LAWS8026 Chap.3 Loan Documentation and Events of Default
Loan Documentation and Events of Default
A loan agreement reduces to a promise to advance money, a promise to repay it and a duty to pay interest; everything else manages the risk that one of those promises fails. This chapter sets out the protective package from the opening seminar: conditions precedent, representations and warranties, general and negative undertakings, events of default, and the boilerplate.
It compares term and revolving facilities and amortising and bullet repayment, and gives a method for classifying any clause by when it speaks and what it unlocks. The chapter is built for problem questions.
It shows how one breach travels through a facility: a negative pledge broken today makes a repeated representation false at the next drawdown, which blocks funding, while the breach itself may be a default that, after any grace period, allows acceleration. It also explains why the facility type changes the answer.
A revolving loan is repaid and redrawn at each interest period, so refusing the redraw can work like acceleration, whereas a term loan simply continues. The repayment profile matters too, because an amortising loan reduces the lender's exposure with every payment and a bullet loan leaves it unchanged until maturity.
What this chapter covers
- 01
The core promises of a loan agreement
- 02
Conditions precedent to first and later drawdowns
- 03
Representations and why banks repeat them
- 04
General and negative undertakings
- 05
Events of default, cross default and the MAC clause
- 06
Term and revolving, amortising and bullet facilities
Worked example · free
Compare a refused redraw with acceleration
- +1Explain that a revolving loan is repaid and redrawn at the end of each interest period.
- +1Note that conditions precedent apply again to the redraw.
- +1Show that an existing event of default can defeat those conditions.
- +1Conclude that refusing the redraw works as an effective acceleration.
Key terms
- Representation
- A representation is a statement of fact by the borrower on which the lender relies when it lends.
- Undertaking
- An undertaking is the borrower's promise about conduct while the loan is outstanding.
- Cross acceleration
- Cross acceleration is a default triggered only when another creditor has actually accelerated its debt.
- Bullet repayment
- Bullet repayment returns the whole principal at the end of the term rather than in instalments.
- Revolving facility
- A revolving facility allows amounts to be drawn, repaid and redrawn up to an unchanged limit.
- Material adverse change
- A material adverse change clause makes a significant deterioration in the borrower's position an event of default.
- Negative undertaking
- A negative undertaking is the borrower's promise not to do something, such as create security or dispose of key assets.
- Default interest
- Default interest is a higher rate charged on amounts the borrower fails to pay when due.
Loan Documentation and Events of Default FAQ
What is the difference between a representation and an undertaking?
A representation is about facts that exist or have taken place when it is made; an undertaking concerns what the borrower will or will not do in future. Both can feed into an event of default, but they protect different moments in the life of the loan.
Why do bank lenders repeat representations?
Repetition at drawdown and on interest payment dates turns a one-off statement into a recurring test. If the facts have changed by the next drawing, the repeated representation is untrue and the lender can decline to fund, which a bond investor with issue-date representations cannot do.
Why is a MAC clause often contentious?
It allows the lender to treat a broad deterioration in the borrower's position as a default, rather than a specific measurable breach. Borrowers resist that uncertainty, so the clause's inclusion and wording are frequently negotiated, which is why the seminar flags it.
What do conditions precedent do in a loan?
They decide whether money moves. Some must be satisfied before the first drawdown and others before each later drawing. Because a repeated representation and the absence of default are usually among them, they let a lender stop funding as soon as the factual picture changes.
What is the difference between cross default and cross acceleration?
Cross default is triggered by a default under the borrower's other debt; cross acceleration needs another creditor to have actually accelerated. Borrowers prefer the narrower trigger, because a minor default elsewhere then cannot bring down the whole facility.
Assessment move
Take a facility agreement from your readings and sort ten clauses into representation, undertaking or default trigger, writing one line on when each operates. Then rehearse the consequences of one breach through the whole loan, from the next drawdown to acceleration.
Keep the term and revolving comparison table beside you during Class 2. Practise explaining the effect of one breach aloud in under two minutes, naming each clause in the order it operates; that is the form a strong Class 2 contribution takes. Note which clauses in your sample agreement protect the lender against changes in tax or regulatory cost.
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