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.
Q: I am a borrower and I want to refinance my existing credit agreement with a new lender. What should I expect?
A: The typical steps involved in relation to any refinancing include serving notice of termination to the outgoing lender, calculating the full repayment amount (including accrued but unpaid interest and any unpaid costs and expenses), evidencing actual repayment of the full termination amount, and releasing any security granted in favor of the outgoing lender.
Normally, the outgoing lender is involved in the refinancing and will confirm the termination amount, acknowledge receipt of such amount on the refinancing date, and sign the applicable security release documents. However, if the outgoing lender is an affected lender, particularly in the early days of the recovery process, it may not be in a position to cooperate in the refinancing process. In this scenario, the borrower and the new lender may need to take a pragmatic view on some of these steps. For example, the borrower and the new lender will collectively calculate the termination amount. Receipt of the termination amount could be evidenced by an electronic payment confirmation (such as SWIFT), thus sidestepping the need for confirmation from the affected lender.
Q: What is the process of releasing the affected lender’s existing liens in connection with a refinancing?
A: In many cases, if not all, the involvement of the affected lender will be necessary to terminate the security agreement between the borrower and the affected lender. This is the point at which the new lender will need the most pragmatism: if the affected lender has been repaid in full, but the old security has not been released, the liabilities secured by the old security are now zero, so that security is of no practical effect. So while the new lender would only get second ranking security, it is second ranking behind liabilities of zero.
Q: I am a lender and my borrower's bank accounts over which I have security are with an affected lender. What does this mean for me?
A: There are two issues to consider in this scenario. First, if the accounts with the affected lender are the sole bank accounts of your borrower, your borrower may not be able to access the applicable account(s), and therefore will not be able to make payments to you when due, even though the borrower has sufficient funds in the applicable account(s). Technically, if payment is not made, such non-payment will trigger a default under the credit agreement. However, because the failure to make such payment is outside of the borrower’s control, the lender and borrower should be flexible in their approach to remedying the situation. It will take time for the borrower to set up new bank accounts with a different account bank, and we would suggest that you inform the borrower in writing that the non-payment default has occurred and (assuming you are willing to agree to this) allow them a grace period to pay commensurate with the amount of time necessary to open new bank accounts. Second, your security over the affected bank accounts will remain effective notwithstanding the account bank being in a recovery process. Note, however, that the recovery process may delay your ability to enforce against those accounts. Furthermore, you should ensure you take security over the borrower’s new bank accounts as soon as they are opened, and require the borrower to pay all incoming amounts (from drawdown proceeds and/or underlying assets, as applicable) into the new accounts as soon as they are opened.
Q: How are letters of credit impacted?
A: If an affected lender is an issuing bank under a credit agreement, it will be obligated to issue letters of credit ("LCs") when requested by the underlying borrower. It is possible that the intended beneficiary of the LC may not accept an LC issued by an affected lender. If this occurs, the borrower should look to the credit agreement for alternative approaches to issuing LCs, such as allowing another lender in the syndicate to provide an LC under a separate credit facility. If there are ancillary facility provisions in a credit agreement this may allow a borrower to approach another lender in the syndicate to provide an LC under an ancillary facility.
If an LC has already been issued by an affected lender and the beneficiary makes a demand under that LC, then it is possible, especially in the early days of the recovery process, that the demand will not be paid. In addition, the borrower should also be mindful of its obligations under the credit agreement to pre-fund or cash collateralize the LC.
Q: How do I submit a claim?
A: Any creditor of an affected lender prior to its closing should register and file claims with the FDIC as receiver. More details on what is required can be found at the FDIC Claims Portal.
Q: What if I have any other questions?
A: All affected customers can contact the FDIC directly at 866-799-0959 for questions regarding their deposits. You should also reach out to your legal and financial advisors for advice regarding the particular bank recovery process impacting your affected lender.
There are other important issues and priorities that all fund finance industry participants should be considering and acting upon as soon as possible. Our priority is to service our clients in an effort to protect them and to identify opportunities for continued fund finance activity.
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