Events of Default
| Title | Description |
|---|---|
| Big Picture | This nugget focuses on four key issues in relation to the Events of Default: certainty; scope; control; and robustness. It outlines the pros and cons of having objective versus subjective Events of Default from the point of view of both Borrowers and Lenders. It highlights the issue of the scope of the agreement, in terms of the companies which can be affected by it and which can have an impact on the availability of the finance under it. Finally, it also explains the Borrower’s concerns to ensure the agreement is robust, particularly in view of the cross default clauses, and that the Events of Default are within the Borrower’s control. |
| Purpose and Mechanics Part 1 | This part of this nugget focuses on the role of the Events of Default in allocating risk and in giving the Lenders leverage. It highlights the difference between automatic and non automatic Events of Default and the question of whether, once an Event of Default has occurred, the Borrower has any unilateral right to remedy it. It also looks at the relationship (or lack of it) between Events of Default and default interest. |
| Purpose and Mechanics Part 2 | This part of this nugget looks at the distinction between a Default and an Event of Default, and at the concept of a “Rollover Loan” in a revolving credit facility. It also considers the borrower’s position if the lenders serve notice of acceleration when the existence of an Event of Default is in dispute, and suggests some protections which the borrower might like included in the documents to cover this situation. |
| General Events of Default Part 1 | This part of this nugget deals with the Events of Default relating to non payment, failure to meet financial ratios, breach of undertaking and misrepresentation. |
| General Events of Default Part 2 | This part of this nugget looks at the Events of Default relating to insolvency, litigation, change of control and illegality. It focuses on the need for the borrower to ensure that, in the context of litigation, they have the right to defend the litigation without causing a breach of the loan agreement. It also highlights the difference between compulsory prepayment on change of ownership and more extensive requirements in relation to the borrower’s shareholders. |
| Cross Default | This nugget looks at the purpose of the cross default clause and some of the issues which it commonly gives rise to. In particular it highlights the spiralling effect of the clause, the difference between cross default and cross acceleration, and the types of contract which can trigger the clause, as well as looking at ways in which the borrower may seek to reduce the impact of the clause. |
| Material Adverse Change Part 1 | This part of this nugget looks at the arguments for and against the material adverse change clause and the importance of addressing the issue at the term sheet stage. It highlights the borrower’s concerns about the subjectivity of the clause and the degree of discretion which it gives the lenders. It also explains the lenders’ concerns to maintain the clause to use as a last resort in unforeseen circumstances and to bolster the effectiveness of the financial ratios. |
| Material Adverse Change Part 2 | This part of this nugget focuses on the drafting of the material adverse change clause. It highlights the distinction between a forward looking and a backward looking clause (does the change actually have to have happened?), and at the question of what has to be adversely affected. It looks at the level at which the change is tested (group or company) and the relationship with the financial ratios. It also notes the potential impact of laws other than the law of the loan agreement on the issue of enforceability of the clause. |