Mark M. Madden
Turmoil in the financial markets has reached historic levels. Nevertheless, many banks view the current market as a window of opportunity. The best lenders recognize that a downturn in economic conditions is often the best time to solidify existing business relationships and more importantly, build new ones. Most customers will remember the bank that was willing to work with them during difficult times such as these. For that reason commercial lending is still available, albeit on more conservative terms than we once knew. Banks capable of making a loan for their own portfolios can still make logical credit decisions and avoid expensive risk adjustments thereby giving themselves an advantage over rivals which must sell the loan on the secondary market.
Strong Understanding
Solid lending relationships are equally important for borrowers hoping to ride out the current storm and traditional credit concerns haven’t changed. The cost of capital and the conditions upon a commitment to fund have taken on a renewed focus for every borrower. Because of that, loan commitments or term sheets have become critically important. Unfortunately, however, commitments are often overlooked in a rush to get to closing.
Several issues should be addressed in every loan commitment. Some are routine, some are not so routine. It is important that both parties consult with experienced counsel before preparing and executing the commitment. They should fully understand the terms and conditions of the loan which most likely will have been impacted by today’s market. The loan commitment agreement may also serve to reduce a borrower’s overall cost of capital. For example, one cost-effective, but seldom used approach aimed at reducing the negotiation of loan documents is the use of a rider to the commitment addressing specific issues a borrower knows it will have to address when reviewing loan documents prior to closing.
Counsel may use a rider to define when the borrower may freely transfer a membership or partnership interest in itself, or when a borrower shall be entitled to restoration funds necessary to rebuild after a casualty. The rider should then become a part of the commitment and more importantly the initial draft of the loan documents:
Counsel may also insert boilerplate language into the rider addressing certain issues routinely commented upon during the document review process. The agreed upon language can result in a significant saving of both time and cost.
A frank discussion of the new issues resulting from today’s market will help to maintain lending relationships through these difficult times. Parties should, therefore, utilize the commitment to address any new issues and reduce the time and cost traditionally associated with the negotiation of loan documents through the use of a rider. If commitments are overlooked or ignored because of time constraints surrounding a loan both parties are exposed to a number of unknown risks and expense.
