FINANCIAL SERVICES CLIENT ADVISORY GROUP
Model Credit Agreement
January, 2012 No. 2
By: Harriet B. Alexson (714.384.6578)
©2012. All Rights Reserved.
In August 2011, the Loan Syndications and Trading Association (“LSTA”) through its Primary Market Committee (“PMC”) published its revised Model Credit Agreement Provisions 2011 (“Revised MCAPs”). The Revised MCAPs have become, with certain variations, standard market terms in many bank forms.
Although defaulting lender provisions are not new, the increase in bank failures following the credit crisis focused the attention of market participants on the issue of defaulting lenders, and highlighted some of the weaknesses of typical defaulting lender provisions. A key objective of that effort was to craft a set of provisions that were crisp enough to address with certainty issuing lenders’ and borrowers’ exposure to defaulting lenders, but flexible enough to address issues that might arise in the bankruptcy or receivership of the defaulting lender (e.g., the automatic stay).
Under the Revised MCAPs, a lender will be a defaulting lender if:
- It fails to fund borrowings or to meet its funding obligations to the administrative agent, issuing bank or swingline lender within two (2) days of the date when due;
- It delivers a written notice to the borrower, the administrative agent or any issuing bank or swingline lender that it does not intend to comply with its funding obligations (or makes a public statement to that effect);
- It fails to confirm its intention to comply with its prospective funding obligations following written request by the administrative agent or the borrower (the “Failure to Confirm Limb”); or
- It or its parent becomes subject to any bankruptcy or receivership proceedings.
One of the most significant tax changes to the Revised MCAPs, the new increased costs provision, was drafted with an eye to protecting lenders from the various proposed bank taxes. The PMC took the view that a newly imposed bank tax is similar to an increased cost resulting from a regulatory change and, therefore, should be similarly covered by the increased costs provision. While the increased costs provision has some complicated cross-references, essentially the provision covers taxes that (i) are not imposed on payments and (ii) are not net income or franchise taxes imposed because of a lender’s connection with the taxing jurisdiction. The indemnification provisions were modified to ensure that the lenders’ obligation to indemnify the agent in connection with suits by lenders was clear. Other provisions, such as agency, assignment and electronic communications, have also been augmented and modernized, including by adding a mechanism in the agency provision for the removal of an agent that has become subject to bankruptcy or receivership proceedings.
Harriet B. Alexson
Chair Financial Services Practice Group
Bohm, Matsen, Kegel & Aguilera, LLP
695 Town Center Drive, Suite 700
Costa Mesa, CA 92626
Actual resolution of legal issues depends upon many factors, including variations of fact and state laws. This article is not intended to provide legal advice on specific subjects, but rather to provide insight into legal developments and issues. The reader should always consult with legal counsel before taking action on matters covered by this article.