In recent times, lenders have been fielding an increased number of borrower requests for amendments and waivers of financing facilities. These requests commonly seek to accommodate changes to the debt profile or the relaxation of certain covenants, in light of the impact of the COVID-19 pandemic on borrowers' liquidity. Our previous Sound Bite looked at some of the commercial and practical factors for lenders to consider when assessing such requests. In this issue, we round out this topic by reviewing some legal and documentary considerations for English law facility agreements, which are often used in the region.

Documentation options: pros and cons

There are generally three options for implementing changes to a facility – an amendment letter, an amendment agreement (without restatement), and a full amendment and restatement agreement. These options are equally robust, but in the given circumstances one may be more appropriate than another. An amendment and restatement agreement will provide a single reference point for the full set of up-to-date facility terms, and this saves the parties from needing to piece this together over several amendment letters.

Where the timeframe is compressed, there may be more appetite for a simple amendment letter or agreement. This approach makes it easier for the parties to focus on the essential terms requiring amendment. By contrast, a full restatement may require the parties to consider whether to make ancillary changes (for example, incorporating recent LMA updates or stripping out historical provisions). Where only two parties need to sign, an amendment letter tends to work well. Alternatively, where signing is by multiple parties, it can be cleaner to use an amendment agreement.

A further consideration is who needs to sign the documentation. The LMA standard templates allow the facility agent to effect amendments on behalf of the other finance parties (provided that the agent has obtained the relevant approvals). However, in the case of more substantial amendments requiring all lender consent, it is prudent to have all lenders sign. On the obligor side, the parent or the obligor's agent is usually empowered to sign on behalf of all obligors, but it is best practice not to rely on this approach for more material amendments.

Lender consent thresholds

In a syndicated facility, it will be necessary to determine the lender consent threshold applicable to the matter to be amended or waived. This will typically be majority lender (usually 66⅔%) consent.  Certain reserve matters will instead require unanimous consent, primarily for terms impacting the syndicate's exposure and return, such as an extension of payment dates or reduction in margin. Notably, this does not usually include changes to financial covenants. There may be exceptions or variations to these thresholds in specific scenarios, such as "snooze you lose" and "yank the bank".

Guarantor confirmations and retaking of security

Lenders should keep in mind that existing guarantees and security are potentially vulnerable on an amendment. At law, it is fairly easy for guarantees to be inadvertently discharged by an amendment to the facility terms. A well-drafted guarantee will include "waiver of defences" language to address this risk. While this is helpful, it would be unusual for lenders to rely on it. The accepted practice is for all guarantors to provide confirmations of their guarantees, other than for the most trivial and guarantor-friendly amendments.

The position is different with existing security, and lenders need to consider carefully whether they can continue to rely on it. A key factor is firstly the nature of the secured liabilities, and whether the security is first- or third-party. The scope of third-party security is more likely to be interpreted more narrowly, as in the case of a guarantee. Another factor is whether the security is "all monies" or transaction-specific. If a lender has first-party, all moneys security that is properly drafted, in most cases there should be no need for the lender to retake security, even for very substantial facility amendments. However, this issue will need to be considered.

The drafting of the "secured liabilities definition", and the extent to which it covers future amendments, is key. As is the nature of the proposed amendments – the types of amendments that typically prompt lenders to retake security are significant facility increases, new facility purposes and new tranches that are not envisaged under the original facility. If there is a risk that the amendments could render the existing security ineffective, then a security confirmation is likely to be of little value and it will be necessary to take fresh security.

Waivers

Where it becomes apparent that there is a breach or default under the financing, a paramount consideration for lenders when determining next steps is to ensure that they do not inadvertently give a waiver through their conduct. The best practice in this scenario is for the lenders to issue a reservation of rights letter. This should make clear that any future discussions or actions relating to the breach or default shall not operate as a waiver of the lenders' rights or remedies under the financing, or a waiver of the breach or default itself.

As part of the waiver process, lenders should consider which rights under the facility agreement it is appropriate and acceptable to waive. For example, should all, or only some, rights be waived? Should the right to refuse a drawdown request be waived, in addition to the right to accelerate? Furthermore, some thought should be given to the scope of the waiver. Should the waiver be time-limited, or permanent? Should it attach certain conditions, or be unconditional? It is important that these matters are accurately reflected in the drafting of the waiver document.

By taking into account the above points from the outset, lenders can ensure that the legal and documentary aspects of the amendment or waiver are properly aligned with the broader commercial and practical factors at play. This will also promote a smoother and more efficient amendment or waiver process that provides flexibility for the borrower's business, while at the same time protecting the lender's rights.