A loan may be classified on different bases that determine the loan form. Generally, the essentialia and naturalia of a loan for consumption are fixed features as contemplated in law, although parties may vary the naturalia and add incidentalia to suit their particular finance transaction.159 Wright contends, correctly, I submit, that the principal bases for a loan are (i) the availability of the loan; (ii) the purpose of the loan; (iii) the lender's credit decision; and (iv) the number of lenders160 which results in the loan being classified as a bilateral loan or a syndicated loan.
The loan forms and accompanying characteristics described in this thesis represent the general position, based on market trends in South Africa, the UK and the USA. They are not to be read as cast in stone as the nature of the finance structure may, depending on the country, dictate a different loan form and characteristics.
3.1.1 Availability of the loan161
The availability of the loan depends on the manner in which the lender makes the money available and the borrower draws down on the facility. The principal loan forms using this criterion are (i) term loan facilities; (ii) revolving credit facilities; and (iii) demand loans.162
Term loan facility
A term loan is a loan advanced on the basis that the borrower will repay the capital and interest in stipulated instalments over a term or repay the capital and interest in one lump sum on a specified repayment date.163 If the borrower repays capital and interest in instalments, the loan is known as an 'amortising term loan'. If the borrower repays capital and interest in one lump sum, the loan is known as a 'bullet term loan'. In this facility, the borrower needs a fixed amount of money for a specified purpose. The facility is committed in that the lender ensures that there are always funds available to the facility limit for a specified time period.164
The capital and interest instalments can be structured differently, for example:
(i) equal monthly or quarterly instalments of capital and interest; (ii) biannual or annual instalments of capital and interest; (iii) a full capital repayment at maturity, plus monthly or quarterly interest payments; or (iv) the interest is rolled into the capital and the full amount of capital plus interest is repaid by a bullet payment at maturity. Once a term
159 The incidentalia of a loan agreement are the terms incorporated by the parties either by way of a departure from the naturalia (terms implied by law) that would ordinarily have applied to a loan or for which the law does not make provision.
160 Wright International Loan Documentation (2014) 3–7.
161 Ibid 3–4.
162 Ibid 4.
163 Ibid 3–7; Gregoriou & Hoppe (eds) The Handbook of Credit Portfolio Management (2009) 101–102.
164 As to the risks to banks arising from committed facilities in the USA, see Avery 'Loan Commitments and Bank Risk Exposure' (1991) 15 Journal of Banking and Finance 173–192.
loan is repaid, the loan is completed, and it may not be redrawn.
Revolving credit facility
A revolving credit facility is a committed facility made available on the basis that the borrower may draw down on the facility and redraw the amount paid up to the facility limit at any time during the loan term.165 The facility is committed in that the lender ensures that funds are always available to the facility limit for a specified time period when the lender receives a utilisation request from the borrower.166 The facility is therefore underwritten by the lender and binds the lender to advance the amount, whereas an uncommitted facility is one that is not so underwritten. The debt incurred is long-term debt on the borrower's balance sheet. In this facility, the borrower needs a fluctuating amount of money for a specified purpose. The facility remains operative until unutilised amounts are automatically cancelled at the end of the availability period.167 The borrower's right to draw down on the revolving facility and to redraw paid amounts is subject to its ongoing satisfaction of any conditions subsequent, repeating representations being true on each draw down date and the first day of each interest period and no event of default having occurred.
An overdraft facility168 is, it is submitted, a form of a revolving credit facility because the borrower may redraw the amount paid. For this reason, it can be terminated by the lender on written notice. Its term is typically of shorter duration and this facility may be committed or uncommitted. The overdraft facility is effectively an on-demand facility as the borrower can redraw moneys when needed, and the lender must, if the borrower has complied with the terms of the agreement, advance the requested moneys. Bucher and Von Frowein submit that an overdraft facility is an uncommitted facility for which no collateral exists, and that it is a general-purpose facility.169 Whether or not the lender requires collateral for an overdraft facility is determined by the lender's assessment of the borrower's credit-worthiness and the many benefits that security affords the lender.170 Consequently, Bucher and Von Frowein's view that collateral is not required for an overdraft facility is questionable.
Demand loan facility
A demand loan facility (which is an uncommitted facility) is a facility that the lender is able to either cancel on notice or require settlement of at any time. The loan is thus repayable on demand by the lender. The lender is not committed to funding the facility.
165 The LMA's Single Borrower Term and Revolving Facilities Agreement, clause 5.1 (Utilisation, delivery of a utilisation request), clause 5.2 (Completion of a utilisation request), clause 5.3 (Currency and amount) and Part I (Utilisation request) of Schedule 1 (Requests); clause 7.7(d).
166 Ibid clause 5.4 (Lenders' participation).
167 Ibid clause 5.5 (Cancellation of commitment) (b).
168 There is very little authority on the nature of overdraft facilities as standalone facilities in South African law. There is, however, some authority that where a bank's customer draws a cheque against his bank in the absence of an overdraft facility, it is in fact a loan application. See Pretorius 'Aspects of Bank Guaranteed and Certified Cheques' (1999) 11(4) South African Mercantile Law Journal 564 at 568–569. However, the relevance of this legal principle is questionable given that most, if not all, South African banks have done away with cheques.
169 Cited in Gregoriou & Hoppe (eds) The Handbook of Credit Portfolio Management (2009) 103–104.
170 McCormack Secured Credit under English and American Law (2004) 4.
This form of facility is somewhat unknown in South African banking practice.
Combined facilities
Often, term and revolving facilities are combined into a single facility agreement.171 Each facility has terms applicable to only that facility172 in the single agreement whilst other terms apply to both facilities.173 The borrower can draw against the term facility, typically to acquire an asset or business, and against the revolving facility, typically to finance its operations. The popularity of such combined facilities in the market is evidenced by the LMA having produced standard-form agreements for it.174
3.1.2 The lender's credit decision175
Loans can be categorised based on the borrower's ability to repay the loan, its financial position, and the source from which it will be repaid.176 Whilst the availability of the loan includes a consideration of the borrower's ability to repay the loan, the manner and form in which the lender avails the money is the primary consideration which is the determining criterion.
Corporate finance
As an example, in 'corporate finance', which generally refers to debt or equity or a hybrid form of finance, the lender advances a loan based on the borrower's balance sheet strength. Wright contends that, in this type of finance, the lender does not rely on a specific asset or income stream from which the borrower will repay the loan, but rather relies on the borrower's strong balance sheet as evidence of its ability to repay the loan.
Asset finance
By comparison, in asset finance, the lender advances a loan to enable the borrower to acquire an identified asset, the value of which features significantly in the lender's decision to grant the finance.
Project finance
In a project finance transaction, the borrower is usually the project company, typically a company incorporated solely for the purpose of undertaking and executing the project.
The assets and revenue are owned by the project company and comprise its business.
The lender advances a loan to the project company to enable it to undertake a project, the revenue of which will be used to repay the loan. The lender also typically requires
171 The LMA's Single Borrower Term and Revolving Facilities Agreement and the LMA's Multiple Borrower Term and Revolving Facilities Agreement.
172 As an example, the LMA's Single Borrower Term and Revolving Facilities Agreement, clause 6.2 (No reborrowing) applies to only term facility amounts repaid.
173 As an example, the LMA's Single Borrower Term and Revolving Facilities Agreement, clause 4 (Conditions of utilisation) applies to both the term facility and the revolving facility.
174 The LMA's Single Borrower Term and Revolving Facilities Agreement and the LMA's Multiple Borrower Term and Revolving Facilities Agreement.
175 Wright International Loan Documentation (2014) 4–5.
176 Ibid.
the sponsors or shareholders to fund, from their own resources, up to 30 per cent of the funding required by the project company. The assets of the project company are pledged, its property is bonded and its revenue, equity and claims are pledged and ceded in securitatem debiti to the lender or a security special purpose vehicle company ('Security SPV') if the loan is syndicated.177 The lender or the Security SPV may take various types of additional quasi-security, including guarantees and suretyships. In the ordinary course of recovering a loan, the lender or the Security SPV has recourse to all the borrower's assets, property and revenue that were encumbered if the loan is not repaid, naturally pursuant to a court order if one is needed. However, in project finance transactions, the lender or the Security SPV contractually agrees (i) to limited or no recourse to the shareholder's assets, property or revenue if an event of default occurs;
and (ii) to confine its recourse to recover the loan and interest from the (liquidated) project assets, property and revenues. This type of finance is therefore known as limited recourse or non-recourse financing, due to the contractual limitations on the lender or the Security SPV's legal recourse in the event of a default.
3.1.3 The purpose of the loan178
In this category, the lender's decision to advance a loan is based on the purpose for which the borrower will utilise the loan proceeds.179 The purpose could be specifically stated in the agreement or stated more generally, depending on the borrower's needs.
The purpose clause therefore states the commercial purpose for which the borrower requires the loan. It induces the lender to contract to provide the loan to that end. The lender is under no obligation to monitor or verify that the borrower in fact utilised the loan proceeds for the stated purpose.180 Under South African law, the borrower's use of loan proceeds for a purpose other than the purpose stated in the facility agreement may amount to a default because it contravenes the agreed purpose. However, a lender is unlikely to call a default if it does not affect the borrower's ability to repay the loan, except if the borrower uses the loan proceeds for an illegal or unlawful purpose.
Acquisition or leveraged finance
Acquisition or leveraged finance is used by the borrower to acquire a business or a company. The terms 'acquisition' and 'leveraged' are used interchangeably.181
Bridge or bridging finance
This type of finance is used by the borrower to bridge a gap between its immediate
177 See section 4.11 Security structure and security rights of syndicate lenders for an analysis of the Security SPV structure.
178 Wright International Loan Documentation (2014) 5–7.
179 Ibid.
180 The LMA's Term Facilities Agreement, clause 3.2 (Monitoring). McKnight et al state that in English law, the lender may contend that after disbursement but prior to the use of the funds, for as long as the funds are identifiable, the lender enjoys a trust over the funds. If the borrower uses the funds for a purpose other than the agreed purpose, the lender can reclaim the funds; see McKnight, Paterson & Zakrzewski The Law of International Finance (2017) 118 para 3.5.2.
181 Wright International Loan Documentation (2014) contends that the term 'leveraged finance' is derived from the scenario where the borrower is highly leveraged in that its debt to equity ratio is higher on the debt side. Bratton Corporate Finance (2012) 304 contends that the term 'leveraged' refers to the state of the borrower's capital structure that is leveraged, presumably to borrow against, and not the loan itself. He further explains that a leveraged loan is made to a non-investment grade borrower, which is a borrower that is not graded by a ratings agency.
funding needs and its long-term funding needs. A borrower may, for example, require long-term funding to acquire a business or fund its operations but may use bridge finance to fill the gap until the long-term funding is available.
Mezzanine finance182
A mezzanine loan is typically a subordinated loan that fills the gap between senior finance and equity in terms of risk and reward.183 A mezzanine loan carries high interest rates184 and its repayment is subordinated to the repayment of, and the security rights attached to, the senior loan. Mezzanine finance can therefore be described as middle- ranked or intermediate finance that falls between senior debt and equity, and it is a hybrid form of finance because it may combine debt and equity characteristics.185 Pratt and Crowe186 state that mezzanine finance may take different forms and that the form is determined by the transaction. The forms that mezzanine finance takes include preference shares with covenants, and financial instruments that cumulatively offer a 'middle return/middle risk position'.187 An advantage of mezzanine finance, compared to equity finance, is that the borrower is funded without diluting its ownership.
Mezzanine lenders may participate in the profits arising from the funded transaction by using equity kicker or profit participation provisions. Vargo states that, in a real estate finance transaction, a lender may share in the income derived from the property.188 Swingline facilities
This type of finance funds a borrower's short-term liquidity needs. It is usually made available on the same day as the notice requesting it is issued and it must be repaid within a matter of days.
3.1.4 The number of lenders189: Bilateral loans and syndicated loans
In a bilateral loan, one lender lends money to a borrower while in a syndicated loan, a group of lenders each lend money separately, but as a group, to a borrower(s).190 In this structure, each lender has its own contract with the borrower even though it is all typically contained in one facility agreement.191 A loan can initially be structured either as a bilateral loan or a syndicated loan in the primary loan market. A bilateral loan can
182 The origin of mezzanine finance is discussed in section 3.2.10 The origins of mezzanine finance.
183 Silbernagel & Vaitkunas 'Mezzanine Finance' Bond Capital (updated Spring 2012).
184 Structured Mezzanine Investments (Pty) Ltd v Davids and Others 2010 (6) SA 622 (WCC); [2011] All SA 583 (WCC) paras 7, 8 and 9.
185 Amon & Dorfleitner 'Financial Crisis' 2013 Journal of Small Business & Entrepreneurship 171; Pratt & Crowe 'Mezzanine Finance' 1995 Bank of England Quarterly Bulletin 370; Davis 'Mezzanine – going through the Roof' September 2000 The Treasurer 45; Silbernagel & Vaitkunas 'Mezzanine Finance' Bond Capital (updated Spring 2012) 2.
186 Pratt & Crowe 'Mezzanine Finance' 1995 Bank of England Quarterly Bulletin 370.
187 Ibid.
188 Vargo 'Equity Participation by the Institutional Lender: The Security Status Issue' (1985) 26 South Texas Law Journal 225 at 226, whose views could be applied to mezzanine finance.
189 Wright International Loan Documentation (2014) 7.
190 McKnight, Paterson & Zakrzewski The Law of International Finance (2017) 452 para 9.1.3.
191 Ibid; Proctor The Law and Practice of International Banking (2015) 430 paras 21.32ff; Hooley 'Enforcing syndicated credit agreements: All for one and one for all?' (2016) 2 Journal of International Banking and Financial Law 74.
be syndicated later by applying the transfer provisions in a facility agreement.192 Loan transfers are also described as trading loans in the secondary loan market193 which originated in 1983.194 A loan may be traded many times.195
The transfer provisions of facility agreements entitle the lender(s) to transfer the loan or portions thereof to new lenders.196 The LMA's position is that the new lenders must be in the business of loans, securities or financial assets for a loan to be transferred to them.197
3.2 Syndicated loans in South African law