There are various reasons why a corporate group may wish to reorganise its structure. Standard drivers include preparation for a sale or merger, improvement of financial performance and refinance or restructure of debt.
Whatever the objective, it is essential that the management team consults with professional advisers and carefully considers the effects of a new structure from a tax, operational and legal perspective. When a corporate reorganisation involves dealing with new or existing loans, the potential banking consequences must also be taken into account at the outset, especially when time is of the essence.
Our Banking Lawyers explore the challenges and key considerations that arise when corporate groups undertake reorganisations during the term of a loan facility, with a focus on common lender restrictions and the importance of early engagement.
Lender considerations
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.
Key lender limitations during loan terms
In order to protect the lender’s interest, where a group company involved in a reorganisation has existing banking facilities, such as a term loan or a revolving credit facility, the facility terms will likely contain provisions that impose restrictions on the relevant company’s ability to do certain things during the term of the loan, without the lender’s consent.
Below is a list of limitations typically found in loan agreements which may be triggered as a result of a reorganisation:
- change of control;
- restrictions on distributions to shareholders;
- restrictions on disposals and acquisitions, noting however that specific disposals and/or acquisitions may be permitted;
- negative pledge which places prohibitions on granting security interests over assets to other lenders without consent;
- cross-default provisions which provide that default may be triggered under the loan agreement if a group company defaults under another unrelated agreement; and
- financial covenants, requiring the maintenance of certain financial conditions which may be affected by a reorganisation.
Borrower considerations
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.
Consequences of breaching loan agreement provisions
If any limitations placed on the borrower are breached, this may result in an event of default under the loan terms which can give the lender the right to accelerate repayment of the loan, charge additional fees, refuse further drawdowns and take steps to enforce any security over the borrower’s assets.
Should a default occur, the borrower should take steps to remedy the breach and seek retrospective consent from the lender(s).
Such consent may be conditional on the provision of additional security or renegotiation of the facility terms. In addition, the borrower should seek legal advice as soon as possible to minimise negative consequences and avoid enforcement actions.
The importance of proactive planning
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.
Contact Our Banking Lawyers
Planning a corporate reorganisation? Don’t let hidden loan restrictions derail your strategy. Contact our banking lawyers for practical, forward-thinking advice.
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