Legal opinions in debt finance deals are a potentially powerful business tool, Bowmans
In debt finance transactions, the issuance of legal opinions is sometimes perceived as a perfunctory, final step in the closing process.
However, from the perspective of the opinion recipients, usually the lender group, a legal opinion, or more specifically the engagement around the content of the legal opinion, is a valuable tool. Used early on in the negotiation of the debt finance documents, an opinion may identify, positions that the lender group may optimally leverage to mitigate their risks.
According to Anton Barnes-Webb, partner at pan-African law firm Bowmans, experience has shown that there are “better and worse” approaches to the use of legal opinions in the negotiation of transactions.
Unlike legal advice, which is often not in writing, legal opinions are written statements expressing legal conclusions about a transaction or matter, or providing legal analysis of a transaction, on which reliance may be placed by the opinion recipients.
In debt finance transactions, legal opinions serve principally to give the recipients the assurance that the agreements have been executed with due and proper authority; that the counterparties have the necessary capacity, power and authority to conclude and perform their contracted obligations; and that the agreements are legal, valid, binding and enforceable.
However, probably the most important reason for using an opinion is to flush out and mitigate legal issues well before the documents are signed. Issues that are sometimes hidden quite deeply can come to light in the opinion process, says Barnes-Webb.
Opinions are helpful – if not essential – for a successful syndication of the debt. With almost all syndications, each original lender is expected to have sought a legal opinion in respect of the finance documents from reputed counsel, and for new lenders to be able to place reliance on those legal opinions.
Opinions provide a valuable assurance to lenders that the legal counsel issuing the opinions have properly interrogated the transaction and formed the views expressed in the opinions, but they should not be seen as a guarantee or indemnity against losses that may arise if the funding transaction goes sour.
The firm issuing the opinion will, however, be liable to the opinion recipients if they have been negligent in reaching the views they have expressed, says Barnes-Webb. “What a bank receives when an opinion is issued is the knowledge that the lawyer responsible has applied his or her mind to the matters opined on and has reached a carefully considered legal view.” This makes a sound legal opinion an effective risk management tool.
Commenting on the difference between a mediocre legal opinion and a sound one, Jason Wilkinson, also a partner at Bowmans, lists three main characteristics that distinguish a good legal opinion: the quality, the legal issues identified and the timing.
Quality refers to the technical competence behind the drafting of the opinion, both on the part of the lawyers responsible for writing it and their law firm. Legal opinions should be carefully structured documents setting out an appropriate balance of assumptions and qualifications in relation to the opinions expressed – assumptions going to the facts of the transaction and qualifications to the law.
Wilkinson say lenders should be aware that two types of assumptions exist: “standardised” assumptions that apply to virtually every funding transaction, and “non-standardised or specialised assumptions” that are deal-specific.
An important point is that an opinion should specify who may rely on the opinion, making the point that it is intended for the addressee or, in the case of a syndicated transaction, the primary syndicate. Similarly, it should be made clear that reliance may be placed on an opinion for a limited period after the date of issue and that this is not open-ended.
Alarm bells should ring for the lender when a legal opinion does not identify the usual risks and/ or any specific issues peculiar to the type of funding instrument or counterparty. Such an omission could indicate that the lawyers who wrote the opinion may not have fully applied their minds and identified and understood the material risks and issues.
That said, there is no fixed formula as to how detailed the lawyers’ investigation should go. This would usually depend on three factors, says Wilkinson, “The lender’s level of comfort over the transaction, the time available and the question of what is practically achievable”.
Timing is key. “Since the legal issues that the lender needs to know about may be hidden, it is best to identify them early on – as opposed to the night before financial close – so that they can be properly addressed. An opinion is not a document that can be cobbled together at the last minute.”
Shamilah Grimwood, head of Banking and Finance at Bowmans, concurs, noting that in a project finance context, a range of opinions is required given the multiplicity of the project participants; the multiple roles individual project participants may perform in the project; and the necessity to ring-fence project revenues and clearly direct the project cost spend and cash outflows. This necessitates that work on the opinions commences early enough to avoid “last minute” surprises and rushed solutions.
She highlights the project finance transactions undertaken in respect of the South African government’s renewable energy programme for independent power producers, which had seen as many as 20 to 30 different legal opinions being required to reach financial close.
“With all those moving parts, it would be inconceivable to embark on such complex projects without having mapped out all the legal issues and to make as early a start as possible,” she explains.