Waterfall Provision In Loan Agreement

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To demonstrate the operation of a cascading payment system, we assume that a company has taken out loans from three creditors, creditors A, B and creditors C. The system is structured so that creditors A are the highest creditors, while creditors C are the lowest creditors. The agreement for what the company owes each of the creditors is as follows: the case concerned the construction of a 400 million pound facility agreement related to the purchase of 30 St Mary Axe in London (better known as “gherkin”). As with many syndicated credit facilities, the loan facility started with a single bank (Bayerische Landesbank, London Branch or BLB), which performed a number of tasks in addition to that of the lender, including the arranger; Facility Agent; Security guard and security bank. As might be expected from a syndicated credit facility, the terms of the facility agreement clearly distinguished between the different capabilities in which BLB acted. The facility agreement also required borrowers to enter into a number of interest rate swaps (guarantee contracts) with BLB as a hedging counterparty (defined as a hedging provider in the credit facility documents). Although BLB, as the guarantor of the guarantee, was not separately involved in the facility agreement, the agreement acknowledged in several places that it was also acting in this capacity. Rainfall payment is a repayment system in which priority lenders first receive interest and capital payments from a borrower and subordinate lenders receive capital and interest payments. The BLB`s argument centred on the assertion that it was economically reasonable and reasonable that all amounts paid by borrowers or guarantors, given that they were the lender of the guarantee and therefore presented a risk under the guarantee contracts (unlike other lenders), were economically reasonable and reasonable, that all amounts paid by borrowers or guarantors should compensate their benefit as a priority to other lenders. BLB must provide such amounts to other lenders, in accordance with the penultimate sentence of Clause 9.7. For example, suppose John has three credit cards: the A card, the B card and the C card. Interest rates for cards are 20%, 12% and 10% respectively. John wants to withdraw from the credit card debt, so he decides to pay the highest interest card first.

Minimum monthly payments on cards are $150, $100 and $75. John pays for the waterfalls. First, he pays the minimum on each card ($325 in total) each month, then sends the A card an additional $800. When the A card is finally paid, it cuts it out and applies the additional $800 per month, plus the monthly payment of $150 that he used to send it to the A card ($950 in total) on the B card. If the B card is paid, John uses the $800 in additional payments, plus the minimum payment of $250 he used to send the A and B cards ($1,050 in total) to the C card until it is paid. The dispute concerned how BLB (as a facility agent) would be required to allocate the amounts collected by borrowers or guarantors among the financing parties under the so-called “payment waterfall” of the loan facility. Payment of the cascade would be insufficient in cases where the sums collected by the borrowers would not be sufficient to fully repay the parties to the financing. The clause in question (which was not included in the standard form of the credit market association) provided that Mr. Justice Flaux rejected the proposition that an agent of the facility could never be held liable for breach costs under a guarantee contract.

In any event, he found that in long-term commercial contracts, there would often be words or phrases that were superfluous or had no obvious meaning. While the court will try to avoid a construction that could render an entire clause insignificant or ineffective, it will recognize the clear and obvious meaning of a clause despite the addition of a contingen language

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