Learning Objectives:

  • Structure a loan to meet borrower needs and manage bank risk.

  • Identify key loan documentation requirements.

  • Understand how to use loan covenants to mitigate risk.

5.1 Loan Structuring Principles

Loan structuring involves designing a loan that meets the borrower’s needs while protecting the bank’s interests. The IBA programme covers “Types of Commercial Loans and Proper Loan Structuring” . The Connecticut Bankers Association programme covers “Basic credit facilities (Lines of Credit, Revolving Credits, Term Loans)” and “Credit structuring” .

5.2 Loan Documentation

The Connecticut Bankers Association programme covers “Loan Documentation (Notes, Credit Agreements),” “Covenants, Material Adverse Change clauses (‘MAC’),” and “The concept of collateral perfection” . The SMU Academy programme covers “Credit Documentation Requirements and Validation Approaches” and “Key Loan Agreement Components for Lender Protection” .

5.3 Loan Covenants

The IBA programme covers the “Effective Use of Loan Covenants” . Covenants are legally binding terms and conditions imposed to mitigate risks and ensure repayment:

  • Affirmative Covenants: Actions the borrower must perform (e.g., providing financial statements).

  • Negative Covenants: Restrictions on borrower actions (e.g., limiting additional debt).

  • Financial Covenants: Requirements to maintain financial ratios (e.g., minimum DSCR).

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