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Business Law Services Alert: Demystifying bank jargon

You need a new C&I loan. Your bridge loan is about to mature. Do you want interest based on LIBOR? Do you need to put a collar on the interest rate? The bank is not willing to provide an “air ball” given the current state of the economy. The banker says that to get a loan approved, it will need to be an ABL with a borrowing base and many financial covenants. How’s your EBITDA? What’s your current DSCR? Are you confused, or just overwhelmed?

Just like many other professions, the world of banking is filled with abbreviations, slang and jargon. Understanding banking terminology is key to managing your financial relationships and to understanding your loan documents. Your failure to have at least a rudamentary understanding of these words can restrict your ability to effectively communicate with bankers and might make it hard for you to understand exactly what is being offered to you by your bank or a potential lender.

It is impossible to list and define every key term that you may hear in conversations with a banker, or in a banking term sheet, commitment letter, or loan document. Hopefully this brief article will provide a few basics and pointers.

Let’s start with some basic terms used in documents. If you come across a term you don’t know, the first thing to notice is whether or not the word is capitalized. If the word is capitalized (and it is not a proper noun or the first word of a sentence), there is a good chance that the word is a defined term. Look to see if the document has a glossary of terms or a “definitions” section. If these are not provided, look to see if there is a sentence in the document that refers you somewhere else for definitions. For example, you might see a provision that states, “capitalized terms used herein that are not defined herein are used herein as defined in. . .” (e.g., another document or the Uniform Commercial Code.)

The problem with legal documents is that often one definition might lead you to two others, which might lead you to others, that might lead you to a different document or statute, or nowhere at all. The following is a sample loan agreement’s definition of Debt Service Coverage Ratio (this would be the DSCR referred to in the first sentence of this article).

Debt Service Coverage Ratio”: shall mean for any period the ratio of (a) EBITDA, to (b) the sum of (1) the interest expense, plus (2) all principal loan payments with respect to the Indebtedness and the Liabilities scheduled or otherwise required to be paid during such period.

This definition requires you to figure out three additional defined terms, “EBITDA”, “Indebtedness” and “Liabilities”. The sample loan agreement happens to have a definition of EBITDA but also has the following statement at the end of the definitions section, “except as otherwise defined in this loan agreement or the other agreements, any accounting terms used in this loan agreement which are not specifically defined herein shall have the meanings customarily given them in accordance with GAAP (Generally Accepted Accounting Principles consistently applied from time to time.)” If the loan agreement did not have a definition of EBITDA (which some do not), you need to look to GAAP instead (and to do that may require you to read an accounting treatise or become a certified public account). Just to confuse things further, the loan agreement adds, “unless the context indicates otherwise, all other words, terms or phrases used herein shall be defined by the applicable definition therefor, if any, in the Uniform Commercial Code as adopted by the State from time to time.” You would need to at least know that EBITDA was an accounting term to know to look to GAAP instead of the Uniform Commercial Code for the appropriate definition. A couple additional possible wrinkles may result from poor drafting; the unknown term might be capitalized and might not be defined in the document, GAAP or the Uniform Commercial Code or the term might be defined somewhere in the document but without a reference to the definition in the glossary or definition section (this is when the search function of your word processing software comes in handy). The confusion continues.

Trying to figure out the meaning of unknown terms in the comfort of your own office with a variety of tools like a glossary, a computer and phone to call your attorney or accountant is one thing, but trying to have an intelligent conversation about banking in person without these tools can be intimidating and even risky to your ability to obtain financing. For example, if your company is in financial distress, it may only qualify for an asset-based loan (this would be the ABL from the first paragraph and basically means a loan fully-secured by the assets of the company, the value of such assets being monitored on a frequent basis). A potential lender may get frustrated trying to explain the terminology and mechanics of this sort of loan and might fear that your unfamiliarity with the terms and loan structure could make the loan difficult to close.

So what can you do to better prepare yourself for a meeting and the onslaught of unknown terms? First, I suggest preparing for discussions with lenders well in advance. Read your existing loan documents to become familiar with some of the terminology and some of the specific mechanics and terms of your current loan. If you don’t have a current loan, search the Internet or ask business advisors and contacts for help. Use the Internet, it is filled with banking glossaries, dictionaries and other resources. If you are wondering what any of the terms I mentioned above mean, just type into any search engine, “C&I,”  “airball,”  “LIBOR,” or “EBITDA” together with “banking” or “finance” and many results will appear.

The quickest and easiest way to handle a specific type of jargon, be it bank jargon, legalese, or accounting mumbo jumbo, is to rely on your experts for support. Bring your accountant, your lawyer or your financial advisor with you to meetings with the bank to help demystify what you are being told. Or get them on the phone with you when you are having discussions during a call. Let your advocates help to advance your position and get you the best possible deal available. It takes a long time to understand the terminology of any specialty area. Let the people who already understand the language help you to understand it as well, and don’t be afraid or embarrassed to ask questions when you don’t understand something because of unfamiliar terminology.

For more information, please contact:

Joel S. Dalinka
312.642.2141
jdalinka@mcdonaldhopkins.com

Business Counseling

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