Having entered into its own hedging arrangements to manage its exposure to swaps, BLB attempted to argue that the “hedging costs” in clause 9.7(a) would include the costs and expenses of restructuring or rebalancing those swap agreements in the event of early termination of borrowers` collateral arrangements. BLB further argued that, according to the penultimate sentence of clause 9.7, the reimbursement of those costs and expenses would prevail over the principal and interest due to the lenders under the Facility Agreement. Landesbank Hessen-Thüringen Girozentrale (better known as Helaba) and the other applicant banks became lenders in 2007 under the facility agreement on their syndication. After the borrowers encountered financial difficulties, discussions took place among the syndicate members about the various restructuring and execution options of the lenders. Borrowers were considerably short of money in swaps, so if they were terminated around the day of the hearing, they would have to pay BLB in the order of GBP 138 million in swaps. Think of the cash generated by a company as a cascade that moves from primary lenders to subordinated lenders. Subtotals help you understand each element of the cash flow cascade I am often asked if the sponsor (equity provider) can include some of its own costs in the cash flow cascade. Because cash flow is so important in project financing, the financial report that is most interesting for lenders and investors is the cash flow cascade, sometimes referred to as the “cash flow cascade”. This is similar to the cash flow statement, but the cash flow cascade indicates the priority of each cash inflow and outflow of the project. And that`s an important distinction! To demonstrate the operation of a cascading payment system, suppose a company has taken out loans from three creditors, creditor A, creditor B and creditor C. The system is structured in such a way that creditor A is the creditor with the highest level and creditor C is the creditor with the lowest level. The agreement on what the company owes each of the creditors is as follows: For example, let`s say Big Company borrowed $100 million from Lender A and Lender B.
If a large company has to make cascading payments, Lender A must meet all of its obligations before Lender B gets anything. The facility agreement required borrowers to enter into a series of interest rate swaps (the Hedging Agreements) to manage interest rate risk over the life of the loan with a “hedging lender” defined as a BLB or other lender that has become a hedging lender. Although BLB as a hedging lender was not a separate party to the Facility Agreement, it was recognized in different parts of the Facility Agreement that BLB also acted as a hedge The cash flow cascade is modeled from the borrower`s perspective as with many syndicated credit facilities, the credit facility started with a single bank (Bayerische Landesbank, London Branch or BLB), which assume a number of roles in addition to that of the lender, including the arranger; Installation agent; Security guard and rescue bank. As might be expected from a syndicated credit facility, the terms of the facility arrangement clearly distinguished the different capacities in which BLB operated. The FACILITY also required borrowers to enter into a series of interest rate swaps (collateral agreements) with BLB as collateral (defined in the Facility`s documents as collateral providers). Although BLB, as a collateral provider, was not a separate party to the Facility Agreement in various locations, the Facility Agreement acknowledged that it was also acting in that capacity. As mentioned at the beginning of this blog, SPVs are not taxable companies in many countries such as the United States, Canada, and the Netherlands. What I mean by that is that the tax is paid by the companies that own the SPV, not by the SPV. In these countries, we don`t see taxes paid in the cash flow cascade. Landesbank and the other applicant banks became lenders under the syndication agreement in July 2007. The facility agreement also provided that the identity of the facility agent and the cover provider could change during the term of the loan and that BLB`s preferred interpretation of clause 9.7(a) would not be viable in this case.
Are federal taxes ahead of cadS in the cash flow cascade? The dispute concerned how BLB (as a facility agent) would be obliged to allocate the amounts received from borrowers or guarantors among the parties to the financing under the so-called “payment cascade” of the credit facility. The payment cascade would apply in cases where the amounts received from borrowers would not be sufficient to repay the financial portions in full. The clause in question (which was not included in the Loan Market Association`s standard form) provided that cascading provisions can often be contentious issues for trade unions, particularly in situations where a default has occurred and the credit transaction involves collateral arrangements. This case is a salutary reminder of the importance of clearly agreeing and documenting where payments related to such hedging agreements rank before or in the event of early termination in the payment cascade. While the English Court has evolved in recent years from a literal interpretation approach to a more contextual or focused approach to the interpretation of contracts, parties should be aware that the starting point for construction is probably still the literal approach. .