Facility Close

Choosing a term sheet feels like the end of the work. The business has sized its facility to the downside, approached several lenders, compared their covenants and picked the best offer. What remains is legal drafting, which feels like a formality.

Drafting is where the terms move. A term sheet runs to a few pages and a senior credit agreement to a hundred or more, and the lender's counsel fills the gap with definitions, conditions and obligations, most of them standard. A few are not. The EBITDA definition used for the covenant test comes back without one of the add-backs the business's lender pack uses. The owner's personal guarantee turns up as a condition of closing. A prepayment clause reaches further than the term sheet suggested. None of this is unusual, and each change is easiest to accept in the last week before closing, when everyone wants the deal done.

Facility Close is the driver that holds the line between the term sheet and the signature. It moves levered cash flow by putting the sized debt in place on documented terms, so that interest and principal become real deductions and the security and guarantees behind the debt sit with the company instead of the owner.

Closed on the chosen terms

The close has to produce a facility on the terms of the term sheet the business chose, and a debt schedule listing every facility with its rate, amortization, security, covenants, prepayment terms and maturity, each field traced to the executed agreement.

The covenant definitions matter most. EBITDA, cash flow available for debt service and the permitted add-backs should mean the same thing in the agreement as in the lender pack, and if counsel cannot get the agreement to match, the pack changes before closing. It sounds like housekeeping. A business whose pack reports coverage on one definition while the agreement tests it on another has two coverage figures, and the one the lender will act on is the one nobody has been watching. Two years of on-time packs built under Lender Reporting are worth exactly as much as their definitions' agreement with the covenant.

The debt schedule is then built from the signed agreements by the finance lead and checked by counsel against the documents. A schedule drawn up from the term sheet, or from memory, records what the business expected to sign. Each rate, date, covenant level and prepayment term is traced to the clause it comes from, and each facility gets a refinancing start date, set at closing. A buyer or a later lender can then take the schedule as the debt the documents create, and has no reason to discount for the chance that it is something else.

Guarantees that belong to the company

The other half of the close concerns the owner personally. No personal guarantee by the owner should survive closing, or each one should be capped with a written release trigger agreed with the lender, such as four consecutive quarters below a stated leverage, and no personal asset of the owner should secure company debt. This is what lets the debt stay with the company when the owner leaves, which is the durability a buyer otherwise discounts for.

The release is negotiated as a term of the facility, compared across the competing term sheets and agreed before closing, because that is when the business has leverage over it. Before closing, several lenders are interested and their positions on guarantees can be compared like their rates. After closing there is one lender, and it has no reason to give up security it already holds. An owner who signs a guarantee "for now" because it is the fastest way to close is usually still signing it at the second renewal.

Where the lender insists on security, the company's own assets replace the owner's. Charges over the owner's home or savings are discharged, the company's assets are charged instead, and someone checks the registrations, because a discharge that was agreed and never registered leaves the owner's asset encumbered on the public record.

Why the guarantee is a business problem

Owners often treat the personal guarantee as a private matter between themselves and the bank, a risk they chose to carry. A buyer reads it differently.

When a business with a guaranteed facility is sold, the guarantee has to come off, and the lender will not release it until something replaces it: the buyer's own guarantee, which few buyers will give, or a refinancing. Either way the lender becomes a party to the sale, with a consent to give and a view on the timing. A buyer facing that consent prices it, through a longer timetable, a condition in the purchase agreement or a lower offer.

This is the one place on the driver where the release touches value. It does not make default less likely; it moves the risk from the owner to the lender, who prices it in the facility's terms. What it changes is the cost of selling, because a buyer no longer needs the lender's consent, and that narrows the discount for illiquidity. Everything else the driver does is permission: documents that make it legitimate to value the owners' cash directly, and a cleaner structure that can draw a better price from a buyer.

How a buyer's counsel reads the close

When the business is later sold or refinanced, the buyer's counsel reads the closing as closely as the business's own counsel did, asking what this debt will do to the sale.

Counsel starts with whether the debt schedule matches the documents. A schedule built from the signed agreements, with every field traced, is read once and relied on. One that disagrees with the documents on a rate or a date suggests the business does not know its own debt, and from then on every term is checked by hand. Next comes the change of control. Most senior agreements let the lender demand repayment if the business is sold, so counsel wants to know the prepayment cost, which the business compared when it chose the term sheet. Last is the guarantee, and whether its release depends on the lender's goodwill or on a trigger written into the agreement.

A business that closed its facility well answers all of this from the file. One that did not finds its sale timetable depending on its lender.

What it does to value

Facility Close carries no rank of its own on the tree, and its effect in the cash flows is zero: the guarantee release transfers risk, and the tax shield is counted on Facility Sizing. What it contributes is the documents that make the equity valuation permissible and the release that removes a buyer's objection and lowers the cost of exit.

The incentive follows from that. The seat paid for the driver is the owner's own retained seat, measured against guarantee exposure and conditions still open at closing. The full award comes at release, part of it for a written release path with a date, and nothing while a guarantee stands without one.

What has to be in place first

The close executes a decision already made on paper, so it needs the chosen term sheet from Facility Sizing. It needs the shareholder loans subordinated under Capital Structure File, since a senior lender will not close with shareholder claims ranking alongside its own. And it needs counsel experienced in senior credit agreements, budgeted before the term sheet is signed, because general corporate counsel reading a credit agreement for the first time will miss the clauses that matter.

Knowing that it works

Until closing, the conditions precedent still outstanding are counted every week. After it, two figures stay live: the share of debt schedule fields traced to an executed document, and the owner's guarantee exposure in dollars, with the date of the next release test.

Computing one covenant test from the pack on the agreement's definitions, the owner should get the answer the finance lead reported; a different answer means the definitions were never aligned. And the owner should be able to state the remaining guarantee exposure and its release trigger, in dollars and dates, without the documents open.

Why it slips, and what holds it

The guarantee tends to come back at renewal, because the bank asks for it and giving it is the path of least resistance. The defence is to write release into every renewal as a fixed condition, negotiated by the finance lead, so that reinstating a guarantee takes a decision recorded in writing with the owner's signature on it.

The other failure is a maturity that arrives without a committed refinancing. Every facility has carried a refinancing start date on the debt schedule since the day of closing, and the lender pack shows it every month, so a maturity should be a date everyone has been watching for well over a year.