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Loan Forbearance Options
and Waivers After Default Crafting Forbearance Agreements That Minimize Lender Liability and Bankruptcy Risks
Today’s faculty features:
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WEDNESDAY, SEPTEMBER 5, 2012
Presenting a live 75-minute webinar with interactive Q&A
Andrew L. Turscak, Partner, Thompson Hine, Cleveland, Ohio
Curtis L. Tuggle, Attorney, Thompson Hine, Cleveland, Ohio
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ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.
Loan Forbearance Options and Waivers After
Default: Crafting Forbearance Agreements that
Minimize Lender Liability and Bankruptcy Risks
Curtis L. Tuggle
Thompson Hine LLP
Cleveland, Ohio 44114
Curtis.Tuggle@ThompsonHine.com
216-566-5904
Andrew L. Turscak, Jr.
Thompson Hine LLP
Cleveland, Ohio 44114
Andrew.Turscak@ThompsonHine.com
216-566-5617
6
Overview of Presentation
I. Essential Due Diligence
II. Reservation of Rights Letter
III. Agreement: Forbearance or Waiver
IV. Specific Drafting Points for Waiver Agreement
V. Specific Drafting Points for Forbearance Agreement
7
I. Essential Due Diligence
■ Review the Lender’s most recent asset quality report for the
Borrower to understand the history of the credit and
contemplated exit strategies.
■ Review correspondence among the Lender and the Borrower,
other Credit Parties, Guarantors and Subordinated Lenders.
Keep in mind, syndicated facilities will require reviewing
correspondence between the Administrative Agent and Lenders.
■ Analyze Credit Agreement, Loan Documents, Security
Documents, Guaranty Agreements, and Subordinated
Indebtedness Documents to identify any issues that may need to
be addressed (e.g., Documentation Errors, execution of
Landlord’s Waiver, issuance of Subordination Notice, etc.).
8
I. Essential Due Diligence (cont.)
■ Request UCC-1 search for the Borrower, other Credit Parties and Guarantors.
■ Review filings with the United States Patent and Trademark Office.
■ Request updated title reports and appraisals on real property subject to
Mortgages.
■ Request current financial information of the Borrower, other Credit Parties and
Guarantors.
■ Identify additional personal and real property of the Borrower, other Credit
Parties and Guarantors that may be pledged as collateral.
9
II. Reservation of Rights Letter
■ Formal notice by the Lender to the Borrower, other Credit Parties, Guarantors,
and Subordinated Indebtedness Holders of the occurrence of a Default or
Event of Default.
■ Express reservation of all of the Lender’s rights and remedies under each of
the Loan Documents and applicable law.
■ Specific Drafting Points:
► Lender’s identification of the Specified Default does not imply the non-
existence of any other Defaults or Events of Default.
► Specified Default is continuing and has not been waived by the Lender or
cured by or on behalf of the Borrower.
► Lender’s acceptance of payment shall not constitute or be deemed to
constitute a cure or waiver of the Specified Default.
10
III. Agreement: Forbearance or Waiver
■ Relevant Factors to Consider:
► Seriousness of the Specified Default – Is it a Financial Covenant Default or
Payment Default.
► Overall Stability and Viability of the Borrower’s business.
► Impact the existence of the Specified Default is likely to have on the
Borrower’s business operations including, among other things,
relationships with customers and suppliers.
► Impact the waiver of the Specified Default may have on implementing and
achieving the Lender’s overall Exit Strategy (e.g., impairment of the
Borrower’s ability to secure refinancing or the Lender’s enforcement of
Guaranty Agreements.)
11
IV. Specific Drafting Points for Waiver Agreement
■ Form of Agreement
► Amendment to Credit Agreement (Financial Covenant
Adjustments)
► Stand Alone Waiver Agreement
► Letter Agreement
IV. Specific Drafting Points for Waiver Agreement (cont.)
■ Key Provisions for Agreement
► Specifically identify the “Specified Default” that Lender is waiving
and the conditions of the limited waiver - Sample Provision:
Waiver of Specific Defaults. Borrower has notified Lender that Borrower has failed to
comply with (a) the covenant set forth in Section 6.11(b) (Consolidated Total Leverage
Ratio) of the Credit Agreement for the periods ending June 30, 2010, September 30,
2010, December 31, 2010, March 31, 2011 and June 30, 2011 (collectively, the
“Leverage Ratio Violations”), (b) the covenant set forth in Section 6.11(e) (Minimum
Consolidated EBITDA) of the Credit Agreement for the periods ending June 30, 2010,
September 30, 2010, December 31, 2010, March 31, 2011 and June 30, 2011
(collectively, the "Minimum EBITDA Violations"), and (c) Section 7.01(i) of the Credit
Agreement by virtue of Borrower’s failure to pay certain debts as they became due as
of the date hereof (collectively, the "Debt Violations", and together with the Leverage
Ratio Violations, and the Minimum EBITDA Violations, collectively, the “Violations”).
Borrower has requested that Lender waive the Defaults or Events of Default that exist
solely by virtue of the Violations (collectively, the “Specified Defaults”).
12
IV. Specific Drafting Points for Waiver Agreement (cont.)
Lender hereby waives the Specified Defaults on the condition that, after giving effect
to the terms of this Agreement, no Default or Event of Default shall exist under the
Credit Agreement or any other Loan Document. This Agreement shall serve as
evidence of such waiver. Borrower acknowledges and agrees that (a) the waiver
granted herein applies only to the Specified Defaults that relate to the periods set forth
in this Section 9 and to no other period, (b) except with respect to the limited waiver
granted herein specifically relating to the Specified Defaults, Lender shall not be
under any obligation to forbear from exercising any of its rights or remedies upon the
occurrence of any Default or Event of Default, and (c) Lender has not established any
course of dealing with respect to such limited waiver or otherwise that is inconsistent
with the express terms of the Credit Agreement and the other Loan Documents. The
limited waiver requested by Borrower and granted by Lender hereunder relates solely
to the items specifically set forth in this Section 9. No further waiver has been
requested or granted.
13
14
IV. Specific Drafting Points for Waiver Agreement (cont.)
► Acknowledgement of Continuation of Liabilities - Sample
Provision:
The obligations of Borrower under the Credit Agreement and other Loan Documents
shall, except as expressly modified herein, remain in full force and effect, and shall
not be released, impaired, diminished or in any other way modified or amended as a
result of the execution and delivery of this Agreement or by the agreements and
undertakings of the parties contained herein. Borrower hereby ratifies and confirms
each of the Loan Documents to which it is a party and the rights granted thereunder
in favor of Lender. Borrower hereby confirms that the security interests and liens
granted pursuant to the Credit Agreement and other Loan Documents continue to
secure the obligations of Borrower under the Credit Agreement and other Loan
Documents, whether presently existing or hereafter arising, and that such security
interests and liens remain in full force and effect.
IV. Specific Drafting Points for Waiver Agreement (cont.)
► Representations and Warranties
● General Representations and Warranties – Sample Provision:
Borrower hereby acknowledges and confirms that (i) all of the Recitals set forth herein are true and
correct; (ii) as of the close of business on November 17, 2011, Borrower was liable to Lender under
the Credit Agreement and other Loan Documents in an aggregate approximate principal amount of
$17,177,980.00, plus accrued but unpaid interest thereon, plus the costs and expenses of Lender
incurred in connection with the obligations and indebtedness of Borrower to Lender, as applicable,
including, without limitation, reasonable attorneys’ fees and expenses incurred by Lender in the
negotiation, preparation or enforcement of this Agreement, and any documents, agreements or
instruments referred to herein, all without offsets, counterclaims or defenses of any kind or nature
whatsoever; (iii) the Credit Agreement and the other Loan Documents are in full force and effect and
are enforceable in accordance with their respective terms; (iv) Borrower does not have any claims,
defenses, causes of action, counterclaims or offsets against Lender or any of its respective current
or former officers, employees, agents, representatives, consultants, directors, parents, subsidiaries,
affiliates, members, managers, consultants or attorneys of any kind or nature whatsoever; and
(vi) as of the date hereof, all liens, security interests, assignments and pledges encumbering the
Collateral, created pursuant to and/or referred to in the Credit Agreement or the other Loan
Documents, are first priority liens, security interests, assignments and pledges, continue
unimpaired, are in full force and effect and secure and shall continue to secure all of the obligations
described in the respective instruments in which such interests were granted.
15
IV. Specific Drafting Points for Waiver Agreement (cont.)
● Other Standard Representations and Warranties:
□ All Representations and Warranties in the Credit Agreement and other Loan
Documents are true and complete on the date hereof as if made on such
date.
□ Execution, delivery and performance of the Agreement will not result in the
validation of any other agreements or laws to which the Borrower is subject.
□ Except for Specified Default, no Defaults or Events of Default exist.
□ Agreement constitutes legal, valid and binding obligations of Borrower.
□ Borrower has corporate power and authority to execute and perform in
accordance with Agreement.
□ No consents or approval required in connection with Agreement.
□ No actions, suits or proceedings pending or threatened that have had or
could have a material adverse effect or question the validity or enforceability
of any of the Loan Documents.
16
17
IV. Specific Points for Drafting Waiver Agreement (cont.)
● Borrower must acknowledge and confirm that the Representations and Warranties are being
specifically relied upon by Lender as a material inducement to enter into Agreement.
► Release of All Claims Against Lender – Sample Provision:
Borrower hereby acknowledges and confirms that there are no existing defenses, claims, counterclaims
or rights of recoupment or set-off against Lender in connection with the obligations and indebtedness
owed to Lender under the Credit Agreement and other Loan Documents or in connection with the
negotiation, preparation, execution, performance or any other matters relating to the Loan Documents or
this Agreement.
Borrower further acknowledges and agrees that, notwithstanding anything to the contrary set forth in this
Agreement, Lender does not have, nor shall have, an obligation to: (i) amend any one or more of the
Loan Documents or otherwise further restructure the obligations described therein; (ii) make any further
loans, advances or extension of credit to or for the benefit of Borrower, except as expressly set forth in,
and subject to the terms and conditions of, each of the Loan Documents; (iii) except solely with respect
to the Specified Defaults as herein provided, waive any Defaults or Events of Default; (iv) refrain from
exercising any of its rights or remedies under any one or more Loan Documents upon the occurrence of
any Default or Event of Default or (v) enter into any other instruments, agreements or documents
regarding any of the same with Borrower, and that neither Lender, nor any of its representatives, has
made any agreements with, or commitments or representations or warranties to, Borrower (either in
writing or orally), other than as expressly stated in this Agreement.
IV. Specific Points for Drafting Waiver Agreement (cont.)
In consideration of the accommodations being made available by Lender to or for the benefit of
Borrower under this Agreement, Borrower, for itself and its present and former agents, employees,
representatives, officers, directors, shareholders, parents, members, managers, subsidiaries,
successors and assigns, does hereby unconditionally remise, release and discharge Lender and its
current and former shareholders, parents, subsidiaries, affiliates, members, managers, officers,
directors, servants, agents, employees, financial advisors, consultants, representatives, attorneys and
their respective successors and assigns (collectively, “Released Parties”, and individually, “Released
Party”) of and from any and all claims, counterclaims, demands, actions and causes of action of any
nature whatsoever, whether at law or in equity, including, without limitation, any of the foregoing arising
out of or relating to any of the Loan Documents, any acts or omissions of any Released Party in
connection therewith (including, without limitation, extensions of credit and other financial
accommodations made or not made to Borrower), the transactions described in this Agreement, the
return of any checks, or any proposed financing arrangements to or for the benefit of Borrower, or any
entities owned by or under the control of Borrower, which Borrower now has or hereafter can or may
have for or by reason of any cause, matter or thing whatsoever, against any of the Released Parties,
from the beginning of the world to the date hereof.
18
19
V. Specific Drafting Points for Forbearance Agreement
■ Many provisions contained in the Waiver Agreement are also appropriate for the
Forbearance Agreement.
► Acknowledgement of Continuation of Liabilities
► Representations and Warranties
► Release of All Claims Against Lender
■ Define “Forbearance Period” and “Terminating Events”
■ Specific Affirmative Covenants for the Forbearance Agreement (many of which
may be appropriate for the Waiver Agreement).
► Borrower shall retain a Financial Advisor and/or Investment Banker
acceptable to the Lender.
20
V. Specific Drafting Points for Forbearance Agreement (cont.)
► Borrower shall cause the Financial Advisor and Investment Banker to
provide regular reports to the Lender and fully and thoroughly answer any
questions the Lender may have.
► Borrower shall pursue a restructuring/refinancing/sale transaction that shall
result in payment in full of all obligations owed to the Lender.
► Borrower shall enter into an agreement, in form and substance satisfactory
to the Lender, that provides for a restructuring/refinancing/sale transaction
that shall result in payment in full of all obligations owed to the Lender on or
before December 31, 2011.
► Borrower shall have fully and finally paid all obligations owed to the Lender
on or before December 31, 2011.
21
V. Specific Drafting Points for Forbearance Agreement (cont.)
► Fees and Costs – Sample Provision:
Borrower shall pay within five (5) Business Days of any written demand by Lender, all
reasonable costs and expenses of Lender related to or in connection with this
Agreement and any documents, agreements or instruments referred to herein,
including, without limitation, the reasonable fees and expenses of the attorneys
retained by Lender in connection with the negotiation and preparation of this
Agreement or the enforcement of Lender’s rights and remedies under this Agreement
or any of the Loan Documents (the “Fees and Expenses”); provided, however, that
Borrower hereby authorizes Lender to debit any one or more deposit accounts of
Borrower for the Fees and Expenses on or after the seventh (7th) Business Day
following such written demand by Lender. Nothing in this Agreement shall be intended
or construed to hold Lender liable or responsible for any expense, liability or obligation
of any kind or nature whatsoever (including, without limitation, attorneys’ fees and
expenses, other professionals’ fees and expenses, wages, salaries, payroll taxes,
withholdings, benefits or other amounts payable by or on behalf of Borrower).
22
V. Specific Drafting Points for Forbearance Agreement (cont.)
► Disgorgement - Sample Provision:
If Lender is, for any reason, compelled by a court or other tribunal of competent
jurisdiction to surrender or disgorge any payment, interest or other consideration
described hereunder to any person because the same is determined to be void or
voidable as a preference, fraudulent conveyance, impermissible set-off or for any
other reason, such indebtedness or part thereof intended to be satisfied by virtue of
such payment, interest or other consideration shall be revived and continue as if such
payment, interest or other consideration had not been received by Lender, and
Borrower shall be liable to, and shall indemnify, defend (engaging counsel acceptable
to Lender) and hold Lender harmless for, the amount of such payment or interest
surrendered or disgorged. The provisions of this section shall survive execution and
delivery of this Agreement and the documents, agreements and instruments to be
executed or delivered herewith.
23
V. Specific Drafting Points for Forbearance Agreement (cont.)
► Lender’s Actions – Sample Provision:
The authority herein conferred upon Lender and any action taken by Lender
hereunder or under the Loan Documents or any document, agreement or instrument
referred to herein will be taken by Lender for the protection of Lender only, and Lender
shall not assume or nor shall be deemed to have assumed any responsibility to
Borrower or to any other persons with respect to any such action authorized or taken
by Lender, except as required by applicable law. No person shall be entitled to rely
upon, or claim to have relied upon, any action taken or failed to have been taken by
Lender or its respective consultants, attorneys, agents, employees or representatives.
24
V. Specific Drafting Points for Forbearance Agreement (cont.)
► Indemnification of Lender – Sample Provision:
From and after the date hereof, Borrower shall indemnify, defend and hold harmless
Lender and its current and former shareholders, subsidiaries, members, managers,
affiliates, parents, directors, servants, agents, employees, representatives, officers,
consultants, attorneys and their respective heirs, personal representatives, successors
and assigns (severally and collectively, the “Indemnified Parties”) against and from
any and all liability for, and against and from all losses or damages Indemnified
Parties may suffer as a result of, any claim, demand, cost, expense, or judgment of
any type, kind, character or nature (including reasonable attorneys’ fees and court
costs), which Indemnified Parties shall incur or suffer as a result of (a) any act or
omission of Borrower or any of its agents or representatives in connection with the
transactions described in this Agreement and any of the instruments, agreements and
documents referred to in this Agreement, (b) the inaccuracy of any of the
representations or warranties of Borrower or (c) the breach of any of the respective
covenants set forth herein of Borrower. This indemnification shall survive execution
and delivery of this Agreement.
25
V. Specific Drafting Points for Forbearance Agreement (cont.)
► Integration – Sample Provision:
This Agreement and the instruments, agreements and documents referred to in this
Agreement shall be deemed incorporated into and made a part of the Loan
Documents. This Agreement shall be deemed to be a Loan Document as that term is
defined in the Credit Agreement. All such instruments, agreements and documents,
and this Agreement, shall be construed as integrated and complementary of each
other, and, except as otherwise specifically provided in this Agreement, as
augmenting and not restricting Lender’s rights, remedies, benefits and security. If
after applying the foregoing an inconsistency still exists, the provisions of this
Agreement shall constitute an amendment to the Loan Documents and shall control.
26
V. Specific Drafting Points for Forbearance Agreement (cont.)
► Bankruptcy Filing – Sample Provision:
If Borrower (“Bankruptcy Party”) files or has filed against it a petition in bankruptcy or seeks relief or protection under any of
the sections or chapters of the United States Bankruptcy Code (the “Code”), Lender thereupon will have the right (and
Bankruptcy Party will not interpose any objection thereto and hereby waives its rights with respect thereto) to request and
receive any one or more of the following: (i) immediate relief from any automatic stay imposed by Section 362 of the Code
or any stay or other restriction on Lender’s rights under this Agreement, under the documents, instruments or agreements
referenced in this Agreement, or under any of the court’s equitable powers (and, in this regard, Bankruptcy Party hereby
admits that it is unable to adequately protect the interests of Lender), (ii) a termination of the exclusive period under Section
1121 of the Code, and (iii) a dismissal of the bankruptcy case or proceeding. Nothing in this Agreement shall be deemed in
any way to limit or restrict any of Lender’s rights to seek in a bankruptcy court or any other court of competent jurisdiction
any relief Lender may deem appropriate in the event that a voluntary or involuntary petition under any title of the Code is
filed by or against Bankruptcy Party. The properties which Bankruptcy Party has encumbered and which are subject to the
security interests and liens of Lender include all cash, cash equivalents, or cash collateral, as the term cash collateral is
defined in Code Section 363, which accrues from such properties or is owned by each Bankruptcy Party, and upon the filing
of any bankruptcy case naming a Bankruptcy Party or any successor as debtor, such Bankruptcy Party, or such successor
debtor, as the case may be, has and shall have no right to use any such cash, cash equivalents or cash collateral, and no
method of providing adequate protection for any such use to Lender exists. Bankruptcy Party further acknowledges and
agrees that the representations, acknowledgments, agreements and warranties in this Agreement have been made by
Bankruptcy Party as a specifically bargained for, material inducement to Lender to enter into this Agreement, that Lender is
relying on such representations and warranties, had changed and will continue to change its position in reliance thereon
and that Lender would not have entered into this Agreement without such representations, acknowledgments, agreements
and warranties. Bankruptcy Party has consulted with counsel and relied upon counsel’s advice in connection with the
negotiation and execution of this Agreement.
27
Thank you! Any questions?
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