An analysis of MasterCard's $2.75BN Credit Agreement

Credit agreements are typically all boilerplate but do reflect the trends in litigation, securities law and the economic environment. For that reason, it is useful to read them occasionally. From the credit agreement available here(at the SEC site), I noticed the following things(this is not a complete list but merely the unusual/interesting aspects)

• 1.1- floating rate is the highest of 3 floating rates(Citi base rate/1 month LIBOR+1%/0.5%+Fed rate)
• 1.1 Interestingly, the commitment fee and applicable margin are based on the credit rating instead of merely on time basis. As expected, lower the rating higher the fee.
• 1.1 Adjusted EBITDA definition seems standard except 
• that restructuring expense is amortized pro rata over 8 quarters recognizing cookie jar reserve accounting!! Consolidated EBITDA will be reduced in the quarter in which such charges or expenses are incurred and in each of the immediately following seven quarters by an amount equal to 1/8 of the amount of such charges or expenses so added back.
• Non Cash income/expenses are added back/subtracted as the case maybe-other expenses or charges to the extent that such expenses or charges do not represent a cash item in such period

• 1.1 Material Adverse Change is defined to exclude any factor disclosed in the 10K/10Q/8K filed before the agreement date. That is quite logical because the lenders should have done due diligence to incorporate it into the lending decision. Such clauses also encourage complete and fair disclosure by corporates prior to lending to avoid such complications layer. Also, Master Card being in credit card processing and banks failing in the USA,MAC excludes  settlement failure by one or more customers of the Borrower
• 1.1 Surprisingly, indebtness('adjusted debt') includes nearly all sorts of off balance sheet debt(capital leases, guarantee, L/C, pledged assets) but excludes under funded pension obligations.
• MasterCard can choose the interest period(month/quarter/half year) for each period differently. That gives some flexibility. 
• 9.14(b) Maybe because of recent Wall Street/City litigation on breach of trust, a clause exists that neither the Managing Administrative Agent nor any Lender has any fiduciary relationship with or duty to it arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between Managing Administrative Agent and Lenders, on one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor.
• 9.15 Big Business is(with due reason) afraid of jury trials where sympathy may rule over legal obligations . Hence, all parties unconditionally waive trial by jury 

An analysis of the ISDA Master Agreement 2002

I'm not an expert on derivatives law/markets but there are some interesting nuggets in this agreement from a legal/economic perspective. Thanks to the SEC which mandates filing of financing agreements, I could get a legal electronic copy of the ISDA agreement here. I noticed the following points(preceded by Article)

•  1(c)-Each agreement is taken as a whole which means that disputes/issues with other agreements will not give right of setoff etc(to the client).
• 2(a)(iii)-To guard against credit risk, the parties are excused from their obligations if an event of default/potential event of default has occured. The latter being subjective, it is an easier escape route
• 2(d)(i)(4) provides for the person liable to bear the effect of tax changes with/without grossing up. The party with stronger negotiating power can tweak this clause to their benefit
• 3(a)-The basic representations sought here(status/powers/violation/consents/obligations) are really speaking redundant(except maybe to prove equity/intent in arbitration forum). If a transaction is really ultra vires/void, no amount of representations will make it valid.
• 6-The concept of Liquidated damages on premature termination is enshrined here with the clause that an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses.
• 8(d)-Contrary to the legal concept of an indemnity(actual loss should have been incurred), there is no need to prove an actual loss here  as "it will be sufficient for a party to demonstrate that it would have suffered a loss had an actual exchange or purchase been made."
• 9(a)-Misspelling cannot be pleaded as the document "supersedes all oral communication and prior writings with respect thereto" 
• 11-The defaulting party is made liable for the legal/other expenses incurred by the prosecuting party!! Not that unusual but again against the 50:50 cost split that may occur elsewhere.
• 13(b) mandates disputes to be submitted to English Law/ New York Law and debars the party(actually nonbank) from pleading the genuine ground of inconvenient forum/jurisdiction. Though litigation elsewhere is not prohibited, this clause makes it difficult for domestic companies to defend their case in case of litigation. Practically matter may be settled in arbitration only but this is a potent weapon against the non-bank/non-MNC.
• 13(d) again(relating to waiver of immunity) seems redundant because once a party has decided to default, even if an international ruling is returned against it, it is unlikely to honour it.

Can a 100% subsidiary NOT be consolidated? Yes-under US GAAP!!

While reading the 3Q'10 conference call transcript of a shipping company, the Q&A session revealed an interesting nugget which goes to show why we need a principles based system like IFRS.

Ship Finance has a 100% subsidiary which it does not consolidate. Instead, it accounts for that as an investment/associate. The company explains this surprising accounting as follows:- 
The only reason these are not fully consolidated based on US GAAP, is that when we structured those charters, we structured them in a very, in a way where we mitigated a lot of the risks for ourselves. We structured it with higher charter in the beginning. We have structured it where we offload interest risk, relativity risk within those projects through an interest compensation cost....it’s kind of coming back and biting us because after end run, US GAAP introduced a lot of very rigorous calculation methods to identify who is more closely associated with the asset, and particularly who absorbs more of the downside volatility. And because we are structured in a very low risk way for ourselves, we, who own 100% of the company, can only account for them in investment and associate.
And then from our side, what we do, and this is more from a bookkeeping perspective, we can allocate our equity investment in those subsidiaries either as a combination of equity and call in inter-company loan, or whichever way we like.

When a rule is applied too mechanically without a "Comply or explain" type opt our provisions, such things happen. That is why the "fair presentation override" in IFRS will help avoid these situations.