Tool M1
The third form of mitigation / protection in a deal structure is the flow of information from client to Bank.
Key considerations include:
- Information requirements and format should be specified in the documentation especially the calculation details of financial covenants
- It should be clear on which entities the information is required
- The ability of the client to provide the requested information on time
- Non receipt of information as required by the documentation constitutes an event of default, giving the Bank the legal right to cancel the facility and / or accelerate repayment
- The documentation should always give the Bank the right to request at any time (not just reporting dates)‒ that the information be independently verified‒ a Certificate on Non Default
The main focus of the information requested should be to help the Bank to continually assess key risks, the continuance of natural mitigants and the strength of the protection package.
Common information requirements
| Financial Information | – Audited [consolidated / non-consolidated] financial statements and annual report within [180] days after financial year end – Semi annual [audited] [consolidated / non-consolidated] accounts within [90] days after the first six months of each financial year – Quarterly management accounts within [30] days after each quarter end – Monthly management accounts within [14] days after month end – Simultaneously with the above, a compliance certificate certifying compliance with financial covenants – Asset valuation reports (for example fixed assets, land & buildings, investments, stock (inventory) – Lists of aged debtors (accounts receivable) and stock (inventory) for borrowing base facilities |
| Shareholder Information | – All documents dispatched to [shareholders / creditors] or filed with any stock exchange |
| Non-financial information | Any event which constitutes / would constitute in time an event of default Any information the Bank may from time to time reasonably require All documents regularly lodged with regulatory authorities on compliance |
Other information requirements
Wherever possible negotiate specific information requirements linked to the key business risks and potential loss of natural mitigants you have identified. Ideally these are events which could adversely affect the client’s operational cash flow, and therefore its ability to repay the facility. These should be incorporated into a Client Monitoring Plan (see ‘Internal Information’ below).
Some examples are:
- Changes in laws / regulation / tariffs / quotas
- Loss of a licence / ISO accreditation
- Loss of a major contract / customer
- Current order book level
- Average monthly / quarterly market price of a key raw material (e.g. oil)
- Progress reports on new projects (“Milestones”)
- Crop reports (yields, commodity prices, pre sales)
- Exposure to country risk
Non receipt of information
If information is not received in accordance with the time limits set in the documentation, the Bank must take prompt and formal action, as follows:
- Telephone the client to advise of non receipt and the consequent occurrence of an event of default. Establish why the information is late. Determine when the information will be available and set a deadline.
- Confirm the telephone call in writing the same day, advising the occurrence of an event of default and reserving the Bank’s legal rights.
- Diarise the agreed deadline and monitor.
- Follow up if not received by the deadline. Consider taking formal legal action.
Please note that in the case of a syndicated loan it is still your responsibility to monitor receipt of information. Initial contact with the agent bank is recommended to make sure that they are not responsible for the delay. Unless the agent bank can guarantee receipt of the information within 2/3 working days you should still proceed as outlined in steps 1-4 above. Refer to Tool L8 “Covenant Breach”
Internal Information
What information will be monitored internally? As the Bank moves towards pro-active monitoring (in compliance with the recommendations of Basle II) internal ‘triggers’ should be agreed at the outset of a transaction for internal monitoring purposes. These triggers should be set out in a Client Monitoring Plan and provide the Bank with an early warning system. Remember that non-financial triggers are likely to take effect before financial triggers.
Summary of Key Issues
- Request information which helps the Bank to continually assess both the key risks / natural mitigants and the strength of its protection package (collateral, covenants etc)
- Make monitoring of the information a properly structured part of your relationship management
- Ensure the client can readily produce the required information
- Consider the minimum information you would require in the stress scenario
- Negotiate the right to have the information independently verified at any time not just reporting dates
- Take prompt and formal action if information on bilateral and syndicated loans is not received in a timely manner
