Given the recent news regarding Silicon Valley Bank, Richard Oman looks at the impact that lender insolvency has on loan facilities and what borrowers and lenders need to consider.


Background

The recent news regarding Silicon Valley Bank has caused borrowers and lenders alike to consider how the insolvency of a lender might impact their syndicated loan facilities. In particular, the Loan Market Association's Defaulting Lender and Impaired Agent provisions - which deal with circumstances where a lender or a facility agent becomes insolvent or fails to discharge its obligations – will have come under close consideration. 

Of course, the position for any particular facility will depend on its specific negotiated terms and it's very possible that the Defaulting Lender/Impaired Agent provisions in a facilities agreement may have been amended. However, for these purposes, we are focussing on the position set out in the LMA template documentation which, in our experience, tends to be incorporated into syndicated facilities agreements without (or with only minimal) amendments. 

But first, a brief history lesson…

The Lehman Effect

Prior to the Financial Crisis, loan agreements didn't contemplate a lender becoming insolvent. However, following the collapse of Lehman Brothers in September 2008, it became clear that loan documentation needed to be adapted to deal with this situation. 

In 2009, the LMA introduced Defaulting Lender and Impaired Agent provisions into its leveraged finance facilities agreement template to address this situation. Whilst these provisions aren't included in the LMA template investment grade facilities agreements (or indeed its real estate finance facility agreements), they are also usually incorporated into these documents in practice to ensure that syndicated facilities can continue to operate if a lender or the Agent becomes insolvent.

Defaulting lender provisions - what do they do?

So, what happens in when a lender or the Agent becomes insolvent and what protections do the LMA's Defaulting Lender and Impaired Agent provisions give to borrowers and lenders in syndicated facilities?

What is a defaulting lender?

A lender is designated as a Defaulting Lender if it: 

  • fails to make its participation in a loan available, or notifies the Agent or the borrower that it won't make its participation available by the relevant utilisation date (other than as a result of technical issues or market disruption and payment is made shortly thereafter);
  • rescinds or repudiates a finance document; or
  • is subject to an insolvency event.
Implications of a defaulting lender

The LMA documentation provides various remedies to avoid a Defaulting Lender's circumstances frustrating the operation of the facility. These include: 

  • the conversion of any of the Defaulting Lender's participations in revolving credit facility loans into separate term loans, repayable on the termination date for that facility;
  • the Defaulting Lender losing its right to vote in respect of its undrawn commitments;
  • the Defaulting Lender's drawn commitments being disregarded for any vote if it has failed to respond within the given time period (usually around 5-10 Business Days);
  • no commitment fee being payable on any of the Defaulting Lender's undrawn commitments whilst it is a Defaulting Lender; and
  • the ability for Defaulting Lender's identity to be disclosed to the other parties.

If a revolving credit facility can be utilised for letters of credit, the documentation also provides work-arounds and protections to address this. 

Rights of a borrower

The Defaulting Lender provisions give borrowers the ability to take certain actions, including to:

  • cancel the undrawn commitments of the Defaulting Lender;
  • subsequently reinstate these cancelled commitments so that these can be assumed by another lender (albeit the time period allowed between cancellation and this reinstatement is usually relatively short); and
  • force a Defaulting Lender to transfer its participations in loans to a new lender at par.

The latter two rights are, of course, dependent on the borrower being able to find a new lender willing to replace the Defaulting Lender on the same commercial terms and pricing – which might not be a straightforward task in practice, particularly when other borrowers are likely to be in the same position. 

There is no general right for a borrower to repay or prepay the Defaulting Lender's participations in loans ahead of loans made by the other lenders. 

What if the agent is insolvent

The Impaired Agent provisions work in a similar manner to the Defaulting Lender provisions. An Agent is designated as an Impaired Agent if it:

  • fails to make a payment it is required to make on its due date (other than as a result of technical issues or market disruption and payment is made shortly thereafter);
  • is also a lender which is a Defaulting Lender;
  • rescinds or repudiates a finance document; or
  • is subject to an insolvency event.

In these circumstances, the LMA template documentation allows for the borrower and lenders to make payments, and to communicate, directly between each other rather than needing to go via the Agent. The usual notice periods for the replacement of the Agent are also able to be shortened by the other lenders if that Agent is an Impaired Agent.

Conclusion

Whilst the LMA facility documentation provides useful solutions to the legal and mechanical issues created by the insolvency of a lender or Agent, it may be of little comfort to a borrower who is faced with the practical problem of needing to find another lender to fill the gap left in its loan facilities by the insolvent lender, at a time when many other borrowers will be looking to do the same. 

And it will be no comfort at all to a borrower which has bilateral loan facilities with an insolvent lender (even if these are documented on a syndicated basis).  

If you have any questions or require any advice, please speak to one of the contacts below.

Key contacts

Meet the team
Richard Oman

Richard Oman

Partner, Finance
Manchester

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Amanda Gray

Amanda Gray

Partner, Co-head of Financial Services Sector

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Steve Mackie

Steve Mackie

Head of Group Finance & Projects
London

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Martin O'Shea

Martin O'Shea

Partner, Finance
Manchester

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