What happens in an asset finance
transaction if a lender becomes insolvent? Until the collapse of
Lehman Brothers, this question was rarely contemplated in the
market. Indeed, the detailed default provisions found in most
financing agreements focus on default by the borrower, not the
lender.
The key question in the current market is:
what changes should be made to finance documents to address this
issue?
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The Loan Market Association (LMA) is expected
to issue a revised draft of its standard facility agreements to
address this issue. In particular it will look at:
(i) How an insolvent, or otherwise defaulting
lender, is to be treated under the financing agreement.
(ii) What happens if the agent bank becomes
insolvent and fails to make onward payment to the banking syndicate
or a payment to the borrower.
Until the LMA publishes its revised draft,
many finance documents (in all banking sectors, including asset
finance) are now incorporating provisions to deal with these two
issues.
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By GlobalDataIn relation to secured debt asset financing,
it is helpful to distinguish between facilities that are utilised
in full on first drawdown (for example, financing of existing
equipment) from facilities that can be utilised in tranches over
time (for example, financing of pre-delivery instalments for
aircraft or other assets).
For the former, the insolvent lender will have
no further obligation to advance funds and, therefore, it may only
be necessary to remove or modify their voting rights. For the
latter, borrowers may want to include provisions to facilitate
replacement of the insolvent lender as well as
disenfranchisement.
Where assets are to be leased and the
production contract is in the name of the lessor, the lessee may
want to ensure that it can exercise ‘step-in’ rights against an
insolvent lessor (particularly in respect of manufacture, delivery
and warranties) so that either the lessee, or an alternative
financier, can replace the lessor and perform the production
contract.
In relation to ‘impaired agents’ (for example,
insolvent agent banks) in syndicated transactions, the new
solutions being considered in the market include inserting
provisions:
(a) That allow payments and communications to
be made in certain circumstances directly between the other
parties, and without them going via the (insolvent) agent.
(b) Where the agent is insolvent, to allow
payments to be made into an interest-bearing trust account until a
successor (solvent) agent is appointed.
Comment
The current economic climate
continues to present new issues with potentially significant
consequences. It is, therefore, increasingly important that the
terms agreed in any financing documents keep pace with these
developments to ensure that the parties involved have an
appropriate level of protection, and that asset operators are not
exposed unnecessarily to financier insolvency risks.
Emma Seaton is
a lawyer and Graeme McLellan is a partner in the
asset finance team at Pinsent Masons LLP
