An Underwriting Agreement governs the sale of securities by underwriters on behalf of an issuer. This playbook provides insights on indemnification, representations, and allocation of liability among underwriters.
Why This Matters: Uncertain prepayment provisions can trigger unintended penalties or opportunistic exits. Well-defined termination terms provide exit flexibility and protect economic interests on both sides.
Negotiation strategy
If you're the Lender:
Negotiate for flexible prepayment options with minimal penalties. Ensure notice periods are reasonable and compensation formulas are based on market standards.
If you're the Borrower:
Secure compensation for early repayment to cover potential losses. Advocate for clear termination conditions to manage credit risk effectively.
Essential elements
1
Prepayment Rights
Terms for early loan repayment.
2
Termination Conditions
Criteria for ending the agreement.
3
Compensation Formula
Method for calculating penalties.
Action framework
ACCEPT
Propose edits when notice periods are too short or compensation formulas are unclear.
EDIT
Reject clauses that impose excessive penalties or lack clear termination conditions.
ADD
Add clauses if prepayment or termination terms are missing.
PRO TIP
Always align prepayment and termination terms with current market practices to avoid disputes.
Example clauses
FAVORABLE
Preferred Prepayment Clause
"The Borrower may prepay the loan in whole or in part, subject to a 30-day notice period and a compensation formula based on yield maintenance."
NEUTRAL
Standard Termination Clause
"Termination is permissible under defined conditions with a 60-day notice period."
UNFAVORABLE
Excessive Penalty Clause
"Prepayment is allowed only with a 90-day notice and a punitive make-whole provision."
Fallbacks
High-Risk Projects
In high-risk projects, ensure termination terms allow for quick exits to mitigate potential losses.
Cross-Border Transactions
Consider jurisdiction-specific requirements that may affect prepayment and termination rights.
Volatile Markets
In volatile markets, flexible prepayment options can provide strategic advantages.
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