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3.14 COSTS, TAXES, AND ANCILLARY CHARGES

In addition to the fees due to the bank, the agreement must also specify the costs which are to be borne by the borrower, including the costs of regular notices provided for under bank transparency legislation. The agreement may grant the right to vary the interest rate or any other price or condition to the detriment of the borrower; such a right must be expressly provided for in the agreement and the relative clause must be specifically approved by the borrower, subject in addition to compliance with bank transparency legislation.

3.15 CONTRACTUAL COVENANTS

A covenant is a contractual clause agreed upon during the negotiation stage which grants the bank the right to renegotiate or terminate the agreement following the occurrence of the events expressly specified in the clause. Under a covenant a borrower will undertake not to carry out acts which could be detrimental to the rights of the bank or otherwise increase the risk of default, whereby the bank is generally granted the right to renegotiate or terminate the loan where the conditions of the covenant are breached (negative covenant), or alternatively to act in such a manner as to enable the bank to monitor the loan over time (positive covenant).

Under some covenants, the borrower undertakes to repay the loan (in full or in part) should any situations arise which increase the risk associated with the transaction for the bank.

Compliance with covenants may result in:

• improvements to the financial terms of the loan, or more stringent financial terms in the event of a deterioration in the parameters of valuation of the creditworthiness of the company and/or transaction (in order to offset the lower or higher credit risk of the transaction and the resulting spread applied);

• termination where a change in the conditions deemed to be fundamental at the time the loan was granted requires the bank to request early repayment of the loan (event of default).

In particular, covenants may be divided between:

• balance sheet covenants;

• financial covenants.

 
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