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Introduction

These undertakings relate to the information required to be delivered by the Obligors to the Lenders during the life of the Facilities.

Borrower Notes

The key issue from the Borrower’s point of view in relation to information undertakings is to ensure that the Lenders’ requirements accord with what the Company and the Target Group are able to produce and that the time frames for delivery are achievable. The scope of the information undertakings in the Leveraged Facilities Agreement very broadly reflects the approach often seen in the market. However, the scope of information undertakings has been the subject of increased focus in recent times as a result of certain developments relating to the types of investor now participating in the loan market.

Concerns have been voiced about market abuse by non-bank institutions such as hedge funds who participate in syndicated loans and also deal in regulated investments (such as equities). The LMA has issued two statements which relate to the inclusion in syndicates of public-side Lenders, the second of which contains guidance for loan market participants on potential areas of concern and how information flows might be managed in such circumstances.

In September 2008, the LMA made a number of amendments to the Leveraged Facilities Agreement which were intended to address the concerns of public-side Lenders, for example, a new paragraph (d) was added to Clause 32.13 (Relationship with the Lenders) to enable Lenders to appoint a person to receive communications on their behalf and new paragraph (c) of Clause 32.8 (Responsibility for

documentation) was added to make clear that none of the Arranger, the Issuing Bank or any Ancillary Lenders is responsible for any determination as to whether information provided to any Finance Party is non-public information.

These changes are a useful response to requests from certain participants in the loan market who have asked for sanitised information packages, “scrubbed” of private-side information. From a Borrower perspective it is hard to see how such requests could be dealt with in practical terms, save by not providing any documentation at all to such participants who opt out. The internal requirements of a Lender in relation to the provision of confidential information are a matter for that Lender to manage and the appointment of a representative to receive information on their behalf is a practical solution. If raised, Borrowers are likely to resist any suggestion that they might police the information flow on behalf of such Lenders.

Clause 25.1: Financial statements

Clause 25.1 contemplates the delivery of annual, quarterly and monthly financial statements to the Lenders.

Borrower Notes

Financial covenants (see Clause 26 (Financial Covenants) below) are usually tested on a quarterly basis, so monthly financial statements are not always required. The time for delivery of financial statements varies. Four to six months after the year end is usually permitted for audited statements, one to two months for quarterly statements.

The extent to which solus accounts or consolidated accounts prepared below Group level are provided to Lenders varies. Lenders may wish to see (or retain the right to request) solus accounts for certain Material Companies.

Clause 25.2: Provision and contents of Compliance Certificate

 compliance with the financial covenants. This is the customary purpose of a Compliance Certificate; and

 compliance with other financial tests in the Agreement: for example the Margin ratchet, the number of companies which qualify as Material Companies and satisfaction of any Guarantor coverage test, to be included as applicable. The form of Compliance Certificate in Schedule 9 also contains confirmation that no Default is continuing (or if any Default is continuing, details of the Default and steps being taken to remedy it).

A Compliance Certificate is required to be signed by two directors of the Parent. The Clause goes on to provide (optionally) that any Compliance Certificate accompanying audited accounts is required to be accompanied by a report from the Company’s auditors in the form agreed by the Parent and the Majority Lenders.

Borrower Notes

Some Borrowers may resist including any confirmation in the Compliance Certificate as to whether any Default is continuing. This is on the basis that a Compliance Certificate is a snapshot of the Obligors’ compliance with the Agreement as at a particular testing date. The appropriate mechanism for notification of Defaults is via the covenant at Clause 25.9 (Notification of default). It is also unclear what the statement in the Compliance Certificate is intended to confirm. If the statement relates to the existence of any Default as at the testing date, this is not a useful statement for the Lenders’ purposes because the situation may have changed in the period between the testing date and the date upon which the Compliance Certificate is delivered. If the Lenders are looking for confirmation as at the date the Compliance Certificate is delivered, this could potentially delay the delivery of the relevant Compliance Certificate. Whether Borrowers are able to succeed with these arguments varies.

Borrowers may also resist the requirement for an auditor’s report in relation to Compliance Certificates. If auditor involvement is agreed, Borrowers should be aware of a guidance statement issued by the Institute of Chartered Accountants in November 2000, which advises accountants that they should not report to Lenders on Borrowers’ covenant compliance without first entering a separate engagement letter with the Lenders. They are advised to report only on the extraction of figures by the Borrower in the certificate, the accuracy of the arithmetic, and compliance with the relevant definitions.

As a result, if provision of an auditor’s report is agreed, it is important to involve the auditors at an early stage in discussions, to ensure that the exact nature of their remit is settled before signing. If the auditors will be reporting on the certificate, the form of the report needs to be settled.

There are some difficult issues relevant to the delivery of Compliance Certificates, relating to the point at which a Default under the financial covenants is triggered. These issues are discussed at Clause 26.3 (Financial Testing).

Clause 25.3: Requirements as to financial statements

This Clause sets out requirements as to the content of the financial statements delivered under Clause 25.1 (Financial statements).

Borrower Notes

The detail of this provision, in particular, in terms of which financial statements are to be delivered, will need to be agreed. Note that in certain jurisdictions Lenders may require particular financial statements for regulatory purposes. Generally, the Borrower will be concerned to ensure that these requirements provide Lenders with what they need without being so burdensome as to inhibit the Group’s ability to run its business.

When negotiating this provision, Borrowers should bear in mind the extent of the representations in relation to the financial statements (see Clause 24.13 (Original Financial Statements) above). For example, paragraph (a)(iii) requires that each set of quarterly financial statements includes a cashflow forecast. Borrowers should take care to ensure that any such forecast is not warranted (other than the belief that the assumptions on which it is based are reasonable and that it has been prepared in good faith).

Paragraph (b)(iii) provides two options: that the financial statements shall be prepared on the basis of the Accounting Principles or alternatively, that the financial statements are prepared on a consistent basis with the Base Case Model (in the case of the Parent) or the Original Financial Statements (in the case of any Obligor).

Paragraph (b) includes so-called “frozen GAAP” wording. This provides that if there is a change in Accounting Principles or accounting practices, the auditors must provide to the Agent a description of the changes and sufficient information to enable the Lenders to make a comparison of the most recently delivered financial statements with the Original Financial Statements or the Base Case Model (as the case may be). In particular, the Agent must be provided with sufficient information to determine whether the financial covenants have been met, to calculate the applicable Margin and to calculate the amount of any mandatory prepayment obligations.

In any case where there is a possibility that individual or group financial statements may switch to alternative Accounting Principles or accounting practices during the life of the Facilities (and leveraged facilities are usually long term facilities), it will usually be advisable to include an additional Clause, under which the parties agree, on a change in Accounting Principles, to negotiate in good faith to settle the amendments which are required to the agreement as a result. In relation to the Investment Grade Agreements, the LMA and ACT agreed the following wording in the context of the move to IFRS in the UK:

“If the Company notifies the Agent of a change in accordance with [paragraph ([ ]) of Clause [ ] (Requirements as to financial statements)] the Company and the Agent shall enter into negotiations in good faith with a view to agreeing any amendments to this Agreement which are necessary as a result of the change. To the extent practicable these amendments will be such as to ensure that the change does not result in any material alteration in the commercial effect of the obligations in this Agreement. If any amendments are agreed they shall take effect and be binding on each of the Parties in accordance with their terms.”

Borrowers may wish to provide additionally that the parties will negotiate for a minimum period, such as 30 days. A provision of this kind should provide the necessary basis for dialogue between the parties, though it should be appreciated that, as an agreement to agree, its meaning is not sufficiently certain for it to be enforceable.

Paragraph (c) may be controversial: it gives the Agent the right to submit

questions about the Group’s financial condition to the Auditors (via the Parent), at the Parent’s cost. The Parent may want to limit this right, for example, by reference to cost and such that it applies only during the continuance of a Default.

Clause 25.4: Budget

Clause 25.4 provides for an annual budget and any updates to be supplied to the Lenders.

Borrower Notes

Similar considerations apply in terms of content and the timing of delivery of budget information as described above in relation to the financial statements. Clause 25.5: Group companies

This Clause permits the Agent to request at any time confirmation of the Group’s compliance with the Guarantor coverage test and of those companies which qualify as Material Companies.

Borrower Notes

Borrowers may resist this provision on the basis that it is unduly burdensome. This information will be provided to Lenders quarterly via the Compliance Certificates (see Clause 25.2 (Provision and contents of Compliance Certificate) above). Clause 25.6: Presentations

This provision requires at least two directors of the Parent (including the chief financial officer) to make an annual presentation to the Finance Parties as to the Group’s business and financial position. More frequent presentations may be requested if the Agent suspects a Default is continuing or may have occurred or may occur.

Borrower Notes

Borrowers are likely to object to the requirement to make presentations at any time where the Agent suspects a Default. Borrowers may seek to impose the more onerous test of no Event of Default or to delete the reference to a Default which “may occur” or “may have occurred”.

Clause 25.7: Year – end

This Clause sets out requirements as to the accounting reference date of companies within the Group.

Clause 25.8: Information: miscellaneous

This Clause contains a number of information requirements including notification of any material litigation, of the occurrence of any mandatory prepayment trigger (Recovery Claims, acquisitions or disposals) plus a general requirement to supply the

Borrower Notes

Certain aspects of this provision may be objectionable from a Borrower perspective, for example:

 the Parent may resist copying Lenders in on information provided to its shareholders as required by paragraph (a). The obligation applies only to information provided to shareholders generally (or any class of them), but particularly in the private equity context, this may be not be acceptable to Borrowers;

 the general requirements in paragraphs (d) and (e) to provide further information to the Security Agent and the Agent might be limited to such information that can be provided without material cost to the Group (at least prior to the occurrence of an Event of Default).

Additionally, Borrowers should ensure that the materiality threshold for notification of litigation and claims in paragraph (b) is consistent with that agreed in the related representation and Event of Default (see Clause 24.14 (No proceedings pending or threatened) and Clause 28.17 (Litigation)).

Clause 25.9: Notification of Default

This is a fairly customary provision obliging each Obligor to notify the Agent promptly upon becoming aware of the existence of any Default.

Borrower Notes

To ensure that this obligation is complied with on a timely basis in complex Groups, Borrowers may wish to provide that the notification requirement is triggered promptly upon the Parent becoming aware of any Default. As drafted, each Obligor is required individually to notify the Agent of any Default (unless it is aware that another Obligor has already done so).

Clause 25.10: “Know your customer” checks

These provisions require the Obligors to provide information to the Agent for the purpose of satisfying applicable “know your customer” or “KYC” requirements. KYC checks on each Obligor will need to be carried out by the Original Lenders prior to signing. Clause 25.10 requires the Obligors to provide KYC information to Lenders in one of three situations:

 a change in the status of an Obligor after signing; or

 a proposed secondary market purchase.

This obligation is limited in that a Lender or prospective Lender is entitled to request the information only where it is obliged to carry out KYC checks. The request may not be made where the information is already available to the Lender or prospective Lender, as would be the case if the Agent were willing to pass on information already in its possession. In addition, the information may only be requested in order for the Lender to satisfy itself that it has complied with applicable law. Finally, the Obligor is not obliged to comply unless the request is reasonable.

Borrower Notes

There are a couple of issues which Borrowers may raise with Lenders in relation to this provision in the context of a leveraged transaction:

 Borrowers may wish to provide that all requests for KYC information should be sent via the Agent.

 The information which the Obligors are obliged to provide is expressed to be in order for the Lender or prospective Lender “to carry out and be satisfied it has complied with all necessary KYC or other similar checks”. Borrowers will prefer the purpose to be expressed objectively (“in order for the Lender . . . to comply . . .”); or Lenders may be prepared to concede that the aim is for them to be satisfied “acting reasonably”.

The background to the introduction of these provisions by the LMA is discussed in detail in the ACT Borrower’s Guide to the Investment Grade Documents, Part II at Clause 20.7.