Tips for getting and keeping debt funding – Part One

By Kristen Grover (partner) and Peter Williams (solicitor),
McCullough Robertson Lawyers

The reality is that whilst significant upheaval in global financial markets initially led to a freeze on lending for resource projects, there are growing signs of improvement in the resource finance market. Although, financing resource projects of almost any size and type in Australia has become considerably more challenging than at any time in the last 10 years. Getting (and keeping) debt funding in place is causing a large number of resource companies a considerable amount of grief.
Although it is cold comfort for companies currently struggling to refinance, it is worth putting the current funding difficulties in context: the market for resource funding exploded in recent years given the significant liquidity in financial markets, high commodity prices and an increased appetite (by banks and borrowers) for spending on capital-intensive assets and projects. There were a number of domestic and international banks wanting to push into the resource funding arena in Australia and bank competition for resource finance deals was often fierce.
What has happened over the last twelve months is a rapid reversal of that trend. After boom years typified by major expansions and high debt levels, the sudden collapse of financial and commodity markets and the hasty departure of a number of foreign banks from the domestic market have made securing funding for Australian resource projects extremely difficult. The sad fact is that the speed of that change caught many resource companies unawares and not all have managed to stay afloat, with several forced to call in administrators when banks refused to extend loans or companies were unable to refinance critical funding.
Despite the obvious increased difficulty in obtaining finance, there are still lenders willing to provide the capital necessary to fund projects. So what needs to be kept in mind when it comes to getting (and keeping) debt finance in place in the current economic climate?

1. You can still negotiate
Despite what the banks and their lawyers will tell you, you can - and should - negotiate the terms of your finance carefully. You might be provided with ‘standard form’ finance documents but that does not mean you cannot negotiate important changes to those documents.
Be wary of the bank that outright refuses to make changes to its ‘standard’ documentation: in our experience it is indicative of how flexible they will be to deal with over the course of the loan. Notwithstanding that banks and their lawyers will often argue that making any changes to ‘standard form’ documents will incur increased bank legal fees, failing to make the necessary changes will put the company at far greater risk of having its finance withdrawn, with very little notice, for non-material technical breaches.
Admittedly in the current climate you may have a limited ability to negotiate wholesale changes to the documentation or to negotiate significant changes to margins and fees, but over the life of a loan, even small changes to the terms of the finance can be extremely important.
Given their own funding constraints, banks are now seeking to provide shorter terms for loans, increasing the refinancing risk for long-term projects that extend beyond the term of that loan. For example, it is now quite normal for finance, even for long-term projects, to be provided by the bank on a rolling yearly term.
Prior to the end of the current year the bank will consider and determine whether to continue to provide finance for the coming year. That decision is ordinarily communicated to the borrower only a short time - often 30 days - before the end of the current term. Negotiating a three-month period, rather than accepting the standard 30 days, will give the company some vital breathing space to seek alternative funding if the bank does not agree to roll over the loan beyond its initial term.
Borrowers should also be aware of the current trend where banks wish to decrease their exposure to the resource industry generally or to a particular borrower. That trend is to rely on fairly minor technical breaches to call a default and thereby require the borrower to repay the loan in full within a short period of time.
‘Standard’ finance documentation (if not appropriately modified) will ordinarily allow for the bank to call technical defaults for a wide range of things that most companies would not ordinarily consider might amount to a default on the loan. For example, a failure to provide audited accounts to the bank within the required period of time, notwithstanding the delay might be caused by the auditor rather than the company, can be sufficient for a bank to call default under many ‘standard’ loan documents.
Borrowers must be careful to read the finance documents so that they know the potential impact of something as seemingly insignificant as late provision of accounts. If necessary, the company should negotiate a realistic timeframe for such as things as providing accounts to the bank so that issues do not arise later.
Failing to make the necessary changes at the point of entry into the finance documentation can also mean a far greater compliance burden on the company and management over the life of the loan. Most finance documents will include a long list of activities for which the company needs bank consent. If those activities include things which are part of the everyday business of the company or which the company expects to undertake over the life of the loan, then those activities should be carved out of the consent provisions.
One Australian bank’s ‘standard’ resource financing documents includes a requirement to provide prior written consent where the company is to cause damage to the land on which its business is carried out. The real question is: what mining company does not cause daily damage to the land on which its business is located in order to carry out its very business? Here again, some time and effort negotiating reasonable terms in the finance documentation will avoid the company and management having to seek the bank’s consent every second week – or failing to seek that consent and then being regarded as being in default by virtue of its failure to obtain that consent.

For more information tel: +61 (0)7 3233 8757 or email: kgrover@mccullough.com.au

The read the second part of this story click here