Overview
Bank financing agreements typically carry terms beyond the interest rate and repayment period, from ongoing financial covenants a company must maintain for the facility's duration to default provisions that may grant the financing entity the right to demand immediate full repayment.
These terms need careful review before signing, since the ability to negotiate after signing is far more limited than the ability to adjust terms before committing formally.
Regulatory Basis
Banking institutions operating in Saudi Arabia are subject to Saudi Central Bank regulations, which govern how these entities extend financing and its general terms.
The financing agreement itself between the company and the financing entity falls under general contract provisions, with any special provisions considered if the financing is Sharia-compliant.
How We Review Financing Agreements
We look at ongoing financial covenant terms with particular care, since they determine the flexibility available to the company in running its business for the facility's full duration.
We also carefully review the definition of a default event in the agreement, since a loosely drafted definition may grant the financing entity broader authority than the borrowing company anticipates.
Who Needs This Service
A company negotiating a new credit facility that needs its terms reviewed before signing, particularly covenant and guarantee clauses.
A company restructuring its existing financing that needs the impact on current guarantees and ongoing obligations assessed.
A company facing difficulty meeting a specific financial covenant that needs their position assessed before the financing entity considers it a formal default.
Common Mistakes
Signing a credit facility without carefully reviewing the default event definition, which may grant the financing entity the right to demand immediate repayment for reasons the company didn't anticipate.
Neglecting to track ongoing compliance with financial covenants after obtaining financing, even though breaching a single covenant may be considered a default despite regular repayment.
Cost and Fees
Reviewing financing agreements is priced as a fixed fee based on the facility's size and complexity of terms.
Restructuring or negotiation services with the financing entity are priced separately, beginning with an initial assessment of the company's financial position and existing obligations.
We've noticed from our work with companies in Riyadh and Dammam that many credit facilities include a financial covenant tying continued financing to certain ratios, like debt-to-equity, and some business owners overlook monitoring this ratio regularly until the company unintentionally breaches it during a period of rapid growth or a temporary revenue slowdown.
Additional Considerations
When the financing is tied to a specific commercial asset, this connects with our real estate mortgage service if the collateral is property.
For companies preferring Sharia-compliant financing, this connects with our Islamic finance and takaful service instead of treating conventional financing as the only available option.
Common Questions
Do you review financing terms before signing or only after a dispute arises?
Before signing is preferable, since reviewing terms at this stage is far less costly than negotiating changes after commitment.
What happens if we unintentionally breach a financial covenant?
This depends on the specific agreement terms, and some agreements provide a grace period to correct the situation before it's considered a formal default.