Automating and Updating Facility Agreements: a practical guide
Preparing the first draft of corporate lending and other types of facility agreements manually can be a time-consuming and repetitive activity for finance lawyers. The reasons for this stem from the length of facility agreements based on the Loan Market Association (“LMA”) facility agreements and the number of minor amendments that need to be made to law firms’ precedent agreements to fit the specific loan being worked on.
At echo.legal, we have significant experience automating facility agreements as well as implementing major updates of facility agreements where internal technology teams have not had the time to process LMA and market changes. Frankly, these things can be hard to do, and if you’re interested in pursuing such a project, we’d be delighted to help get things done more quickly, and with the quality benefit of experience.
In case however, that isn’t feasible, we thought we’d share some tips based on our experience of automating and updating facility agreements for clients.
Here are some of our top suggestions for ensuring that your facility agreement automation project is delivered efficiently and with minimum disruption.
1. Agree the over-arching automation design at the outset
Decide at the outset whether the facility agreement is to be automated as a standalone agreement or will form part of a document suite (which may include security documents, intercreditor agreements etc). Given that ancillary documents are usually prepared at a later stage of a transaction, check whether users require the flexibility to be able to generate ancillary documents as standalone documents or as part of the suite. Also important to consider is whether the ancillary documents will be shared between different types of facilities and, if so, design the automation to support this sharing.
2. Avoid unnecessary over-automation
We have encountered instances of facility agreements having been overly automated by clients which not only increases the testing burden but also the time taken by users to create a first draft of a facility agreement. We’ve even been engaged to simplify and reduce automation!
When automating a facility agreement, don’t forget to reflect on whether an end user is likely to have all the information they require to complete the automation questionnaire (for instance, information additional to that contained in the term sheet) and whether the data that a user will need to input will only be utilised in one or two places in the agreement.
3. Identifying and addressing drafting gaps
Before automation, review whether your facility agreement precedent contains drafting that is applicable for all alternatives and optional provisions covered by the agreement. For instance, does the drafting adequately accommodate both bilateral and syndicated facilities as well as different types of facilities (such as term and revolving facilities).
4. Use of colour highlighting
Using text colour highlighting to distinguish between different types of provisions within the facility agreement provides a valuable visual guide during the automation and testing phases. We recommend retaining that highlighting until launch of the automated facility agreement. With good document management, you should also consider maintaining highlighted and unhighlighted versions post launch to help implement LMA and other legal or market practice changes.
5. A phased approach to automation and testing
We frequently recommend a phased approach to automation and testing of facility agreements. Not only does this allow for versions of a facility agreement to be released to users in stages but it helps reduce the testing burden for the subject matter experts and helps to focus their testing.
Next Steps
Most of these tips apply just as well to automating security documents, legal opinions and other documents used by the Banking/Finance practice. Many firms also consider automating different types of facility agreements such as those used for real estate financing and developing markets.
At echo.legal we have a wealth of experience helping law firms no matter their precedent requirements. If you’re considering automating your facility agreements, or are struggling to keep them updated in a timely manner, we’d love to help you get it right the first time.
If you are a law firm or a legal team looking to automate your finance documents – whether or not based on the LMA format, get in touch with Julie Saliba or Will Sumners for a conversation on how automation can work best for you.
Frequently Asked Questions
Q: What is a facility agreement?
A: A facility agreement (also called Credit Agreement or Loan Agreement) is an agreement between a lender (or syndicate of lenders) and a borrower that sets out the terms and conditions governing a loan, including drawdown, repayment, interest, covenants, and events of default.
Q: Why do law firms and banks automate facility agreements?
A: Facility agreements are often lengthy and complicated. Automation gives firms and banks a faster and more consistent way to generate loan documentation.
Q: How do law firms get started with automating facility agreements?
A: Start by defining the base document. In the United Kingdom, this is often based on one of the precedents developed by the Loan Market Association (LMA). Next identify inter-related areas of the documents where manual drafting is time-consuming or risky. It can help to create a questionnaire ahead of time to look at data flow and, crucially, which data points are likely to be known upfront. Start with a small number of questions and build up from there.
Q: Can other banking documents benefit from an automated facility agreement?
A: Yes. Many firms take advantage of the questionnaire and automation points already created to leverage a quick start on ancillary documents such as guarantees, intercreditor and security agreements which leads to their faster generation.
Q: How long does it take to automate a facility agreement?
A: A focused, well-scoped project can launch in a few weeks. Broader implementations with complex logic or integrations may take longer.