Documentation. In this section we will cover the typical agreements for leveraged buyout finance, major agreements, different types of provisions, and key provisions. In leveraged finance transactions documentation is typically prepared by lead banks or their lead councils. For typical corporate lending for investment grade borrowers, documentation may need some negotiation, but it is based on a standard format that is prepared by industry specific organizations such as the LMA, the Loan Market Association in Europe, and LSTA or Loan Syndications in Trading Association in the US, for example. However, in leverage finance that is viewed as a higher risk because of the nature of the transaction, documentation is carefully prepared based on negotiation among a borrower, lenders, and guarantors, et cetera. There are many contracts varying from transaction to transaction. You need to be familiar with at least some of the key agreements here. For bank loans that include revolving credit facilities term loans, A, B, C, or D and other types of loans provided by banks, for example, an asset backed loan facility, generally loan agreement and promissory notes are used. For bond issuance such as high yield bonds, you may see an offering memorandum indentures and notes. An indenture's a contract, and I will explain it further in a later part of this course. Also, apart from general debt, there are other contracts. If a transaction includes mezzanine debt you may need a facility agreement prepared. If a transaction has a unitranche facility, there is an agreement among lenders. Unitranche loans combine first lien and second lean or senior and mezzanine debt that were documented separately historically into a single debt instrument. All the debt should be subject to the same term, but different interest rates. Unitranche loans are becoming more common in the middle cap leverage buyout market. Also, leverage finances secured in most cases so, you need a security agreement. There are so many contracts in the leverage finance market but major contracts are a loan agreement, a bond indenture, and a security agreement. Here you'll become familiar with major contracts most often used in leverage finance regardless of the size of the deal and jurisdiction. For bank loans, there is a contract that is called a loan agreement, a credit agreement, or a facility agreement, et cetera. The name of the contract varies by country or the market. However, the contents have many things in common. In this section, we will call it a loan agreement. It is a binding contract between borrowers and lenders and, in a syndicated loan transaction, there are several lenders listed in a single agreement with a specific title such as lead arranger. Typical terms included in a loan agreement are interest rates, loan maturity, repayment, and covenants. If a transaction needs a high yield bond issuance, a bond indenture has to be prepared. An indenture specifies a coupon rate, bond maturity, covenants, whether it is callable and some special features such as whether it is convertible to equities or not. Lastly, a security agreement is prepared to secure loans or bonds with a sort of collateral or all asset leans, such as first or second. The wording depends on transactions but generally it includes pledge collateral, how to deliver the collateral, and control collateral, et cetera. On this page, I will navigate you through different types of provisions. Provisions are typically documented in a loan agreement or bond indenture based on negotiations among stakeholders such as borrowers and lenders. There are many types of provisions that are used to satisfy both parties by balancing restrictions and permissions of certain kinds of actions. A recent trend in the leverage finance market is a growing number of more flexible and more borrower friendly loan slash bond provisions because of the market where banks and investors rigorously seek a higher return, and leveraged finance is one of their sweet spots. As you can see in this slide there are many types of provisions. These are just examples, and in reality, there are more. Many of the typical provisions are seen in the context of negative covenants including incremental facilities slash lean, negative pledge, reclassification, assignment, investment restriction, payment restriction, incremental facility, et cetera. Negative covenants are generally utilized to protect lenders or bond holders by managing leverage finance related risks. Borrowers also benefit from having appropriate covenants because lenders or investors are willing to offer lower financing costs when having covenants which will reduce the associated risks of the debt. Provisions vary a lot, and different combinations of provisions are included in a transaction depending on the country where the transaction happens or the deal size. Provisions for a large capital deal are somewhat different from those for middle or small cap deals. The next page will introduce some key provisions that you may often see in leverage finance. Mandatory payment, investment restriction, payment restriction, call protection, subordination or liens, cross default and cross acceleration, and change of control. Let's look into specific provisions one by one. First, mandatory prepayment. This is a provision that requires borrowers to prepay some portion of the debt when they get proceeds from events such as asset sales. It is typical in leverage finance and called a cash suite provision as it helps de-leverage and prevents borrowers from spending excess money on things that are not value added. Generally, the payment is applied to term loans first and then applied to a revolving credit facility. The next is restrictions on making investments. It typically prohibits borrowers from making investments unless they get consent from stakeholders. Investments include loans, equity purchases, et cetera. Historically, only a certain amount of investments was allowed but nowadays there are some exceptional cases. For example, those include investments in subsidiaries that are not guarantors for existing claims and investments In short-term securities. Restricted payment provision restricts borrowers from payments for the repurchase of equity, dividend payment, and other types of distributions. In the payment restriction and limited investment, the available amount or a general ratio or builder basket for borrowers have been getting common as the leverage buyout market has become increasingly sponsor friendly. The threshold to excess cash is becoming more common. What is a general basket, builder basket, and ratio basket? A basket is commonly used in the US loan market and it is a specific limit of the amount of money that is allowed to be invested to make payments or distributions to prepay debt, et cetera. Borrowers are getting flexibility on its excess cash. The basket is sometimes determined with a ratio to consolidated basis net income. Which is larger than excess cash flow and is generally used as a term for cash sweep.

Here's some provisions that protect lenders. The first is a call protection provision. It requires borrowers to pay a call premium when repaying debts within a certain period after borrowing money to protect the lenders yield. Call protection is categorized into two types, hard call protection and soft call protection. In a hard call provision, borrowers have to pay a 1 to 3% premium when repurchasing debt without discriminating as to the nature and effect of the subject prepayment. In the soft call provision, borrowers have to pay a 1% premium when refinancing or repricing the current claims. Restrictions on granting lien and security provisions prohibit borrowers from incurring any additional liens and security to protect the current claim's lenders bond holders. However, there are exceptions such as lien securing refinance loans, purchase money liens, et cetera.

The subordination clause is that the current claims shall be prioritized over any other debts to be formed by other contracts in the future. It is to protect the seniority of the current debt and thus protect lenders and bond holders from new lenders rights. The next two provisions are related to the event of default, cross default and cross acceleration provisions. Cross default provision protects lenders to give equal rights when a borrower is in default. When an event of default happens to one type of loan, it automatically triggers an automatic event of default for other loan contracts. Cross acceleration is different from cross default because it triggers in the event of default only when the lender of the defaulted obligation accelerates repayment. The difference is whether the event of default is triggered automatically or not. The cross acceleration clause is often included in bond indentures. The last one is change of control, which is frequently found in a high yield bond and requires borrowers to repurchase the current debts at a certain percentage, typically a 1% premium of their principle in a series of specified change of control events. The definition of change of control has room for negotiation among stakeholders, but generally include events like the acquisition by a third party, a majority change in the company board, or the disposition of subsidiaries.