Current Trends in Loan Transactions

Association of Commercial Finance Attorneys

February 24, 2010

Panel Members

• James A. Dempsey is an of counsel with Greenberg Traurig. James focuses his practice on all aspects of secured and unsecured commercial loan financings. He is experienced in cash flow and asset-based transactions, mortgage warehouse lending agreements, syndicated loan financings and workouts for major U.S. banks and financial institutions. James also works on general corporate matters, including acquisitions and asset sales and advises clients on debt restructurings and credit modifications. He is a member of the Advisory Board of the Commercial Finance Association and a member of the Executive Board of the Association of Commercial Finance Attorneys.

• Thomas P. Duignan is a Shareholder with Greenberg Traurig.  Tom focuses his practice on asset based, commercial and real estate loan transactions and workouts, vendor and equipment finance, and in representing buyers and sellers of financial assets.  He has significant experience representing financial institutions in syndicated credit facilities, single lender transactions, multicurrency transactions, cross border transactions, letters of credit, and intercreditor arrangements.  Tom is a Certified Public Accountant, a Fellow of the American College of Commercial Finance Attorneys, and a member of the Executive Board of the Association of Commercial Finance Attorneys.

• Daniel M. Ford is a Partner in Hahn & Hessen LLP’s Business Finance Practice Group.  Mr. Ford represents financial institutions and borrowers in all aspects of commercial lending transactions (including workouts and reorganizations).  He has experience in structuring and negotiating a wide variety of domestic and cross-border financing transactions, including acquisition and leveraged buyout financings, asset based financings, exit financings and letter of credit facilities.  Mr. Ford is a graduate of Washington University in St. Louis (B.A. with Honors) and a graduate of Case Western Reserve University School of Law (J.D., Magna Cum Laude).  While at Case Western, he was elected to the Order of the Coif and was a member of the Law Review.  

• Richard L. Stehl is a Partner at Otterbourg, Steindler, Houston & Rosen, P.C., New York, New York. Since joining Otterbourg, Steindler, Houston & Rosen, P.C. in 1993, Mr. Stehl has represented institutional lenders, finance companies, hedge funds, factors and insurance companies in connection with the documentation of secured lending transactions, workouts and reorganizations.  Mr. Stehl received his law degree from St. John’s University School of Law in 1992 and earned a Masters in Law, with a concentration in Corporate Law, from New York University Law School in 2001.  Mr. Stehl also holds a Masters in Business Administration from Hofstra University School of Business (1992) and a Bachelors in Business Administration from Adelphi University (1987). Mr. Stehl is admitted to practice in the States of New York and Connecticut.

State of the Market

• Many transactions are being reviewed by lenders, but approvals have been difficult to obtain

• When approved, Borrowers have been negotiating term sheets, proposal/commitment letters extensively

• Many transactions which do close are relationship driven (for example, the lenders have a working relationship with a sponsor)

• Amend and Extend: Is this still a strategy being used by lenders?

Pricing and Covenants

• Interest rate floors are still being used in most middle market transactions, they seem to be disappearing from larger transactions

• Covenants were tightening early in 2009

• Trend seems to have deal terms heading back to where we were two years ago

IMPACT OF TOUSA DECISION

• See Official Committee of Unsecured Creditors of TOUSA, Inc. v. Citicorp N. Am., Inc., Adv. Pro. No. 08-1435 (JKO) (Bankr. S.D.Fla. Oct. 30, 2009).

• Is there a renewed focus on fraudulent conveyance risk in light of the TOUSA decision?

• Are Savings Clauses being deleted or revised?

FRAUDULENT CONVEYANCE

• Court in TOUSA set aside obligations incurred and liens granted by subsidiaries of TOUSA, INC. under various loan agreements and upstream guarantees under both federal bankruptcy law and applicable state law because the subsidiaries:(a) did not receive reasonably equivalent value(b) were insolvent both before and after the transfers(c) were unable to pay their debts as they became due as a result of the transfers, and(d) were left with unreasonably small capital with which to operate their businesses as a result of the transfers.

FRAUDULENT CONVEYANCE(Continued)

• Court rejected arguments that:(a) that it was impossible to determine solvency of the individual subsidiaries and the entities operated as a “common enterprise”.(b) subsidiaries received direct or indirect benefits of the transactions.

• Lenders were required to disgorge all principal, interest, costs, expenses and other fees and amounts received, awarded pre-judgment interest, and ordered the lenders to pay attorneys’ fees and other costs of the plaintiff.

“Solvency” Savings Clause

• Standard savings clause generally provides that the obligations incurred and the liens granted would be reduced to the extent necessary to avoid a fraudulent conveyance

• Court said:– Debtor was insolvent at the time of the transfer so no

reduction in obligations would help– Savings clauses are unenforceable as “ipso facto”

clause– Savings clause seeks to avoid principles of

Bankruptcy Code– Savings clause was unenforceable under contract law

because too indefinite

Syndicated Loan Facilities

• Defaulting Lenders and their treatment under documents have been scrutinized

• Defaulting Lenders definition being broadened to include:

Any Lender that has defaulted in its funding obligation

Any Lender that Agent believes will be unable to meet its funding obligations

Syndicated Loan Facilities(Continued)

• Defaulting Lenders definition continued:

Any Lender that has become insolvent or is the subject of an insolvency proceeding

Any Lender whose parent or affiliate has become insolvent or is the subject of an insolvency proceeding

Syndicated Loan Facilities(Continued)

• Defaulting Lenders definition continued:Any Lender that has defaulted under similar credit facilitiesAny Lender that has issued a public statement that it will be unable to perform under the particular credit facility or under similar credit facilitiesAny Lender that is taken over by the FDIC or is otherwise owned or controlled by the Federal government

Syndicated Loan Facilities(Continued)

If a Defaulting Lender is defined to include an institution taken over by the FDIC, pay careful attention to provisions of the Federal Deposit Insurance Act (12 USC Section 1811, et seq.) when reviewing rights against that Defaulting Lender. For example:

Syndicated Loan Facilities(Continued)

12 USC Section 1821(e)(13)(C) provides that “no person may exercise any right or power to terminate, accelerate or declare a default under any contract” that the failed institution is a party to for a period of (a) 45 days after appointment of the FDIC as a conservator and (b) 90 days after appointment of the FDIC as a receiver

12 USC Section 1823(e) imposes specific requirements on modifications of loans involving failed institutions taken over by the FDIC

Syndicated Loan Facilities(Continued)

• Treatment of letter of credit facilities in situations involving Defaulting Lenders:

Borrower often required to pledge cash collateral to cover exposure of non-defaulting lenders participating in letter of credit facility

Issuing lender is permitted to reduce letter of credit availability by the Defaulting Lender’s pro rata share of the letter of credit sublimit

Syndicated Loan Facilities(Continued)

• Treatment of swing line facilities in situations involving Defaulting Lenders:

Advances under swing line should be discretionary so swing line lender is not obligated to assume fronting risk for Defaulting Lender

Swing line lender is permitted to reduce swing line availability by the Defaulting Lender’s pro rata share of the swing line facility

Syndicated Loan Facilities(Continued)

• Defaulting Lenders lose various rights including:

The ability to vote their interest (retains right to approve any increase in commitment)

The right to receive payments of principal, interest and fees

The right to reimbursement of expenses

Syndicated Loan Facilities(Continued)

• Borrower or Agent may force a Defaulting Lender to assign its rights and obligations to an existing or new Lender:

Assignment would typically be at par so this may not be a viable alternative in today’s market.

What if Defaulting Lender is in bankruptcy?

Syndicated Loan Facilities(Continued)

• Borrower may request right to terminate Defaulting Lender’s commitment and repay its outstanding loans – probably not an attractive alternative to other Lenders, particularly in a workout

• Is Borrower able to borrow from non-defaulting lenders in order to meet its financing needs?

• How does a Lender default affect excess availability calculations from the purposes of financial covenant testing financial reporting pricing grids cash dominion, permitting restricted payments, etc.

Syndicated Loan Facilities(Continued)

• Any trends toward lenders or borrower being able to remove agents?

What happens if FDIC is appointed as a receiver or conservator of the agent?

What happens if agent is the subject of an insolvency proceeding?

In recent bankruptcy of Lehman Commercial Paper, Inc., funds in Lehman’s agency account were not an asset of the estate.

Syndicated Loan Facilities(Continued)

• Amendments and Waivers requiring unanimous consent– Subordination of lien position– Changing/creating new tranches of

indebtedness– Providing superior rights and increased

pricing for new tranches of indebtedness– Changing waterfall to require payments to be

made on new money or to new tranches ahead of payments on existing indebtedness