How Borrowers Can Protect Their Funding Availability

With the current turmoil in the money markets borrowers are advised to understand the detail of their borrowing agreements to counter the risk of lenders seeking justifications to cease lending or to lend on more adverse terms.

Borrowing agreements are receiving more attention. Flagging the pitfalls for corporate borrowers to avoid, the ACT, in conjunction with Slaughter and May, has today launched the Borrower's Guide to the LMA (Loan Market Association) Facilities Agreement for Leveraged Transactions.

The new guide stands alongside the existing guide to the LMA investment grade loan agreements. It provides timely advice to treasurers and finance directors on maintaining flexibility in their dealings with lenders under agreements using terms taken from the LMA Leveraged Facilities Agreement. Many points will also be of interest to investment grade companies.

Issues addressed in the guide also include many of those thrown into focus as a result of adverse market conditions:
• Borrowers need to be confident that they can prevent lenders from trading on loans to new parties that may be less 'borrower friendly', and who could prevent waivers and renegotiations.
• Borrowers can benefit from a right to remove uncooperative banks from the syndicate - a "yank the bank" clause.
• In a similar vein inclusion of a "snooze and lose" clause allows the borrower to ignore banks that fail to respond to requests for changes to the agreement or with a "delay and it's OK" clause to assume agreement for banks not replying.

Richard Raeburn, Chief Executive of the ACT, explained: "In the current markets borrowers have seen pressure on credit margins. However, in extreme circumstances it is not so much the cost of borrowing but the availability and terms and conditions that become absolutely critical. For example, inclusion of the 'yank the bank' clause could be essential to avoid hampering recovery and reconstruction plans or, in the worst case, disaster."

The new guide was produced for the ACT by Philip Snell, partner, and Kathrine Meloni, professional support lawyer, both of Slaughter and May. Philip commented: "As we pass the first anniversary of the onset of the credit crunch, many borrowers face lenders seeking more restrictive lending terms. The new ACT Borrower's Guide will, we hope, provide a useful point of reference not only for borrowers involved in leveraged financing transactions but also for those involved in other types of financing transactions, especially those involving cross-over and sub-investment grade credits."