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DF SGS 3 Consolidation Part 1
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Comprehensive exam notes on SGS 3 debt finance based on the learning outcomes and small group session activities at BPP. This part follows part 2.
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Events of DefaultGeneral: EoD
EoD = serious consequences: even if the lenders do not accelerate,
it may lead to a drawstop (particularly serious if the facility is an RCF).
A drawstop could, in turn, lead to the insolvency of the borrower if it can’t find an alternative source of
funds.
EoD may also trigger cross defaults in other loan agreements.
Lenders will want to preserve the relationship with the B if possible -> however, they must also ensure that
they are not risking loss.
Risk of waiving an Event of Default
creates a risk for the lenders.
If they waive an Event of Default thinking that the matter is not serious and the borrower then becomes
insolvent, the lenders may well lose money.
Objectively, the bank is in the more powerful position, although relationship factors may affect the balance.
1. Auditors have not delivered accounts for the year end. Is it OK if we get them to you within the next 3 weeks?
a) Loan Agreement and Event of Default
audited accounts should normally be been delivered as soon as they become available but in any event
within 120 days after the end of the financial year.
If accounts are late -> Event of Default for breach of ‘other obligations’
BUT: breach is capable of remedy -> 5 Business Day grace period before it becomes an EoD- i.e potential EoD
Further Information
not clear whether we are in the 120 day period running from the end of the financial year; or
whether we are now in the five day grace period
If the accounts will be delivered no later than the end of the grace period -> no need for a waiver (not EoD)
Note: B under obligation to notify the Agent of a Default under clause 20.5.1! If breached, this clause would be an
additional Event of Default under clause 23.3.
b) Should Premier Bank waive?
Further Information
Bank should make enquiries as to why the accounts are to be delivered late.
Bank needs to consider whether the delay in accounts indicates a problem or whether there is a simple
explanation
Bank could ask B to authorise its auditors to confirm the reasons to it i.e. waiving B’s confidentiality
If Bank thinks the accounts will show a breach of financial covenant(s) and that’s why they are delayed ->
less likely to waive the Event of Default.
If auditor’s fault -> grace period expired today + situation is now EoD, Bank may decide to grant waiver
Conditions on a waiver
If a waiver is granted:
-> valid for limited time – i.e end of next week
-> it should only relate to the particular Event of Default, not to all Events of Default arising out of a given event.
--> waiver fee is very likely to be payable.
-> A waiver also gives Bank opportunity to re-negotiate the terms/ structure of the loan
- i.e its margin and make paying an increased margin a condition of the waiver
2. B is being sued for patent infringement in Sweden
a) Loan Agreement and Event of Default
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