#15472 - Events Of Default - Debt Finance

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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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 (lender will favour immediate remedies available under the loan agreement)

Agent's role:

• Duties to notify other lenders of an EoD/non-payment

• Power to exercise remedies & obligation to do so when instructed by Majority Lenders.

Potential Events of Default

• Potential EoD = within grace period/giving notice or determination has not happened yet.

  • 1^st December – loan agreement signed

  • 2^nd March – “vexatious” insolvency proceedings brought against borrower (14-day grace period begins)

  • 5^th March – utilization request sent: representations deemed repeated

• But Lender could still exercise a drawstop if the Default is continuing.

  • Definition of "default" in LMA = actual AND potential default.

• Quashing the petition within the grace period = EoD never becomes actual.

• Problem = when borrower has to repeat representations relating to "potential defaults" the misrepresentation EoD will trigger.

  • Amend repeating representation to refer only to EoD (i.e. actual default)

Agent's Liabilities

• Breach of fiduciary duty

• Breach of terms of the agreement

• Negligence - not acting with reasonable care and skill

Agent's Protections

• Define duties narrowly

• Exclude fiduciary duties

• Express protection when acting on Majority Lenders' instructions

• Conditions precedent (seek legal opinion and only opine on form, not substance)

• Right to appoint professional advisers (and be compensated for expenses)

• No responsibility for checking accuracy/adequacy of documents

• Exclusion of liability (subject to reasonableness, gross negligence & wilful misconduct)

• Indemnity from lenders and borrower