A credit agreement is the master legal document that governs a commercial lending relationship. Whether for a bilateral bank loan or a broadly syndicated facility, the credit agreement defines the mechanics of borrowing, the obligations of the borrower, the rights of the lenders, and the consequences of default. For sophisticated credit professionals, understanding the architecture of a credit agreement is a core skill.
The agreement begins with definitions — the foundational section that defines every capitalized term used throughout the document. Critical defined terms include "EBITDA" (typically with a negotiated list of addbacks), "Consolidated Net Income," "Indebtedness," and "Change of Control." How these terms are defined often has more practical impact on the deal than the stated covenant levels themselves.
The representations and warranties section requires the borrower to certify facts about its financial condition, legal authority, compliance with laws, and absence of material adverse change at closing and, in some cases, at each borrowing. A breach of a representation constitutes an event of default.
Affirmative covenants outline what the borrower must do: deliver financial statements on a defined schedule, maintain insurance, preserve its corporate existence, pay taxes, and comply with applicable law. Negative covenants restrict the borrower from taking certain actions — incurring additional indebtedness, creating liens, making acquisitions, paying dividends, or disposing of assets — without lender consent or within defined baskets.
Events of default define the circumstances under which the lenders can accelerate the loan and demand immediate repayment. Common events of default include payment failures, covenant breaches, cross-defaults to other debt, bankruptcy, material adverse change, and change of control. Upon default, the required lenders (typically a majority by commitment) must vote to accelerate — unanimous consent is not required.
The agency provisions define the role of the administrative agent — typically the lead arranger — who coordinates administrative functions, holds security interests on behalf of the lender group, and serves as the counterparty to the borrower in day-to-day administration of the facility.