A recent case has highlighted the need for care in drafting "equity cure" provisions in syndicated facilities agreements. The case has also clarified how standard LMA provisions regarding the acceleration of facilities and subsequent waivers will be interpreted.
The case was brought by a minority lender seeking to prevent the majority lenders from waiving a notice of acceleration. The acceleration notice had been served due to a breach of financial covenants in the relevant facilities agreement. The borrower group had tried to cure this breach using the "equity cure" mechanism in the facilities agreement. The equity cure was effected by repaying intra-group loans and redeeming equity instruments owed to the borrower group's holding company, and then immediately reborrowing the same amount from the holding company. This met the requirements of the equity cure provisions, but the minority lender objected since no "new" money had been invested in the borrower group.
The majority lenders considered the equity cure to be ineffective. Following acceleration, the majority lenders sold their debt to companies connected to the borrower group, and those connected companies sought to withdraw the acceleration notice and waive the breaches of the facilities agreement.
The court found that:
- the equity cure was effective, even though it did not improve the group's financial position. There was no need to look at the commercial purpose of the equity cure provisions, just whether the terms of the facilities agreement relating to the equity cure had been complied with. The equity cure was given accounting treatment in the facilities agreement that differed from standard accounting practice. The commercial benefit of borrowing further funds under the equity cure was questionable. Based on these factors, the court could not agree with the minority lender's argument that the equity cure should fulfil a commercial purpose by introducing new money when its terms went against commercial sense and commercial accounting practice.
- although the acceleration had placed the loans on demand, the borrowers were still bound by the original repayment schedule in the facilities agreement. Withdrawing the acceleration notice and reverting to the original repayment schedule did not constitute an extension of the term of the loans that would require all lenders' consent in order to be effective.
- Waiving the acceleration of the loans was not a variation of the terms of the facilities agreement, which would have needed all lender consent. The majority lenders had the right to accelerate, and therefore only the majority lenders, not all lenders, had to consent in order for the withdrawal to be effective.
This case shows a common sense approach to lenders' rights under a syndicated facilities agreement. The minority lender's arguments were not without merit, but the court had to consider the interests of all parties in determining how the relevant clauses of the facilities agreement should be interpreted. It would have been a strange outcome if the majority lenders were permitted to accelerate the debt but not waive the acceleration.
The case also shows that a borrower's obligations should be clearly identified in the finance documents. Lenders will have difficulty in convincing a court to look beyond the precise words of the documents to establish whether the borrower has complied with its obligations.
Points to note
Lenders should ensure that any commercial purpose that they are seeking to achieve through a facilities agreement is clearly captured in the wording of the document. Lenders should also consider any adverse interpretation that might be given to the wording of finance documents when they are negotiated.
Equity cure and subordination provisions should be carefully drafted to prevent borrowers recycling existing cash if this is what the lenders want.
A more detailed note regarding this case can be found here.