Bank Loan Commitments Relationship Among Lenders Lender Default Monetary Terms - Corporate Bonds and Credit Agreement

Relationship among Lenders, Lender Default

FMC Credit Agreement ss. 2.01(d), 2.03, 2.04, 3.03(a), (b), (c) 3.04(b), (f), (g), 2.16(a)(b)(d), 2.05(c), 2.11(g)

Problem Set # 2C

1. How are different loans apportioned among Lenders? [1:04:00]

• Kahan: Revolving Loans are made pro rata. Lenders acquire pro rata share in LofC’s per section 3.04(f). Swing Loan Lender can demand that other Lenders pay a pro rata share of any Swing Loan as specified in Sections 3.03(b) and (c).

• Revolving Loans made ratable 2.01(d)

  • 2.01(d) “Each Revolving Loan Borrowing shall (subject to Section 2.09(d) consist of Revolving Loans of the same Type in the same Currency made on the same day by the Lenders ratably according to their respective Commitments.”

  • 1.01 "Commitment" means, “as to any Lender, (i) the Dollar amount set forth opposite its name on the signature pages hereof or (ii) if such Lender has entered into one or more Acceptances, the amount set forth for such Lender in the Register, in each case as the same may be increased or reduced as expressly provided herein (including, without limitation, pursuant to Sections 2.06, 2.15(c). 3.08 and 9.07).

• LofC issued by Issuing Bank 3.04(b)

  • When a drawing is made issuing bank make 100% payment

  • Payments are not made pro rata

  • Upon issuance, LofC deemed assigned amongst Lenders

  • If Borrower fails to pay upon draw, other Lenders pay Issuing Bank – 3.04(h)

2. What happens with respect to the Lenders other than the Swing Loan Lender upon the making of a Swing Loan?

• Swing Loans made by Swing Loan Lender 2.03

  • Swing Loans are funded 100% by a bank (not pro rata)

  • 3.03(b) “The Swing Loan Lender may demand that each Lender pay such Lender's pro rata share of all or a portion of the Dollar Equivalent of the outstanding Swing Loans”

  • ‘may demand’ may not be reapportioned, 100% funded by the Lender then Lenders would not be on the same boat

• Payment currency? E.g.:

  • Day 1 Swing Loan Lender made $40M loan in Swiss Francs

  • Day 4 the Swing Loan Lender makes a demand other “Lender pay in Dollars to the Administrative Agent… such Lender’s pro rata share” if only 2 banks (Swing Loan Lender + Bank B) Bank B would need to pay

    • 50% of the loan at the time demand is made OR

    • 50% of the loan in Dollar Equivalent at the time demand is made?

      • If Dollar Equivalent is $50M the other bank would pay $25M

      • But if on day of demand, Dollar Equivalent is $48M?

        • $24M or still $25M?

    • This is not addressed in this section

  • Prof: 3 options for 40M SF loan to Borrower

    1. Split loan: Borrower should repay 20M Swiss Franc (+SF rate interest) to Swing Loan Lender + $24USD to Bank B (+ USD rate interest)

       • Most rational option, as each bank funded in different currency

       • But Bank B would have Base Rate; and Bank A would have SF interest rate Lenders no longer in the same boat

       • When Borrower repay, Borrower has to pay Swing Loan upon maturity date in 10 days BUT should Borrower also pay the portion converted into Base Rate Loan (which doesn’t have maturity so why need to repay)?

    2. Convert immediately

       • When Bank A make the Swiss Franc Loan, should convert loan immediately into Dollars

       • Becomes a US$50M loan + 3 days interest on the US50M

       • After 3 days, Bank B pays 50% ($25M USD) when due, Borrower would repay $25M to Bank A and $25M to Bank B Dollar interest rate

    3. Always a SF loan

       • Always remains a SF loan between the Swing Loan Lender and Borrower

       • Borrow in SF, pay SF interest rate, repay in SF (40M SF)

    • Ideally should be specified in the agreement but not provided here

To what extent does the Borrower have proportionate obligations to all lenders (same boat) and to what extent does it not?

• All Lenders in same boat except

  • Fronting fee – only Issuing Bank gets it

  • Extra payment if ECR Loan is paid before end of Interest Period

    • If borrower repay Eurocurrency Loan early, the Bank can make demand for compensation, amount it entitled to is specified by the bank

  • Swing Loan Lender failed to demand payment

  • If SLL demands payment, payments by other Lenders become Base Rate Loans, 3.03(c), whereas original Swing Loan is …

    • Base Rate Loan Lender in Dollars v. Swing Loan Lender in Alternate Currency with different interest rate provisions

• Whether to draft to deal with contingencies when Lenders are not on the same boat

  • Since such drafting would be very complex, may have flaws

What happens with respect to the Lenders other than the Issuing Bank upon the issuance of a Letter of Credit or the drawing under a Letter of Credit?

• Only one bank issue the LofC, Lenders are not on the same boat unless in certain circumstances

• 3.04(f) “Immediately upon the issuance by an Issuing Bank of a Letter of Credit in accordance with the terms and conditions of this Agreement, such Issuing Bank shall be deemed to have sold and transferred to each Lender… to the extent of such Lender's pro rata share of the Commitments…”

• LofC is issued to a supplier Issuing Bank farm out pro rata share to other banks (note: no money change in hand)

• Immediately upon making a LofC, the obligation under the LofC are apportioned among all lenders [c.f. swing loan: optionally and at anytime]

• LofC: in Dolalrs and Euros remain in relevant currencies = no currency issues

• When Borrower fails to pay (a draw)

  • 3.4(h) “In the event that any Issuing Bank makes any payment under any Letter of Credit and the applicable Borrower shall not have repaid the Dollar Equivalent of such amount to such Issuing Bank pursuant to clause (g) or any such payment by such Borrower is rescinded or set aside for any reason, such Reimbursement Obligation shall be payable on demand with interest… Issuing Bank shall promptly notify the Administrative Agent, which shall promptly notify each Lender of such failure, and each Lender shall promptly and unconditionally pay to the Administrative Agent for the account of such Issuing Bank the amount of such Lender's pro rata share of such payment in Dollars (based upon the Dollar

  • Equivalent of such amount on the date of such payment) and in immediately available funds.”

  • When issuing bank make payment under letter of credit, Issuing Bank would first go to the Borrower if Borrower fails to pay notify Admin Agent to notify each Lender of such failure other Lenders should pay their pro rata share

  • All should automatically (or semi-automatically) happen

Lender’s Default

3. Assume that Bank A, Bank B, Bank C, and Bank D have, respectively Commitments of $500m, $500m, $300m and $200m. The Borrowers have total outstanding Loans (all related to Revolving Loans) of $900m, of which $300m is owed to Bank A, $300m to Bank B, $180m to Bank C, and $120m to Bank D. Borrowers want to borrow another $200 as a Revolving Loan and Bank B refuses to provide any funds in violation of its obligations under the Agreement. What are the consequences with respect to:

Commitment 1.5B (outstanding 900M want to borrower another 200M)

• A $500M (-300M)

• B $500M (-300M)

• C $300M (-180M)

• D $200M (-120M)

  1. the amounts already lent by Bank B;

  2. the amounts committed by Bank B but not yet lent;

  3. the obligations of other Lenders;

  4. undrawn Letters of Credit under which Bank B has obligations;

  5. Bank B’s right to receive principal and interest;

  6. Bank B’s right to receive fees under Section 2.05.

Do any of these consequences change if the U.S. Borrower terminates the unused amount of Bank B’s Commitment?

Who bears what costs in the event of a Lender Default?

What exactly is reallocated, and how is it reallocated, under Section 2.16(a)(i)?

• Kahn: We discussed extensively the Lender Default provisions and how they should be revised. Additional information is on the slides for the class.

• 2.16(a)(i) “in the case of each Defaulting Lender, the ratable portion of such Defaulting Lender with respect to any such outstanding Obligations will, subject to the limitation in the first proviso below, automatically be reallocated… among the Lenders that are Non-Defaulting Lenders pro rata in accordance with such Non-Defaulting Lenders' respective Commitments”

• Prof: Should be in this order “The ratable portion of any such outstanding Obligations to such Defaulting Lender [a bank] is reallocated among all other Lenders pro rata”

  • (a)(i) – ratable portion of such DL with respect to “any such” outstanding Obligations will be reallocated What does “any such” refer to?

    • Grammatical errors, shouldn’t use ‘such’

    • ‘such’ refers to what mentioned before:

    • “such Defaulting Lender” refers to “each Defaulting Lender”

    • “such outstanding Obligation” refers to “any which outstanding Obligation”

    • Weird consequences B shouldn’t get money back at all?

  • 1.01 “Obligations” means principal of and interest on the Loans made by each Lender to, and the Notes held by each Lender of, each Borrower or Swing Line Borrower and all other amounts from time to time owing… to the Lenders…”

    • Repayment of principal and interest of the Borrower to the Lender

    • Lender is owed obligation, instead of having obligation

    • Should use the term ‘Obligation’ as a defined term, just because it is defined as obligation from the Borrower to the Lender ‘obligation’ here refers to the obligation by Lenders to lend should not capitalized ‘obligation’

    • “reallocating the outstanding obligation to such Defaulting Lender”

  • Obligation of Bank B is 300M reallocate to A (300M 450M), C and D (200M)

  • Borrower thought it has 600M left, if B no longer want to lend (200M) only 400M left

    • 150M (from A) and 100M (from C and D combined)

  • Obligations is amount owning, i.e. $300 m

  • Reallocation: $150m to A, $90m to C, $60m to D?

  • What does it mean to have...