(3 min read)
The term sheet has been signed, first stage credit is complete and now it’s over to the lawyers. Straightforward and the timetable is going to be hit, no problem? Enter the conditions precedent checklist. Whilst inoffensive at first read, on closer inspection there may be something on there that could impact the transaction timeline. Whilst the same can be said about all financing transactions, the nature of asset based lending is such that there can be many different classes of assets being funded in one deal, each with their own title or security challenges to navigate, which creates a more diverse and often longer conditions precedent checklist to work through. So, what are the conditions precedent to watch out for in managing an asset based lending transaction, to ensure that they do not become problematic?
If a third party is involved – prioritising is key
Whilst the counterparties to the transaction will be focussed on achieving completion, third parties in the background will have less interest in working towards what may be a tight timetable. There are many conditions precedent that could involve a third party in an asset based lending transaction, such as:
- landlord waivers – if eligible inventory is going to be located in a third party owned property, it is advisable to obtain a landlord waiver from the landlord. This seeks to provide some assurances to the funder that the landlord will not try to claim the inventory as part of any legal rights it may have to do so, should the borrower not pay sums due to the landlord (most likely rent). These waivers can take time to negotiate and finalise, often requiring an additional set of lawyers to be instructed to represent the landlord. If agreement cannot be reached, or if there is a delay in obtaining the letter, it is possible for a funder to apply a reserve against the inventory availability, usually to the value of a few months' rent, to mitigate the risks. It is however preferable for this condition precedent to be resolved prior to completion, to preserve as much availability for the borrower at day one
- key debtor contracts - when funding book debts, a funder will focus on key contracts where there is a high risk concentration. For a borrower, it is imperative to help the funder get comfortable with these key contracts to make sure that the bulk of the ledger is eligible for funding. Elements such as contractual set off provisions, stage payments and ban on assignment or ban on trust provisions can cause concern for a funder. To avoid problems with debtor contracts, a borrower should engage early in respect of key contracts and liaise with the funder over pre-take on debtor contract due diligence to see what a funder may need changing. Proactive management of this condition precedent will allow enough time to negotiate contractual changes or, if necessary, move required changes to a condition subsequent if agreed by the funder
- insurance broker letters – given that asset based lending is funding against assets, a funder will want to be insured in the event that the underlying assets are damaged or destroyed, so that they can recover their position. To this end, a funder will need an interest in the insurance for the collateral assets, which is obtained by liaising with insurance brokers. It is becoming increasingly challenging to agree broker letters, with certain brokers challenging standard form provisions in pro forma letters. With it not being advisable to make this letter a condition subsequent due to the importance of insurance over the assets being funded, it is vital to ensure that this condition precedent is at the top of the to do list early on
- deeds of release and/or reassignment – these need to be negotiated with the third party funder leaving the existing arrangements. As a jilted member of the party, an outgoing funder may not always be as proactive as those entering the new arrangements. It is therefore key to get in front of the relevant contacts or lawyers early on in the process, to ensure no delays at completion
- intercreditor agreements – where there are any third parties who will either retain the right to receive payments from the obligor group or continue to benefit from the holding of security from the obligor group, such third party rights will need to be properly regulated in an intercreditor agreement to protect the interests of a new funder. Whilst conversations with third parties such as shareholders might be more amicable, the discussions are often more contentious if they involve parties such as property lenders, additional clearing banks or fleet financiers. It is imperative that principles are agreed before the drafting stage of the transaction. Without clarity around how third party interests will be regulated there will be delay and expense incurred in dealing with protracted negotiations, which the transacting parties will want to avoid.
If properties are involved – be realistic about the transaction timeline
Between organising searches at the Land Registry and dealing with unexpected queries or issues arising from property due diligence, a transaction involving lending against a property and obtaining security over a property will often take more time than expected. Ordering the searches ahead of finalising the term sheet and obtaining credit sign off can help. Whilst there is a risk of spending money on searches for the transaction to then not go ahead, this risk is far outweighed by the benefit of avoiding search delays. Clarity at an early stage about exactly what property due diligence is required is also crucial, as this will ensure all parties are pulling in the same direction.
If overseas jurisdictions are involved – funders should undertake thorough due diligence ahead of finalising the term sheet
A transaction timetable can be significantly impacted by additional time being taken to obtain foreign law conditions precedent and so it is important to address some key points from the outset. From a funder's point of view – can the security required actually be taken in the relevant jurisdiction(s)? Is a notary needed ahead of signing? How many sets of lawyers are needed to coordinate the moving parts and is there someone taking responsibility for overall project management? From a borrower's perspective – do the local offices have the correct legal representation in place to deal with the requirements of the funder? Careful consideration around the overseas elements will help smooth out what are often difficult parts of a deal and prevent unwanted setbacks.
A helpful solution – innovative technology for transaction management
The AG ABL and Trade Finance team pride ourselves on using in-house, technology-driven solutions to streamline transactions for our clients. We develop and utilise bespoke products to fit the needs of a particular deal, allowing us to deliver the very best in project management on all types of asset based lending transactions. As an example, online shared conditions precedent checklists accessible to all parties can make a material difference in managing a transaction, with real time updates, the ability to upload and record versions of documents and the option to directly link to DocuSign, for a more controlled completion process. Tech-based project management is the future, and we have seen a real benefit in the use of such products to allow transactions to run smoothly and efficiently.
We have a wealth of experience project managing large scale, often multijurisdictional transactions, dealing with the challenges that arise as part of a conditions precedent process from both a funder and a borrower perspective. We would be delighted to discuss any elements of your next transaction with you, so please do get in touch.
