Question 4

In a nutshell, syndicate loans are debts that are issued by lenders, majorly international banks to a single borrower for purposes of funding the borrower. Financial covenants are one of the covenant clauses entailed in the syndicate agreements. Financial covenants play several roles including ensuring that borrowers meet the required standards so that the interest and needs of the borrower are guaranteed. By doing this, the borrower becomes able to service their loans at any and required points of the stipulated time. A borrower is capable to repay if they maintain a particular cash flow, amount of equity or profit that correlates to their loans or expenses. Therefore, the covenant clauses act as accounting or financial rations that allows banks as lenders to specify significant metrics that borrowers must meet. Borrowers must ensure that their ventures remain with the stipulated limits every time for the mentioned loan duration. Failing to do that result to the “event of default” that warrants the covenant clause to invoke the right of the lender to claim the whole loan given to the borrower with all interest repaid. To keep the lender informed, the covenant clauses have a “system of periodic reporting” where the lender is informed about compliance status that the borrower’s business is keeping with the covenants.

The other legal effect of covenant clauses like the negative pledge clause is that banks are able to proceed against the specific borrower in case the borrower fails to pay since they understand the creditworthiness of the borrower and their repayment ability. Therefore, negative pledge clause allows banks to make the borrower to recover their dues by liquidating their assets. The clause also prevents the borrower from protecting their assets from alienation by placing restrictions on the ability of the borrower to create security, sell or transfer the assets. Change of Control Clause also serves several legal and other related purposes. The main legal purpose served is that if the borrower fails to control their company after they execute the loan agreement, then banks are permitted to cancel all loan facilities then initiate the already disbursed interest amount and principal amount. Also, other covenant clauses like the material adverse effect clause serve different roles. This clause prevents banks from further issuing more loan amounts in case the borrower experiences unanticipated change in their business operations, or change in the financial scores. In this case, banks are able to prevent the borrower from using the loans as a safety aid. The clauses also work on the benefit of the borrower. Covenant clauses allow the borrower to accelerate in case they default. In this case, a lender will either cancel further loans or accelerate them and demand repayments by restructuring the investment of the borrower and how able they can pay their dues.

recheck 2 please,

One of the risks associated with the restrictions imposed by Xandia is that scalability of its financial system will not be attained. In this case, the country’s financial system will not be able to preserve its performance and profitability in most of its markets. When Xandia stops lending to foreign countries who are its major business partners, then, it will direct its deposits (incremental deposits) to government securities, similar case will be done by its population. After some time, the major risk that will be suffered is reduced credit risk and increased interest rate risk since majority of the investment will be done in fixed income. Besides, liquidity risk is part of the legal risks that Xandia will face once it allows its financial institutions like banks to stop lending. Liquidity risk will be a challenge in the sense that banks will not be able to access the required cash to meet its funding obligations. As a way of lessening liquidity problems, banks will be forced to hold their liquid assets for long as a way of surviving lack of inflow of the outside funds. Moreover, when banks stop lending to outside borrowers, then local borrowers will most likely borrow more to service their local businesses and sustain the changed living conditions. In return, since markets will not be effective, inflation will crop in and borrowers will default the payments resulting in stipulated legal measures from banks by using different recovery approaches. Similarly, when Xandia stops lending, household income will in most cases fall, consumption will increase and the economy will largely be affected. Since lending means attracting interest rate, then failing to lend means reduced earnings that might cause reduced GDP, inflation and other financial constraints. Besides, one of the challenges of failing to export or sale goods to other countries is that trade and investment of Xandia will be affected, hence the amount of money in circulation will be minimalized. Production and consumption will also be unbalanced since traders will not find financial resources to continue producing their products when the already produced have not been sold or when they cannot sell the already produced products. Legally, failing to export will attract more customs to the imports or the locally produced products. Producers will be forced to pay higher custom charges as a way of balancing trade or the financial position of the domestic market. Business contracts among the local dealers will also be charged highly because banks will charge high interest rates on the provided loans and the cost of operating business will also be charged highly because lack of exports will challenge the ability to raise more capital for the government and banks. Similarly, unemployment will soar in the country because of the large number of people who depend on manufacturing products for export. In return, the cost of living will be high as costs of locally produced products will soar, resulting in other issues such as high crime rates and inflation. However, restricting bond and stock investment will mean that interest rates of the locally traded or invested bonds and stocks will be higher as bond yields will trend highly. The final result is that fixed-income instruments will most likely post price loses. Besides, lack of foreign investments in bonds and stocks will not produce local currency returns. In return, currency fluctuations will impact the return of the locally invested bonds and stocks since the local value of held bonds and stocks will be reduced to accommodate or attract local investment. Investors will therefore experience longer periods of net loss on total returns. Nevertheless, lending and borrowing will be restricted, then the financial score will be altered making it hard to raise money to service debts. At the end, the borrowing cost for Xandia will increase and its interest rate for the unpaid loans will also increase. Debtors will finally file bankruptcy in international courts, making Xandia to lose majority of its securities.

Please see the attached flie.