Legal Documentation

You will sign a stack, not a document, and each agreement in it allocates a different obligation to a different party. Originators who read only the credit agreement discover during the first reporting cycle that their operational obligations sit mostly in the servicing agreement and the schedules attached to it, neither of which their operations team has ever seen.

What each agreement in the stack does

The exact composition varies with structure, jurisdiction and provider. The set below illustrates a common arrangement in which receivables are sold to a separate borrowing vehicle that grants security over them. Other structures exist: an operating company may borrow directly and grant security over loan assets it continues to own, in which case there is no sale agreement and the security package looks different. Establish which structure you are in before mapping the documents.

Read the stack as a system rather than as eight separate documents. Cash arrives under the servicing agreement, is applied through the waterfall defined in the credit agreement, moves through accounts governed by the control arrangements, and produces reports whose format sits in a schedule. A change to any one of those four points affects the other three.

The same people appear in different capacities

Your operating company will often appear twice: once as seller under the sale agreement and once as servicer under the servicing agreement. Those are separate roles with separate obligations, separate termination provisions and, sometimes, separate consequences if something goes wrong. The borrowing vehicle, typically a special purpose vehicle, is the borrower and the owner of the receivables even though your people do all the work.

Build a one-page party map before the first draft arrives: every entity, every capacity it holds, and every document it signs. Then check that each obligation lands on an entity that can actually perform it. Obligations occasionally get drafted onto the borrowing vehicle when the vehicle has no employees, no systems and no ability to comply without the operating company acting for it.

Signing, effectiveness and first funding are three events

Signing is execution of the documents. Effectiveness is when the conditions specified in the agreements have been satisfied or waived. First funding happens when the conditions to a draw are met, which typically include a draw notice given within the required period, a delivered borrowing base certificate, representations repeated and true, no default continuing, security steps completed, and any legal opinions delivered in agreed form.

Conditions to effectiveness and conditions to first draw are often different lists, though they can overlap or be satisfied at the same time, and some are capable of waiver by the provider. Plan your cash needs against actual funding rather than against signature. Originators sometimes commit to purchase receivables on the assumption that signature means money, then find a perfection step or an opinion outstanding. Ask the provider to walk the closing checklist with you and mark which items sit in which category, and which the provider would consider waiving.

One definition, one number, everywhere it appears

Defined terms propagate through the stack. Cutoff date, collection period, determination date, eligible receivable, advance rate, concentration limit, reserve formula, servicing fee, maturity date. Where a term is intended to carry the same meaning everywhere, define it once and cross refer rather than restating it, because restatement is how two versions of the same term come to exist.

Not every similarly named date is meant to match. A servicing agreement may deliberately continue beyond facility maturity to cover a wind-down, or end earlier if a replacement is arranged, and reporting dates in different agreements can serve different legal purposes with different recipients. The test is whether the drafting reflects an intention someone can articulate, not whether the dates are identical. Compare like obligations with like.

Build a definitions register while you review: the term, the document that defines it, the exact clause reference, the current wording, and every other document that uses it. Update it on each turn of drafts. It catches errors that are expensive to fix after signature, when correcting them requires an amendment and the approvals the documents specify for that change.

Apply the same treatment to numbers. The advance rate in the term sheet, the credit agreement and the borrowing base certificate template should be identical. The cutoff date in the sale agreement schedule should match the tape supporting the initial calculation. The servicing fee in the fee letter should match the servicing agreement.

A consistency review, worked through

Here is what a real consistency review turns up on a first facility, using fictional findings.

None of these are exotic. They arise because drafts are assembled from precedents by different people under time pressure. Each can become a live dispute later, because your operations team will follow whichever document they were given, and the provider will test compliance against whichever document its monitoring references. In the maturity example above, assume both parties intended the two dates to match. Record that conclusion in the review file alongside the fix, so a later reader can see the difference was considered rather than missed.

Run the review as a dedicated exercise with a checklist, not as a by-product of reading each draft in isolation. The conflicts only appear when documents are read against each other.

What belongs with counsel

This page maps functions and parties. It does not resolve legal questions, and several of the most consequential questions in the stack are legal ones that turn on drafting, jurisdiction and facts specific to your structure. Route the following to counsel and expect substantive answers rather than reassurance: enforceability of the obligations, how the transfer of receivables is characterised, what steps are needed to make the security effective against third parties and by when, insolvency analysis, licensing and regulatory permissions, and the treatment of any consents required under your existing contracts. Take tax treatment to a tax specialist and confirm the accounting consequences with your auditor, since a legal characterisation does not settle either.

Securities-offering disclosure is another specialist question when the financing involves an offering. Other disclosure and reporting duties can arise under law or contract even without a securities offering. A private bilateral warehouse loan does not automatically trigger securities disclosure requirements. Where an offering is contemplated, SEC staff interpretations on asset-backed securities indicate that what must be disclosed depends on the type of offering and the structure of the assets involved, so the applicable requirements are a matter of analysis. Ask counsel to establish whether any offering obligations apply before you plan financing that depends on the answer.

One practical instruction to your counsel is worth giving explicitly: ask them to identify which provisions give the provider discretion, and what standard applies to its exercise. Those provisions shape how the facility behaves month to month, alongside the event of default definitions that usually receive more attention.

Before you sign

• The definitions register is complete and every term resolves to one location.
• The closing checklist separates conditions to effectiveness from conditions to first draw, with owners and dates.
• Every schedule is final, with no placeholders left to be completed after signing.
• Signatories are authorised under the relevant corporate approvals, and those approvals are documented.
• Notice details, account details and delivery addresses have been checked by the people who will use them.
• Your operations team has read the reporting schedules and confirmed they can produce every deliverable on the stated timetable.
• A calendar of dated obligations has been drafted from the final agreed documents, with a note to confirm every date against the executed versions immediately after signing.

The commercial positions that feed into this stack are negotiated earlier, and the availability and discretion points worth settling before drafting begins are set out in term sheet negotiation. The sequencing from final drafts to first draw is covered in getting to close.