Draft Loan Agreement

Loan Agreement / Facility Agreement

When to use this

Use this skill when a lender (bank, private credit, bilateral, or syndicated) is extending credit to a borrower (corporate or individual). This skill covers the full loan agreement from facility type through representations, covenants, events of default, and governing law.

Distinct uses:

• Bilateral term loan: one lender, one borrower, single drawdown
• Revolving credit facility: multiple drawdowns up to a cap; repayable and re-drawable
• Syndicated facility: multiple lenders acting through an agent (LMA-style); much more complex — this skill gives the core; engage banking counsel for syndicated structures
• Islamic financing: KSA and other GCC clients frequently prefer Sharia-compliant structures — see Jurisdictional notes below

For a simple short-term promissory obligation, use [[draft-promissory-note]] instead.

Required inputs

Document structure

1. Definitions

Core definitions: Drawdown Date, Availability Period, Interest Period, Interest Payment Date, Repayment Date, Margin, Reference Rate, Mandatory Costs, Market Disruption Event, Event of Default, MAC (Material Adverse Change/Effect), Finance Document, Security Document.

2. The Facility

• Type: term loan / revolving credit facility / multi-currency facility
• Amount: the committed amount; if revolving, the maximum outstanding at any time
• Purpose: state the specific permitted use of proceeds (working capital, acquisition, refinancing, construction) — enables the lender to monitor and, in some cases, restrict misuse
• Availability period: window during which the Borrower may draw down

3. Conditions Precedent

What must be delivered and satisfied before the first drawdown:

• Corporate authorization documents (board resolutions, constitutional documents, good-standing certificates)
• Finance documents duly signed
• Security documents perfected
• Legal opinions from counsel to each party
• No-event-of-default certificate from Borrower
• For acquisition facilities: evidence of acquisition completion or conditionality
• KYC/AML documentation (see [[draft-kyc-procedure]])

4. Drawdown mechanics

• Drawdown notice: form, timing (typically 3-5 business days before drawdown date), irrevocability
• Conditions to each drawdown (for revolving): representations and warranties true; no event of default
• Minimum drawdown amount
• Banking days and cut-off times for same-day value

5. Interest

• Reference rate: EIBOR (UAE), SAIBOR (KSA), SOFR (USD), EURIBOR (EUR), SONIA (GBP) + Margin; reset at start of each Interest Period (1, 3, or 6 months typically)
• Market disruption provision: if the Reference Rate is unavailable (IBOR transition), the lender may quote a replacement rate; include ISDA fallback language or specific contractual fallback
• Default interest: on overdue amounts, reference rate + margin + penalty spread (typically 2-3%)
• Interest payment dates: monthly, quarterly, or semi-annual in arrears

6. Repayment

• Schedule: attach a full amortization schedule as an exhibit; or for revolving, state final maturity date
• Bullet repayment: entire principal at maturity — simple but creates refinancing risk
• Amortizing: principal repaid in equal (or unequal) scheduled installments
• Balloon: partial amortization during term, large final payment at maturity
• Voluntary prepayment: right to prepay; notice period (typically 5-10 business days); prepayment premium (breakage costs for fixed-rate; sometimes a penalty for early repayment in first X years)
• Mandatory prepayment events: receipt of insurance proceeds (above threshold), asset disposal proceeds (above threshold), equity issuance (excess cash sweep), change of control

7. Fees

• Arrangement fee: one-time upfront; typically 0.5-2% of facility amount
• Commitment fee: on undrawn commitment for revolving facilities; accrues daily; typically 25-50% of Margin
• Agency fee: annual; payable to the facility agent in syndicated deals
• Prepayment fee / breakage costs: covers the lender's cost of unwinding hedges

8. Representations and warranties

Borrower represents and warrants (on signing and on each drawdown):

• Corporate status: duly incorporated, validly existing, authorized to borrow
• Power and authority: board resolutions obtained, no constitutional limitation
• No conflict: execution does not violate constitutional documents, material agreements, or applicable law
• Solvency: not insolvent; no pending insolvency proceedings
• Financial statements: most recent audited financials fairly presented; no material adverse change since date of financials
• No material litigation: no proceedings pending that would have a material adverse effect
• Tax compliance: all taxes filed and paid; no disputed tax claims of material amount
• Environmental: no material environmental liabilities (if relevant)
• Anti-corruption: no violation of applicable anti-bribery laws (FCPA, UK Bribery Act, local equivalents)
• Sanctions: not a Sanctioned Person; proceeds not used for sanctioned activities

9. Covenants

Affirmative covenants (Borrower must do):

• Deliver annual audited financial statements within 90/120 days of fiscal year end
• Deliver quarterly management accounts within 45/60 days of quarter end
• Notify Lender of any Event of Default (or potential Event of Default) promptly
• Maintain insurance
• Comply with all applicable laws and authorizations
• Maintain and operate the business in its ordinary course

Negative covenants (Borrower must not without Lender's consent):

• Incur additional financial indebtedness above a defined threshold
• Create any additional security (negative pledge)
• Dispose of material assets above a defined threshold
• Make acquisitions above a defined threshold
• Pay dividends while in default, or subject to a leverage test
• Change the nature of its business materially
• Make changes to constitutional documents affecting Lender's rights

Financial covenants (tested quarterly or semi-annually):

• Debt Service Coverage Ratio (DSCR): operating cash flow / debt service ≥ [1.20:1] or similar
• Leverage ratio: net debt / EBITDA ≤ [3.5:1] or similar
• Interest coverage ratio: EBITDA / interest expense ≥ [3.0:1] or similar
• Define each component carefully (EBITDA: add-backs; net debt: include/exclude shareholder loans)
• Equity cure: right for Borrower's shareholders to inject equity to cure a financial covenant breach (typically limited to 2 cures in the loan term)

10. Events of Default

Standard events triggering lender's acceleration rights:

1. Non-payment: failure to pay any sum when due (sometimes with a 3-5 day grace period)
2. Financial covenant breach: failing a financial covenant test
3. Other covenant breach: breach of any other obligation; 30-day cure period
4. Misrepresentation: any representation or warranty was false when made
5. Cross-default: default under any other financial indebtedness above a defined threshold
6. Insolvency events: filing, voluntary or involuntary; appointment of receiver or administrator; composition with creditors
7. Enforcement of security: any creditor enforces security against Borrower's assets
8. Material adverse change (MAC): a change that materially adversely affects Borrower's ability to perform
9. Change of control: if control of Borrower changes without Lender's consent
10. Unlawfulness: it becomes unlawful for any Finance Party to perform its obligations

Acceleration: on Event of Default, Lender may declare the facility immediately due and payable, and enforce any security. Specify whether acceleration is automatic (on insolvency) or at Lender's election.

11. Security

Cross-reference to security documents (pledges, mortgages, guarantees) separately drafted. State:

• What security is given by which party over which assets
• When security is required to be perfected
• Cross-acceleration between loan and security documents

12. Governing law and dispute resolution

• DIFC/ADGM: full LMA-style documentation; English law; DIFC Courts or LCIA arbitration at DIFC
• UAE federal: UAE Commercial Transactions Law; onshore court proceedings or DIAC arbitration
• KSA: Sharia-compliant structure required for Islamic banks; Saudi law; SCCA or Saudi Commercial Court
• LB: Lebanese law; Beirut Court of Commerce; or ICC arbitration (common for international bank loans to Lebanese borrowers)

Jurisdictional notes — Islamic finance (KSA, GCC)

Where Sharia compliance is required, the interest-bearing structure must be replaced:

Islamic finance documents do not include an "interest rate" — they reference a "profit rate" or "rental rate." Avoid characterizing returns as interest in KSA-governed instruments.

Note: UAE federal interest law — Commercial Transactions Law (Federal Law 18/1993 as amended) regulates commercial interest; usury provisions limit excessive rates. EIBOR-linked commercial rates have generally been accepted. Verify with local counsel for current position.

Key lender / borrower negotiation axes

Common mistakes

• Incomplete or ambiguous EBITDA definition (add-backs create inflated covenant headroom)
• Vague MAC clause — borrowers use "objective test" arguments to dispute MAC determinations; lenders want subjective
• Missing cross-default threshold — a USD 50k default in a subsidiary triggering a USD 100m facility is commercially unreasonable
• Omitting the equity-cure mechanism when the borrower has private equity backers
• Not specifying which law governs each Security Document separately (security perfection is jurisdiction-specific)

Related skills

• [[draft-guarantee]]
• [[draft-security-agreement]]
• [[draft-promissory-note]]
• [[review-financial-covenants]]
• [[draft-kyc-procedure]]