Loan market turmoil sets parties scrambling to re-read the boilerplate
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The last month’s upheavals in the credit markets are “seismic”. And with each new tectonic shift in the world’s financial map, lenders, borrowers, and agent banks have been closely re-reading the “boilerplate” provisions of the typical US credit agreement. For although law is not easily confused with vulcanology, “boilerplate language” has one thing in common with a dormant volcano - you tend not to notice it until too late.
Last month’s financial Krakatoa - the bankruptcy of Lehman Brothers Holdings (LBH) - sent loan market participants scrambling to review not only their outstanding trades with Lehman to assess their counterparty exposure but also to review the credit agreements under which Lehman was the agent.
For many deals, Lehman Commercial Paper Inc, a subsidiary of LBH which at the time of writing this article had not yet filed for bankruptcy, was the agent. Nevertheless, lenders were concerned about LCPI continuing as agent for such facilities. LSTA members focused on whether an entity in such a position could continue to perform its duties under such circumstances, and questioned whether principal and interest payments by the borrower should continue to be made to the agent.
In this respect, the “boilerplate” language often affords a lifeline. Credit agreements typically include provisions whereby the agent can, if it so determines, resign from its role, but such resignation is also usually contingent on the lenders’ appointment of a successor agent.
Notably, over the years, the market has moved away from giving lenders the right to remove the agent. Given recent events, lenders seeking to ensure uninterrupted administration of the loan might now seek to revert to the former approach and require that the agreement include such lender rights of removal. (It is also worth noting that, although some credit agreements may give lenders the right to remove the agent bank, if such bank is also a lender, it will be permitted to continue to vote its loans.)
In connection with a revolving credit facility, the timeline for delivery of notices and the mechanics of funding are tightly compressed. Upon receipt of a notice of borrowing from a borrower, an agent notifies each lender of its share of the borrowing and then typically in the morning on the date of the borrowing each lender pays its share to the agent.
However, most agreements also provide that unless the agent has received notice otherwise, it can assume that a lender has made its share available to the agent on the date of the borrowing, and the agent may then make available to the borrower a corresponding amount.
Although the agents are not obligated to do this, it will be interesting to see whether this clause, too, is revisited at least for some types of deals and whether the delivery of the borrowing notice and the time by which lenders must make funds available to the agent are required further in advance of the agent making the funds available to the borrower.
Also under renewed scrutiny is the Eurodollar “market disaster” provision. Many credit agreements provide a mechanism where the borrower’s ability to get a LIBOR loan could be suspended if there was a major adverse development (the “Mount Vesuvius” event) in the loan markets.
Under many agreements, if the majority lenders were to determine that LIBOR did not adequately reflect their cost of making the loan, any loan requested by the borrower could be made as a base rate loan.
In the past couple of weeks we have heard of new deals where a lesser percentage of lenders has been given this right. With LIBOR increasing by more than 400 basis points overnight last week (only to drop later in the week), the spotlight has shifted, and we have learned of borrowers enquiring about whether they can convert to base rate loans.) The market might indeed move away from the majority lenders needing to make the determination to a lower threshold.
With the passage of the U.S. bailout, we can only hope that the markets will stabilize and that the proverbial villagers can return to their homes. Nevertheless, the aftershocks will continue to be felt. Provisions dealing with the administrative agent, increased costs, and the mechanics of funding facilities are now being scrutinized more closely. We will never look at boilerplate quite the same way again.
Bridget Marsh is vice-senior president and assistant general counsel of the Loan Syndication and Trading Association. To read our recent interview with Bridget, click here.