Summer Sunset September 2021 | Issue 142 – Fast Cash: Swingline Loans in Fund Financing | Cadwalader, Wickersham & Taft LLP
Over the past few months, we have seen several requests to include a swingline facility in demand loan documentation for syndicated facilities. Swingline Loans are normally made available as part of a revolving credit facility by one of the lenders referred to as the “Swingline Lender”. Swingline loans are designed to give the borrower faster access to funds than would otherwise be permitted by the notice periods prescribed in the credit agreement, which generally require at least three business days’ notice for loans. in Eurocurrency and one business day’s notice for base rate loans. In addition to offering same-day financing, Swingline facilities also allow the borrower greater flexibility by allowing Swingline loans to be applied for later than the date of financing. Swingline loans can be funded on shorter notice as they are only advanced by a single lender, which is often the lender acting as administrative agent.
Because a swingline facility is often financed by a single lender, there is often greater flexibility in the amount of loan that can be requested. A revolving line facility often gives the borrower access to loans in a lower minimum amount than would otherwise be required for a syndicated loan from all lenders participating in the credit facility.
Swingline installations have several key features. First, the Swingline Lender is usually obligated to extend Swingline Loans only within its Revolving Credit Commitment and is not obligated to extend Revolving Loans and Swingline Loans beyond that commitment. In other words, the Swingline facility is part of, and not in addition to, the overall commitment of the bank serving as the Swingline lender. If the revolving credit facility is fully funded, the revolving line facility may not be drawn until a portion of the facility has been repaid. Second, the maximum swingline loan amount is almost always specified as a sub-limit in the total revolving credit commitments. The sub-limit could be equal to the commitment of the bank or banks serving as the main lender, but an amount fixed as a percentage of this commitment is very common since an outstanding loan would not allow the commitment of the primary lender to be fully available for a swingline loan. Third, swingline loans are intended only as a short-term stopgap until a revolving credit borrowing from the entire syndicate can be made. As such, Swingline loans are normally required to be repaid no earlier than (i) two to five business days from the date of funding and (ii) the date of the next regular borrowing under the credit agreement. Finally, if for any reason the Borrower fails to repay the Swingline Loans within their prescribed due date (including due to an event of default or intervening bankruptcy), the other Revolving Credit Lenders will be unconditionally obligated, on a joint and several, to buy interests in the swingline loan so that the risk of the swingline loan is shared proportionally among all revolving credit lenders.
Another key point is that swingline borrowings almost always bear interest at the base rate and, in the United States, are almost always limited to dollar-denominated loans. Further, the leasing facility is not intended to permit same day borrowing and repayment to avoid incurring interest. We almost always see the Swingline facility drafted to require that a Swingline loan requires the payment of interest at the base rate for at least one day.
A common syndication strategy is to establish a credit facility for the purpose of future syndication. In these cases, the documentation may include the mechanics of the swingline facility, but the functionality of these provisions does not apply until at least one lender other than the swingline lender joins the facility.
Finally, the conditions precedent to the granting of a swingline loan reflect those of a conventional revolving credit loan. The Swingline facilities are not intended to be a means of avoiding join requirements applicable to a new borrower, in particular know your customer requirements. In other words, if the Swingline lender has received all necessary KYC approvals, but not one or more other syndicate members, the Swingline facility is not intended to be a means of giving the new borrower the access to funds. short term until full KYC checks are completed for all syndicate members. The Line of Credit Facility is only available to borrowers who are fully associated with the Credit Facility and have fully satisfied the loan documentation requirements as they apply to all syndicate lenders.