Documenting Refinancing Transactions

Posted on 11-02-2016 by
Tags: Lexis Practice Advisor , finance , Practice Insights , Refinancing

This Wednesday, We Asked, They Answered.  Andrew Bettwy and Glen Lim of Proskauer Rose LLP address current developments in the refinancing markets below.

What are you seeing in the refinancing market lately ?

We have seen several deals undergo opportunistic refinancings recently. Often these refinancings take the form of an “amend to extend” transaction to push out the stated maturity of loans to a later date. We’re seeing arrangers and borrowers do this even when the maturity date of the loans is still a few years out, because they want to strike while the iron is hot and take advantage of good market conditions for issuers of syndicated loans. In conjunction with this process, borrowers may also attempt to enhance and upgrade their credit terms, depending on market appetite and the strength of the borrower’s financials and the overall health of its business sector. This may include repricing the interest rate to a lower margin or a lower LIBOR floor, upsizing the credit facility by obtaining incremental commitments, loosening certain covenants or other credit enhancements, or all of the above.

How should attorneys approach these types of refinancings? What are some issues to consider throughout this type of transaction?

Debt lawyers on both sides of the table should think of these refinancing occasions as an opportunity to bring up to speed credit documentation that may be a bit outdated in certain respects, and catch it up to prevailing credit agreement terms that have resulted from market and regulatory developments since the original closing. Depending how long it’s been since your credit agreement was first executed, several upgrades may be required. Here are just a few to consider:

  • Bail-in. Unless your credit agreement closed or was amended very recently, you probably have not had the opportunity to include the European bail-in provisions. The European Union’s recent bail-in directive is an attempt by the EU to establish a framework for European regulators to deal with failing financial institutions in their respective home jurisdictions. You might ask (as did most of the syndicated loan market, when bail-in dropped into its collective lap in 2015), what does that have to do with a New York law credit agreement? The answer is, a lot: the bail-in directive essentially requires European financial institutions, and their affiliates that are subject the directive, to include certain acknowledgments of the bail-in regime by all contractual counterparties to non-US law-governed agreements under which the financial institution has an unsecured obligation. This basically encompasses every syndicated credit agreement, since lenders have commitment obligations to borrowers, and they also have indemnity obligations to agents, just to name two obvious examples. The Loan Syndications and Trading Association (LSTA) and the Loan Market Association (LMA) and their advisers quickly developed model language to include in credit agreements that would satisfy the bail-in rule, and in 2016 these bail-in provisions became standard fare virtually overnight. Even if your credit facility doesn’t initially have parties that are subject to the bail-in provisions, you should consider adding the bail-in provisions in case of a future assignment to a European lender or affiliate.
  • Change in Control. Check the “change in control” definition in your credit agreement and consider whether it needs to be updated. Recent case law in Delaware has looked unfavorably upon language known as a “dead hand proxy put,” which is sometimes found in change in control provisions. If your credit agreement has a dead-hand provision, it will usually be found in the board of directors’ prong of the change in control definition. A board of directors’ prong typically provides that a change in control will occur upon a change in the majority of the board of directors of the borrower to individuals who are not continuing directors (i.e. directors who are either nominated or appointed by the existing board). A dead-hand provision provides that a director who is nominated or appointed as a result of a proxy solicitation is not counted as a continuing director for purposes of the change in control test. In a proxy situation, this could have the effect of triggering a change in control event of default, regardless of whether the existing board approves the proxy slate; hence the moniker “dead hand,” as there is nothing the board can do to prevent the trigger. Recent court decisions have frowned upon this type of provision, particularly when it is perceived that the provision has been added to a credit agreement as a way of implementing a kind of poison pill against an ongoing or upcoming proxy fight. In large part as a result of these cases, the trend has been to avoid inclusion of a dead-hand provision in change in control definitions, and in some cases the board of directors prong of the definition has been eliminated entirely.
  • LIBOR/Base Rate Mechanics. Unprecedented developments, both legitimate and scandalous, in the LIBOR markets during the period leading up to and including the 2008-2009 market crash have resulted in a few mechanical adjustments to the LIBOR provisions in credit agreements. For one thing, the British Bankers Association (BBA), the group of financial institutions that determined LIBOR rates for decades, no longer sets LIBOR. Newer credit agreements either refer to the ICE benchmark, or simply refer to the appropriate reference rate terminal accessed by the administrative agent. Most older credit agreements provide for the possibility of a successor entity to the BBA, so there technically may not be a need to change the antiquated BBA reference, but it wouldn’t hurt to update it if the agreement is otherwise being amended.
  • LIBOR and Base Rate Floors.Record-low interest rates over the past several years led to the prevalence of LIBOR and base rate floors in many credit agreements. A borrower may attempt to revisit these floors in the context of a repricing or other refinancing. In addition, talk by certain central banks of the possibility of implementing negative rates to stimulate economic growth has led to the inclusion of a clarification that might seem obvious but is nevertheless important for lenders to clarify: base rate and LIBOR rates should not be less than zero. In a rising interest rate environment these provisions may soon become obsolete, but as of now interest rate floors are still being included in credit documentation.
  • Upcoming accounting changes relating to leases. Beginning in 2019, a change in U.S. Generally Accepted Accounting Principles (GAAP) will require that operating leases be included on balance sheet. Currently, only capital and financial lease obligations are required to be included as balance sheet liabilities, and as a corollary, credit agreements typically do not include operating leases as “indebtedness” for purposes of covenant calculations or debt incurrence. This could change once the new GAAP rule comes into effect, depending how a particular credit agreement defines “indebtedness” (which may include a general reference to all balance sheet liabilities) or “capital leases” (which may refer to GAAP as in effect from time to time). The market has been aware of this potential change for several years, and many newer credit agreements include specific language freezing GAAP on this point to prevent operating leases from being included as indebtedness. Other agreements may have a general mechanism for dealing with changes in GAAP.  Check your credit agreement to see how leases are treated, and consider updating these provisions accordingly.
  • Excluded Swap Obligations. If your credit agreement and related loan documents provide guarantees of or collateral security for obligations under swaps or other derivative transactions entered into between the obligors and the lenders or their affiliates, you should confirm that the loan documents are onside with certain regulatory restrictions affecting swap counterparties. The Commodity Exchange Act places restrictions on the provision of credit support for derivative transactions by persons other than “eligible contract participants.” Standard safe harbor provisions were developed in 2013 to account for these restrictions, and if your credit agreement is of an older vintage, these provisions may need to be included as part of your next amendment.

Some other general and technical considerations to keep in mind when working on an opportunistic refinancing:

  • Voting Requirements. A key component of any amendment process is to determine the requisite lender vote for approval. Certain changes require majority approval; others may require the vote of all lenders or all affected lenders. If the amendment consists only of an incremental tack-on facility, it may not even be necessary to seek majority lender consent; the amendment can simply be implemented by the borrower, the agent and the new lenders. However, if the borrower or lenders desire to include any new document “technologies,” such as the ones mentioned above, a majority or (in the case of pricing changes for example) all-lender vote will be required.
  • Fungibility and Tax Considerations. Tax review should be a part of any incremental upsize or extension of maturity. One important consideration for syndicated loan participants will be to confirm that the incremental loans can trade in the secondary market alongside the existing term loans, i.e. that the two issuances of debt are fungible for trading purposes. The borrower’s tax counsel should also be consulted to determine whether the amendment could result in a “significant modification” for tax purposes, which could result in negative tax consequences for the borrower.
  • Pricing Protection. As part of evaluating the merits of a potential repricing transaction or refinancing, the borrower will naturally take into account any call protection provisions that may still be in effect at that time. Lenders in turn will often require a refreshing of that pricing protection in the new documentation for the refinanced or repriced loans, sometimes in the form of a “re-set” to call protection provisions – usually a “soft-call” for six months to one year at a 1.0% premium for first lien syndicated deals (tied to a refinancing or repricing of the first lien for lower yield debt), and variable “hard call” protection for 2nd lien or other junior debt financings.
  • Springing Maturities. The borrower may have multiple tranches of debt or multiple credit facilities or bond issuances with different maturity dates, and might not be in a position to extend all of the maturity dates at the same time. Lenders may not be willing to extend their maturity beyond the existing maturity date of another existing facility. For example, it might be relatively easy for a borrower to extend the maturity of its revolving credit facility with a small lender group, whereas extending its broadly syndicated term loan facility, or extending or refinancing any outstanding debt securities,could be more challenging depending on the vagaries of the term loan B market or the bond market, respectively. The revolving lenders may not be willing to extend their maturity past the maturity date of other debt instruments unless the other creditholders also extend. One way to address this is to have the revolving credit agreement provide for the revolver maturity date to “spring” into a later maturity date once the other maturities are extended, which allows for the borrower to amend its debt facilities in different stages while lenders remain protected in case the borrower is not able to extend the maturity of the other debt.
  • Leveraged lending guidelines. If the arrangers, agent or lenders are subject to Federal banking regulations, the parties will need to consider whether any of the proposed amendments would give rise to increased regulatory scrutiny under the Federal interagency leveraged lending guidance. These guidelines were most recently issued jointly by the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation in 2013, and clarified somewhat (but by no means entirely) in 2014. The guidance provides some insight into the deal terms that regulators likely will focus on in connection with either a new transaction or a refinancing. Amendments that increase leverage, reduce or push out amortization, or extend maturities without showing adequate repayment capacity, could all elicit a raised eyebrow from bank regulators that could have a chilling effect on an opportunistic refinancing.

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