Since the news broke about Silicon Valley Bank, Signature Bank, and other banks over the past week, Reed Smith has received a stream of inquiries from borrowers and lenders as to what issues they need to consider. This article summarizes the most frequently asked questions we have received, including our responses. We are focusing here on the U.S. perspective, but we will offer our UK perspective where applicable. As used herein, the term “affected lender” refers to any lender whose property and operations are under the control of the Federal Deposit Insurance Corporation (the “FDIC”) as receiver, or otherwise subject to a bank recovery process.
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Q: Is the affected lender a “defaulting lender” under the terms of my credit agreement?

A: Potentially. Whether or not the affected lender is considered a “defaulting lender” under your credit agreement depends on the specific definition of “Defaulting Lender” in your documentation. Most credit agreements now include standard LSTA (or in the UK, the LMA) defaulting lender provisions. These provisions were introduced into documentation in the aftermath of the global financial crisis of the late 2000s to address a lender (or administrative agent) that was no longer in a position to fulfill its obligations as lender or agent. The standard definition of Defaulting Lender includes lenders in a receivership. Importantly, however, if the FDIC has appointed a bridge bank and transferred all of the affected lender’s assets to such bridge bank, then the affected lender would no longer be considered a defaulting lender unless the bridge bank itself is in receivership.

The remedies available to the borrower and the non-defaulting lenders include (i) disenfranchising the defaulting lender from voting on consents, amendments and waivers, (ii) in revolving credit facilities, reallocating the defaulting lender’s participation in letters of credit and swingline loans among the non-defaulting lenders, (iii) allowing the borrower to replace the defaulting lender with a new lender, (iv) allowing the borrower to cancel the undrawn commitments of the defaulting lender and appointing existing or new lenders to make up the cancelled commitments, and (v) in the case of a defaulting agent, allowing all parties to make payments through another entity or directly between lenders and the borrower.

Q: I am a borrower; should I continue to make payments on my loan?

A: Yes. According to the FDIC’s March 10, 2023 press release, “[l]oan customers should continue to make their payments as usual.” Pursuant to the Federal Deposit Insurance Act, the FDIC

“may withhold payment of such portion of the insured deposit of any depositor in a depository institution in default as may be required to provide for the payment of any liability of such depositor to the depository institution in default or its receiver, which is not offset against a claim due from such depository institution, pending the determination and payment of such liability by such depositor or any other person liable therefor.” 12 U.S.C. § 1822(d).

Loan customers, however, should consult their counsel regarding such payments and any rights of setoff or recoupment.