Investors looking to become active in a European company’s restructuring will often have to first acquire a sizable debt position under the relevant senior secured loan agreement. This is generally not a straightforward process and can be fraught with uncertainty. Many loan agreements syndicated during the 2004-2007 high-liquidity period were drafted on “borrower-friendly” terms, often including, among other things, secondary transfer provisions requiring the borrower to consent to any proposed new lender under the agreement.3
Borrower consent rights can pose major barriers for investors trying to accede as secondary lenders under a loan agreement and gain direct exposure to European bank debt. If a trade was conducted on Loan Market Association (“LMA”) documentation, mandatory settlement provisions could leave the investor having to settle via a funded participation, or some alternative means, so that the investor is left with economic risk exposure against the borrower and its trading counterparty (the existing lender of record) but without a voice on any future restructuring.
More and more frequently, borrowers granted consent rights under loan agreements are exercising them as a strategic measure of controlling the composition of their lending syndicate. While many loan agreements stipulate that any borrower consent cannot be “unreasonably withheld,” the historic lack of case law establishing what constitutes unreasonable behavior in a commercial context meant investors were left unsure whether they had legitimate grounds for challenging a borrower’s refusal of consent.
However, recent case law may begin to resolve the uncertainty. In the recent decision of Porton Capital Technology Funds and others v. 3M UK Holdings Ltd. and 3M Company (2011), the High Court in England applied consent principles well established in landlord and tenant property cases for resolution in a commercial contract dispute. The dispute involved the sale of a company, where a substantial part of the sale proceeds were payable based on an earn-out period after completion. In rendering its judgment, the High Court set out certain guidelines for determining whether consent was unreasonably withheld in the given circumstances. Applying these guidelines to a secondary bank debt transaction, where borrower consent is withheld and subsequently challenged as being unreasonable, the following approach may be utilized by the courts when making a determination:
- The burden is on the proposed new lender to prove that the withholding of consent by a borrower was unreasonable;
- A borrower does not need to show that its refusal of consent was right or justified, simply that it was reasonable in the given circumstances;
- In determining what is reasonable, the borrower may have regard to its own interests; and
- A borrower with consent rights is not required to balance its own interests with those of the proposed new lender or to have regard to the costs that that proposed new lender might be incurring.
While there is still little case law on this point, the High Court decision in Porton may provide guidance to investors. The findings merit attention from the bank debt community as to a rejected prospective lender’s uphill climb when disputing borrower consent refusals