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LPC Law Notes Debt Finance Notes

Events Of Default Notes

Updated Events Of Default Notes

Debt Finance Notes

Debt Finance

Approximately 80 pages

A collection of the best LPC Debt Finance notes the director of Oxbridge Notes (an Oxford law graduate) could find after combing through dozens of LPC samples from outstanding students with the highest results in England and carefully evaluating each on accuracy, formatting, logical structure, spelling/grammar, conciseness and "wow-factor". In short these are what we believe to be the strongest set of Debt Finance notes available in the UK this year. This collection of notes is fully updated for ...

The following is a more accessible plain text extract of the PDF sample above, taken from our Debt Finance Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Events of Default

Events of Default Clause

  • Expansion on the common law remedies for breach

  • Grace periods are only relevant where the breach is capable or remedy.

  1. Non payment of principal and/or interest

    • Indicates poor credit situation

    • Impacts lender's matched funding costs

    • NB. Default interest payable on default

    • Short grace periods of 2-3 business days are usual but only for non-payment caused by technical or administrative reasons which are not the borrower's fault.

  2. Breach of financial covenants

    • Not appropriate to have a grace period

      • Based on historical date

    • If a grace period is appropriate, then it should be within the wording of the financial covenant clause itself

  3. Breach of other obligations

    • Key concern = undertakings (may contain materiality qualifications/other carve outs)

    • Can negotiate a grace period into the specific undertaking

    • NB. Some breaches will always be serious (e.g. breach of a negative pledge)

  4. Misrepresentation

    • Can extend to any representations made or repeated

    • It is the inability of the borrower to repeat the representation at the date it should repeat it which triggers the EoD.

    • Qualifications: limit to only written representations or include materiality thresholds

  5. Cross default

    • i.e. borrower's failure to honor obligations in other loan agreements.

    • "Financial Indebtedness" in the LMA drafted widely to include most types of borrowing - i.e. EoD can be triggered where:

      • Borrower fails to pay FI when payment is due;

      • Creditor of the borrower declares any FI due, due to EoD; or

      • Creditor of the borrower suspends or cancels outstanding commitment due to EoD;

      • Creditor of the borrower becomes entitled to declare FI due to EoD.

    • Borrower objections:

      • Lenders should not be allowed to indirectly take advantage of stricter covenants in other Lenders' loan agreements - domino effect.

        • To prevent this, borrower should ensure identical undertakings in all its loan agreements.

  • Qualifications/amendments:

    • Limit to cross default EoD to financial indebtedness (include loans, bonds, hire purchase agreements but exclude trade creditors)

    • De minimis braket (can default on insignificant amounts)

    • Cross acceleration wording as opposed to cross default wording (i.e. cross default occurs when the other lender takes action in relation to the default)

      • Clause will still be titled "cross default" for ease of reference only.

  • NB. there will always be cross default for non-payment.

  • NB. Contested in good faith - borrower may want to dispute vexatious or frivolous claims (e.g. borrower has good reason for withholding payment)

    • Limitation to financial indebtedness and de minimis bracket should be sufficient protection.

  1. Insolvency, Insolvency proceedings and Creditors’ process

    • Actual insolvency = always an EoD.

    • "Insolvency proceedings" usually defined very broadly.

      • Creditor only needs to be owed 750 to be able to petition for a borrower’s liquidation. Borrower will want protection in the form of an exception/grace period for frivolous or vexatious claims.

    • Exercise of remedy by creditor = caught under Creditor's Process clause.

      • Borrower protection:

        • Carve outs for threshold values

      • Lender protection:

        • Including "analogous proceedings" brought in other jurisdictions by overseas creditors.

  1. Change of control

    • "Poison Pill" - existence of this EoD may help protect borrower from a hostile takeover.

    • Amendments: borrower can argue that a change of control is outside its control so having it as an EoD is unfair.

      • Borrower would prefer change of control to be a mandatory pre-payment event (as in the LMA)

        • The success of negotiating this depends on the credit worthiness of the borrower.

  1. Illegality and Unlawfulness

    • Unlawfulness = unlawful for borrower/guarantor to perform obligations (always an EoD) - this is the lender's risk allocation.

  • Illegality = illegal for lender to perform its obligations (lender will want immediate repayment of loan and interest)

    • Loan will be unenforceable.

    • This event is beyond the borrower's control - can change it to a "mandatory prepayment event" to prevent cross-default.

  1. Material Adverse Change

    • Undertakings and representations are comprehensive but lender will want an extra catch all provision.

    • MAC = requirement of most internal credit committees.

    • Highly commercial wording

  • Amendments:

    • Borrower's concern = uncertainty - i.e. "could"

      • Restrict to "will" or "have", "material obligations"

    • Lender unlikely to use MAC to accelerate as MAC is difficult to prove

      • More likely to use MAC to suspend further drawdowns and force borrower to negotiate.

      • BNP Paribas v Yukos Oil: example of successful use of MAC clause. However, no guarantee of less cautious MAC interpretation by the courts.

  1. Mandatory Prepayment Events

    • E.g. illegality and change of control.

    • Compromise between EoD for lender and total exclusion for borrower.

Lender's Options following EoD

  1. Acceleration (1. cancel commitments, 2. demand immediate repayment - actual acceleration, 3. place outstanding loans on demand)

  2. Drawstop (temporary member to suspend future tranches)

  3. Negotiate (waive EoD, agree to reschedule the loan)

    • Must reserve the right to take action and be careful not to implicitly waive its rights while considering its decision.

  4. Common law/statutory remedies in the event of breach...

Buy the full version of these notes or essay plans and more in our Debt Finance Notes.