Simply Finance is a series of newsletters that we hope can contribute to increased understanding of financing law and to demystify financing documents. Our aim is to explain concepts, terms and expressions in a simple way so that anyone can understand them. This time we address the English law concept of representations and warranties.
Except as permitted under [ ], the Borrower shall not (and the Parent shall ensure that no other member of the Group will) (i) acquire a company or any shares or securities or a business or undertaking (or, in each case, any interest in any of them); or (ii) incorporate a company.
The Borrower shall not change or permit a change to the flag of the Collateral Vessels other than to a Pre-Approved Flag or under such other flag as may be approved by the Agent acting on the instructions of the Majority Lenders, such approval not to be unreasonably withheld or delayed.
What is it?
Covenants (regularly also called undertakings) are obligations on the borrower towards the lenders that shall generally be complied with throughout the life of the loan.
Why is it used?
The purpose of covenants is to ensure that the borrower’s performance and operations comply with the lenders’ requirements for awarding the loan. Lenders typically obtain information such as financial reports and compliance certificates on a regular basis. Furthermore, information covenants shall ensure that a borrower informs its lenders of other matters of importance in a timely manner. This is important because it gives lenders the ability to make informed decisions and, where necessary, act swiftly to protect their interests.
How is it used?
Information covenants are typically set out in the covenant section of the finance agreement and are supplemented by other general and specific covenants (for instance in secured financing, covenants related to protection of the security assets). Information covenants regarding financial reports, budgets and notification of key events, like material litigation, are customary. All covenants have to be tailored to each deal. A breach of information covenants will typically be an event of default, but often be subject to a remedy period.
Why should a lender pay attention?
Information covenants are important for lenders as they ensure relevant information is provided without undue delay. Less information covenants, disclosure would depend on the borrower’s discretion, bound however by general duties of loyalty and fair dealing in contractual relationships. Information covenants are a useful tool for lenders to protect their interests and safeguard their investments. The information can also be used to ensure appropriate product offerings or services and facilitate customer relationship development. It may also promote important objectives for lenders, such as legal compliance and sustainability reporting. Lenders should also take care to review the information they receive so that any breaches are discovered at an early stage, and to avoid giving implicit waivers by not reacting to the information received.
What does it mean for the borrower?
For borrowers, information covenant compliance can be an administrative challenge, depending on whether the information requested is easily available or not, and the reporting frequency. A borrower may typically want to align reporting dates and frequency to its existing financial reporting. A borrower should note that information covenants will often be coupled with representations and warranties that the information is true and complete. A borrower may also want to resist disclosing business secrets and should ensure that lenders are subject to appropriate confidentiality undertakings.
Important to note
If the finance agreement requires IFRS reporting (International Financial Reporting Standard), it will be time consuming and potentially costly for borrowers reporting in accordance with local GAAP (Generally Accepted Accounting Principles). Borrowers reporting in accordance with GAAP should therefore discuss with lenders whether local GAAP reporting is sufficient. Borrowers intending to issue debt securities to be listed on a regulated market, will not have this flexibility as the listing rules require IFRS reporting.