Managing Reorganisations: Restrictions During the Term of a Loan Facility

Lenders provide finance based on a clear picture of a borrower’s structure, assets, cash flows, and risk profile at the outset. The terms of the loan are tailored to the profile of the borrower. Any changes during the term of the loan could impact the lender’s risk and security position.

In the event of a business restructure, the bank’s main priority is to ensure that the companies responsible for repaying loans, following the change in structure, are not impacted in a way that would diminish the lender’s ability to be repaid.

If the bank has security over any of the group’s assets, it will also want to make certain that the reorganisation does not adversely impact the validity or strength of that security.

Suppose the group can demonstrate that the reorganisation will not negatively affect the group’s financial position or the lender’s security. In that case, the lender is likely to provide its consent, subject to certain conditions, which may include taking additional security.

Any delay in obtaining bank consent for a reorganisation can have significant tax and legal implications; therefore, it is essential that the borrower checks the loan agreement before proceeding with any structural changes and considers, among other things, the following points carefully.

• Where the assets of the borrower are subject to security in favour of a lender, will the lender allow the existing security to be released and take new security from the entity to which the assets are transferred?
• Would the reorganisation result in the crystallisation of a floating charge? If so, this would result in the floating charge converting into a fixed charge, limiting the borrower’s ability to deal with the affected assets.
• Will updated guarantees or additional security, such as a guarantee, debenture, share pledge, asset-specific security or assignment of debts or receivables, be required as part of the restructure?
• Are there multiple or syndicated facilities in place? If so, this could add complexities to the reorganisation process due to the borrower or the security agent having to obtain consent from several lenders or the security agent, each with their own requirements and approval processes. Having multiple facilities in place could also increase the risk of cross-default provisions being triggered, which in turn may result in the termination of facilities, acceleration of debt repayment and/or enforcement of security.

Before undertaking any restructuring, the group should seek advice from legal and financial advisers to ascertain potential issues under the finance documents and communicate proactively with the lender(s) in order to obtain the necessary consents.

By engaging at the early stages, the group could prevent breaching covenants, avoid unexpected costs and delays in lender approval, thereby ensuring a smooth reorganisation process.