Credit Agreements

Grab one and give it a read with a red pen. Really try to make sure you understand *precisely* what each section is saying. Translating from legalese can be intimidating, but I found that if you just read it and try to put it in your own words, it will start to become natural to you. A great example of attention to detail is things like an assignment of leases/rents. You may not encounter these in corporate banking, but you'll see what I'm driving at:

Some states allow for an absolute assignment of leases and rents when encumbering a property. Meaning that when the owner of the property signs the assignment, they are *absolutely* assigning to the lender the right to receive and collect all rents generated by that property. The lender then, through their benevolence, simply permits the owner to collect rents on the lender's behalf during the term of the loan. Meaning that right can be revoked at any time by the lender and the lender can legally require all tenants to send the lender their rent checks directly. Some states don't allow for an absolute assignment and just give the lender a security interest in those rents (closer to the concept implied by the name of the document itself). The actual document may or may not use the word "absolute" when it is describing what security interest the owner is granting to the lender, but I assure you it is clear in the language if you parse it word for word. I have had a borrower walk away from the closing table because they were one of those that read every single page of the loan documents and they saw that and refused to allow us saying they were the owner; the rents belonged to him and he wasn't going to irrevocably give up his rights to it. We said "OK but understand that any lender you deal with is going to have their documents say the same thing because the state of XX allows for that." He said BS but ended up calling us back a week later asking to come in and complete closing because we were right. We charged him another $2500 for our troubles and got past it. This was a relatively small transaction so it was a take it or leave it situation but that's the kind of thing that borrower counsel will pick up and negotiate over in a corporate deal. 

Another nuance that is a good example is guaranties (again, you may not see these much in corporate space, but could be relevant if you have corporate guaranties for a subsidiary or corporate guaranties on leases for real estate owned by 3rd parties). This also depends on the state, but to a lesser extent: the structure of a guaranty could be that of "performance" or of "payment." The former means that the lender simply wants to receive the payment amount stated in the promissory note on the 1st of the month, every month. If the borrower can't make that payment; then the guarantor is obligated to make the payment. This keeps the loan performing and is what the lender typically wants more than anything else. That situation is completely different than when a loan stops performing, collateral is liquidated, and the lender then pursues the guarantor for the remaining balance. That remaining balance will definitely include the accrued interest that accumulated during that period of nonperformance/liquidation (and that rate will be the default rate of interest, too!) but during that interim period the bank received nothing and was carrying an impaired loan with expensive credit costs. That accumulated interest is to the borrower's advantage because they got to keep their cash (simply making the promise that they'll make the bank whole at the end) and its a hefty bargaining chip when it comes time to negotiate final resolution (ex: bank, I'll pay you 90% of what I owe today because the default rate of interest is high or we can keep litigating this in court for additional costs) That is a guaranty of "payment." Borrower counsel may negotiate hard to have it be the latter but savvy lenders will really want the former. The actual wording in the document is what makes all the difference and it may or may not say "this is a guaranty of [payment/performance]." You should be able to tell which by parsing the language and understanding how the change could impact the bank's position in the event of default.