by Alan Simmons, April 2020

The banking lawyer said I was naive
Because I continued to believe
That in just two pages, a loan agreement could enumerate
All necessary provisions: repayment of principal and the interest rate.

He said it would be completely crazy
If the borrower did not provide security
The risk for the bank would be very large
In the absence of a fixed and floating charge.

So I said “repaying the loan plus interest
And providing security I guessed
Would more than suffice indeed
In order to satisfy the lender’s needs.

The banking lawyer glared at me
Tiring of my apparent frivolity.
He then proceeded to summarise
As If I was a client he had to advise

On the key clauses of which I was unaware
Which was clearly driving him to despair.
Like mandatory prepayment of which the goal
Is on the sale of assets or change of control
This clause would clearly state
The borrower has to repay part of the loan before the maturity date.

The banking lawyer was willing to concede
That the borrower might in certain cases need
To only prepay proceeds of sale of an asset that exceed
A certain amount or exclude the proceeds of insurance claims
Needed to replace an asset that had gone up in flames.

He added that it is common in a secured facility
To impose restrictions on the borrower’s ability
To pay out dividends and also to borrow freely
Which could cause the borrower’s insolvency.

The banking lawyer said the lender ought
To include a provision on cross-default
Whilst excluding from cross-default completely
Intra-group debt between parent and subsidiary.

Without taking a breath or making a pause
He then described the negative pledge clause
Not allowing the borrower to grant security to other creditors
Which could have a detrimental effect on the lender.
The banking lawyer was reasonable and, therefore
The clause would exclude liens arising by operation of law.

I interrupted saying “so if I understand you correctly
The agreement must refer to mandatory prepayment, security
Negative pledge and restricting the borrower’s ability
To pay a dividend” and then I said with glee
“Maybe a two page loan agreement was an exaggeration
But twenty pages was not beyond imagination.”

The banking lawyer’s patience was running thin
He snapped “my conference call will soon begin.
No time to explain the other provisions today.”
And before I could open my mouth to say
“Thank you” he gave me the facility agreement of the LMA
Then turned on his heels and walked away.

I admit the banking lawyer was not wrong
As the LMA agreement was extremely long
To try to cover a loan agreement in twenty pages of A4
Would cause in the banking community complete uproar.

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