If two or more parties come together and only want to do business in good faith, who needs lawyers?! Well, in the episode of A Dictionary of Finance Podcast this week, the lawyers of the European Investment Bank became authentic and talked about “problem banks”. “Trouble Banks.” Bruised egos. And even “nasty banks.” It is clear that finances are not just fun and games. And that`s where complicated lawyers, contracts and legal concepts come in. Since the beginning of the COVID 19 pandemic, the number of borrowers using their revolving credit facilities, including many borrowers who have not been used before, has increased significantly as borrowers attempt to support their balance sheets and protect themselves from expected negative returns. Many borrowers are concerned that current market conditions could lead to delays in their credit facilities, which would prevent them from leaving in the future. In this context, many lenders are questioning their desire to finance a previously solvent borrower, which may soon be about to be restructured. Lenders are increasingly turning to defaulting reserves for lenders in their credit files, to better understand the consequences of a decision not to pay financing – beyond any impact on reputation or trade. Interest deposit account. When a lender becomes a defaulting lender, all funds owed to the defaulting lender must normally be held by an agent in a deposit account. Parties can indicate whether this account is an interest account or not.
Most credit documents unionize silence on this point. Standard Lender waterfall. Payments made by a borrower and received by a representative who otherwise should have been paid to the failing lender are subject to a cascade. Before a defaulting lender can receive any amount, the agent applies the prescribed product in the credit documentation, including compensation of an amount that goes to the agent or lender, that funds the portion of a loan that a loan does not finance, and that is held in a deposit account to meet the potential future commitments of a defaulting lender. Limiting bankruptcies. In the event of bankruptcy, a lender usually becomes a failing lender. A lender may add to the bankruptcy requirements a suspension that, in such circumstances, will not become a defaulting lender if it intends to continue to meet its obligations under the credit documents. U.S. syndicated loan agreements have long provided provisions for defaulting lenders as protection for borrowers from lenders that fail to meet their financing commitments.
These provisions attracted the attention of borrowers and lenders during the 2008 financial crisis, which led to the bankruptcy of many financial institutions. At the time, borrowers were particularly concerned about the liquidity of their lenders and wanted to ensure that they could take corrective action against any lender that was unable to deliver on its financing promises – while still being able to replace such a lender. In the wake of the financial crisis, borrowers sought additional protection from defaulting lenders, and these conditions have since become almost universal in all syndicated credit documentation. Over the past decade, the deflated rules of lenders have become more or less “boiler plates” – rarely negotiated, exercised or brought. Yank the bank – a clause used in more complex financing agreements to get rid of the borrower, a bank in a group of lenders. This may apply if the rest of the union agrees to either additional funding or an amendment to the financing agreement and a lender can no longer provide financing or disagree. But it turns out that there is poetry in all this legal darkness. There are “midnight clauses” and “insolvency stunts” that come down from an “insolvency pool” as a blessing for creditors (at least for the highest).