by Michael Hanley , Danny Heffernan, Catherine Jane O'Rourke July-15-2020 in Banking & Financial Services

In our experience, with any type of financing, an initial meeting is an effective way to identify potential issues which may arise during the course of a transaction and the solutions that may be available to resolve such issues so as to avoid unnecessary delays at a later stage. This meeting is particularly important on development finance transactions, given the number of parties involved. While, given the worldwide COVID-19 pandemic, the physical meeting may now be a thing of the past, there are a multitude of platforms which can be used to facilitate a virtual initial meeting instead. 

Although colloquially referred to as the ‘initial meeting’, a lot of the groundwork will already have been carried out by the time the initial meeting takes place. A Heads of Terms will have been agreed between the lender and developer/borrower, and the developer/borrower will have usually prepared its build plan and may have even started engaging its professional team. 

We have set out below some of the key points from our own transactional experience, that have been identified and resolved at an initial meeting, which ultimately prevented the transactions from being delayed:-

 

Transaction specific requirements

A borrower may have specific requests arising from a lender’s credit team requirements in the Heads of Terms. Usually, for example, a lender will seek an all assets debenture from the borrower. If the borrower is a trading company, and not a SPV, the initial meeting serves as an opportunity to discuss any existing debt or assets which may have already been charged. Depending on the size of the development/ the amount of financing required, a lender may be willing to exclude certain assets from its security package. On a recent transaction we were advising on, a lender was willing to carve out certain assets held by the borrower in its subsidiaries. This was possible given (i) there was no debt within the subsidiaries, (ii) the borrower had not guaranteed any liabilities of its subsidiaries and (iii) the excluded assets were of nominal value.

 

Source of funds

Usually the site will already be held by the borrower and if it has been incorporated as a SPV, the source of the funds used for the acquisition of the site can vary. We have seen (i) third party investor loans, (ii) parent company loans and (iii) company director funds used for such acquisitions. Each of these methods carry their own documentary requirements from both a borrower and lender perspective. For example, if a parent company has provided the loan to its subsidiary, the lender will require confirmation that the loan has been made in accordance with the Companies Act 2014.

 

Restrictions on future indebtedness

If the borrower is a trading entity, the borrower may also require certain flexibility to run its day to day operations. A facility agreement will include certain restrictions on a borrower incurring any further debt/acquiring or disposing of assets without the lender’s consent. Logistically, this could present an issue for the borrower who may need the ability to do certain things as part of its operations without lender consent. The initial meeting affords the opportunity to discuss what may be acceptable to a lender, such as foregoing the requirement for lender consent for those actions carried out in the normal course of trade and/or including a monetary threshold for such actions - though any agreement at that meeting is usually caveated on the basis that it will require the lender’s credit team approval before it is documented.

 

Prior charges

The development site could be subject to a fixed charge or caught by all assets charging language in existing charge documentation to another lender. The initial meeting offers an opportunity to discuss any prior charges on the title to the development site that may need to be discharged/released to ensure no third party has any claim to the site. It may also be necessary to involve an existing lender if such debt (and security) is to remain in place as this will usually need to be subordinated.

 

Form of security documentation

The form of security, ancillary and construction documentation which may be required can also be considered at the initial meeting. There are a number of standard form construction contracts in use in Ireland - for example RIAI, JCT, IEI. The funder may have a standard form it requires to be used or bespoke documents may be drafted and agreed between the parties.

 

Amendment of constitutional documentation

As the borrower is usually an SPV, it will sit within a larger corporate structure. Oftentimes, a lender will seek some form of protection from the SPV’s parent company usually in the form of a guarantee of the borrower’s obligations to be supported by a charge over the parent company’s shareholding in the borrower. A full review of the constitutional documentation of the group should be carried out as certain provisions may require amendment e.g. if share security over a borrower’s shares is to be taken in a transaction, it may need to disapply the statutory power that automatically restricts the transfer of its shares (s.95 of Companies Act 2014).

 

The construction team

In most development finance transactions, the lender will appoint its own project monitor to oversee the development in terms of (i) expenditure on site and (ii) progress of the development generally. Details of the full professional team and determining who exactly will carry out each role will usually be discussed at the initial meeting. A funder’s requirement for a collateral warranty is usually determined on the basis of each professional’s design input to the development. All development projects have a design element and with design comes responsibility. The level of responsibility (and potential liability) should be discussed at an early stage of any development finance transaction so that developer expectations and funder requirements can be set out. Most commonly, the parties with design responsibility are the Architect, the Design Certifier, the Civil and Structural Engineer and the Mechanical and Electrical Engineer. However, further parties may have a design responsibility depending on the development.

A funder may also determine its requirement for a collateral warranty based on the value of the underlying contract with the construction professional and therefore include a two-step test to determine the materiality of the sub-contract being (i) the level of design input and (ii) the overall contract sum.

 

Third-party engagement

We have found that where third parties are involved, engaging in early correspondence on particular lender requirements is key to avoiding potential delays to completion. For example, the lender may require that it be named as sole loss payee, joint loss payee or be co-insured on an insurance policy in respect of the site to be developed and which will be charged as security. Furthermore, the lender will require the construction professionals to have professional indemnity insurance in place up to a certain value (for those with design input), employer’s liability insurance and public liability insurance, as appropriate. Engagement with these third-party insurance providers in relation to particular lender requirements at the early stage of a transaction is vital to avoid delays.

 

Conclusion

It is beneficial to cover the above steps at the very least so that the initial meeting can be meaningful. Where possible, spending the time identifying and flagging these matters as topics for discussion in advance can make the initial meeting more time-efficient but if this is not possible the parties should look to examine as many of these points as possible during the meeting to identify and agree principal approaches.

Depending on the timing of the transaction and the stage at which the initial meeting is to be held it may be possible that initial draft facility documentation will have been circulated and reviewed and further efficiencies can be gained by pairing discussion on the above points with a review of touch points in the facility documentation.  This way the more minor points can be dealt with and agreed, and the main points of issue that will need to be negotiated will become clear. This avoids unnecessary turns of the facility agreement, and thus driving efficiencies.

With the above documentation tabled at an initial meeting, most issues can be identified, assessed and addressed early on in a transaction so that all parties have a clear understanding of the key actions to be taken so as to avoid unnecessary delays and progress to completion in a timely manner.

 

Next time…

We will discuss the above points (and more) in further detail in the remainder of the series and will address specific issues we have observed arising on projects. We will also flag solutions that can assist in navigating these issues early in the process so that delays are avoided.

 


 

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