is often called a club deal, and it works in the same way.

Two roles hold the group together. The arranger agrees the terms with the borrower and gathers the lenders. The agent runs the loan after signing, passing money and notices between the borrower and the banks, so Atlas deals with one bank instead of three. On Sunrise, Pellhaven is both arranger and agent.

Most such loans start from the market's recommended standard forms. The lawyers negotiate the terms of the deal and leave the standard clauses alone. That saves time and makes loans easy to sell on, because a buyer can trust each standard clause to work as it always does.

Clause 2.2 makes the banks' obligations several: each bank promises only its own share. Suppose Vantry fails to lend its share of Facility A, which is €8m of its €9m (Schedule 1 splits each bank's commitment between the two facilities). Pellhaven and Baltra must still lend theirs, but they need not cover Vantry's. Atlas has to find the gap elsewhere, and its claim is against Vantry alone.

1.6A promise to lend is not a loan

From signing, each bank must stand ready to lend up to its commitment, the most it has promised. Schedule 1 lists each bank's commitment, and they add up to €40m. The money moves only at utilisation, also called drawdown, when Atlas asks for it. The money drawn is a Loan.

The difference costs real money. A promise to lend ties up a bank's capital even while nothing is drawn. So Atlas pays a commitment fee on the part of each commitment it has not drawn. Under clause 10.1, the fee is 35% of the Margin, the banks' profit on top of their own cost of money.

Facility B's Margin is 2%. A year's Margin on €5m at 2% would be €100,000. So if Atlas leaves the whole €5m undrawn for a year, the fee is 35% of that: €35,000.

1.7The stages of a loan

A loan starts with a mandate, in which the borrower hires the arranger, and a short term sheet of the main terms. The lawyers then draft and negotiate the agreement, and the parties sign it. Signing binds the banks to lend, but no money moves yet.

Before Atlas can draw, it must deliver the conditions precedent, the documents and confirmations the banks require first. Schedule 2 lists them, from board minutes and a legal opinion to a copy of the signed purchase agreement. Chapter 14 covers them in full.

Over the life of the loan, Atlas pays interest, sends regular financial reports and keeps its promises about the business. Most loans end in a refinancing rather than repayment out of profits. If things go wrong, the banks may waive a breach or demand their money back early.

1.8Your job

On a loan, the trainee keeps the deal's machinery running. Nobody expects you to negotiate the Margin, but everyone expects you to know what is still missing before the money can move. You will usually:

• Keep the conditions precedent checklist, which shows when the money can move.
• Collect each document on that list and check it against the agreement.
• Draft board minutes, officers' certificates and utilisation requests.
• Proof-read each draft, checking defined terms and cross-references after every renumbering.
• Write into the draft the changes the senior lawyers have agreed.

In-house lawyers and treasury teams do the same work for the borrower. Either way, the money moves only when your checklist is complete.