News last week that Co-Op Bank have been calling in property loans, despite the fact that they are generally ‘performing’, is a reminder that a Term Loan is only a commitment on the part of the bank as long as you are meeting your side of the deal.
We see fewer cases of RBS/Lloyds calling in established loans, simply because they have done so much of it since 2008. However Co-Op Bank are the latest bank to have to ‘repair’ their balance sheet and one way of doing that is get larger loans ‘off their books’. They are legally entitled to do that if a borrower breaches covenant(s).
Such Covenants are set out in the Facility Letter (sometimes ‘telephone directory’ sized) and might range from a simple stipulation that year-end accounts (or quarterly figures) should be provided within a certain timeframe, or for a requirement for periodic valuations of property with required LTV’s to be met. Another common covenant might be that adjusted net profits have to show that the borrower generates sufficient cash to cover it’s loan repayments with an added comfort level.
It is risky to breach such covenants in the current climate. So a challenge:
- Do you know what your loan covenants are? (are you sure?)
- Do you check how you are doing against them?
- Do you diarise to check them periodically? (don’t leave the bank to surprise you at the annual review)