FOUR FAST FACTS ON: INSOLVENT LENDER CONSIDERATIONS

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Background

With recent events in the global banking sector surrounding the collapse of Silicon Valley Bank and the takeover of Credit Suisse by UBS, it is timely to consider the mechanisms and protections that may be available under syndicated loan agreements.

Using an Asia Pacific Loan Market Association syndicated facilities agreement as an example, we take an overarching look at some potential implications if a lender becomes a “Defaulting Finance Party”.

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Defaulting Finance Parties

In general terms, a lender can become a Defaulting Finance Party if it fails to make a payment due under the facility agreement, rescinds or repudiates the facility agreement, or becomes insolvent. This will likely result in borrowers being prevented from drawing down available commitments of that Defaulting Finance Party. There are also implications for Defaulting Finance Parties, which may include a stop to commitment fees accruing, their revolving commitments being “termed-out” (i.e. converted to term loans), some level of disenfranchisement, and a requirement to transfer their commitments to a replacement lender at par

Disenfranchisement

A Defaulting Finance Party may still have voting rights (to varying degrees) in a facility agreement.

The standard position is that a Defaulting Finance Party is disenfranchised in respect of available commitments only (i.e. it can still vote to the extent of its drawn commitment). However, as a practical matter, an insolvent lender may have issues in providing consents to amendments, waivers and other decisions.

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Other considerations

Borrowers may have the option to cancel a Defaulting Finance Party’s commitments, and to prepay their outstanding commitments.

To the extent hedging is in place, insolvency events of default in the ISDA Master Agreement that apply to a hedge counterparty are also likely to be triggered. All of these implications must be considered in the context of New Zealand’s statutory insolvency framework, and also in the context of any foreign regulatory regimes applicable to financial institutions that may affect off-shore syndicate members.