. In Financer Worldwide.com, December 2010
Forward start facilities (FSFs) have been used by corporate borrowers in the US and Europe in recent years as a mechanism to ensure the refinancing of a company’s indebtedness during the current financial crisis. To this end, companies execute a committed facility in advance, to be drawn several months or even years later to refinance – fully or partially – an existing facility, which would, unlike traditional debt refinancing, remain in effect until its original maturity date, coexisting with the FSF.
In addition, FSFs are useful instruments to unblock certain crucial decisions in the restructuring of syndicated loans. The extension of the term, the amendment of the repayment schedule or the modification of the pro rata sharing clauses of the restructured company’s syndicated facilities are decisions that generally need to be unanimously passed by the syndicated lenders in European practice. However, this restriction can generally be overcome by lenders that support the restructuring without amending the existing syndicated facilities by means of granting new FSFs that will be exclusively used to repay their share in the syndicated facilities on each scheduled repayment date. FSF lenders can also benefit from an increase in the margin or in the commitment fee under the existing syndicated facility, in order to match the margin and fees applicable under the FSF.
The implementation of FSFs is a solution to unblock restructurings in agreements governed by Spanish law, although it could face the following main challenges under the Spanish Insolvency Law: (i) the double exposure of banks participating both in the syndicated facilities and the FSFs; and (ii) the risk of claw-back of the new security created in favour of the FSF lenders or of the increase in the margin and fees under the existing syndicated facilities granted in favour of the FSF lenders.
Overcoming the double exposure risk
If the borrower becomes insolvent, any contractual arrangements establishing the termination of agreements in the event of insolvency will be null according to the Insolvency Law. Therefore, lenders would not be entitled to terminate the agreements due to the debtor’s insolvency and would have two financings granted to the same borrower (the existing facility and the FSF) and affected by the insolvency proceedings.
Although arguable (because the exclusive use of FSFs is the repayment of the existing facility), the receivers’ intent to use FSFs with the approval of the court (but contrary to their established use) to obtain cash to finance general corporate purposes of the insolvent company cannot be discarded. In order to avoid this potential ‘unexpected’ use, FSF lenders seek to ensure that cash may not be drawn by the borrower prior to the maturity of the existing facility, and that it is exclusively used to refinance the debt. In this regard, it is advisable to structure the disbursement of the FSF as a mere extension of the term of the matured instalments under the existing facility, without disbursing any additional cash. Furthermore, in the event of the partial refinancing of existing facilities, FSF lenders seek further protection by requesting, as a condition precedent to all drawdowns under FSFs, that the borrower evidences that it has sufficient cash to settle the debt due to the lenders under the existing facility that did not enter into the FSF (and which failed to extend the maturity of their credits).
Moreover, due to the specific use of FSFs, if the existing facility is prepaid, the FSF will be proportionally and automatically cancelled. Additionally, the full or partial assignment of the contractual position as lender under any refinanced tranche of the syndicated facilities should also trigger the proportional assignment of its position under the related FSF.
Overcoming the claw-back risk
Any agreement entered into by a Spanish borrower within two years prior to the insolvency declaration (the ‘suspect’ period) can be terminated by a court if the receivers can prove that the agreement was detrimental to the insolvency estate. An agreement is presumed to be detrimental to the insolvency estate when, among other scenarios, it is entered into for no consideration, or includes new security to guarantee existing debt or new debt that replaces any existing debt. Therefore, if the borrower becomes insolvent within two years following the execution of an FSF, and if the FSF benefits from a more extensive security package than the existing syndicated facilities, the receivers will probably argue that the new security created in favour of the FSF lenders would also be deemed detrimental, although this presumption can be rebutted by FSF lenders in order to avoid the cancellation of the new security. In this scenario, the FSF lenders would need to evidence that new security was provided according to market standards to guarantee a financing that was beneficial for the borrower, although this circumstance may be hard to prove.
In addition, the receivers might argue that the increase in the margin and fees under the existing syndicated facilities granted in favour of the lenders participating in the FSF is a gratuitous concession of the borrower (and independent from the FSF transaction). If this argument is accepted by the court in charge of the insolvency, the increase would be deemed detrimental, any rebuttal of this presumption being unfeasible in this case, and any increased payments being rescinded. The FSF lenders would need to challenge this argument by evidencing to the court that this increase is indeed in consideration for their participation in the FSF.
This risk of claw-back actions can be mitigated by including the FSF within the scope of a global restructuring agreement which qualifies as a refinancing agreement subject to the protection afforded by the Spanish Insolvency Law. A ‘refinancing agreement’ aims to ensure the viability of the debtor that significantly increases the funds available to the borrower or amends the terms of an existing financing agreement by extending its maturity date or by replacing existing obligations with new ones.
In order to be protected from claw-back actions, a refinancing agreement needs to meet the following requirements: (i) it must be backed by creditors holding at least three-fifths of the claims against the debtor at the signing date; (ii) it must be consistent with a ‘viability plan’ that evidences the viability of the debtor in the short and medium term and which is supported by a report issued by an independent expert appointed by the relevant commercial registry; and (iii) it must be notarised. Therefore, if FSFs are included within the scope of a refinancing agreement, both the new security and the increase in margins and fees should be protected against the risk of claw-back actions, unless the receivers evidence that fraud existed.
Recent solutions in Spain that may benefit future restructurings
A common challenge in FSF structures is the security package of FSFs, which may be subject to claw-back actions as mentioned above. In this regard, a borrower can anticipate a potential future restructuring by previously including an exception in the unanimity clause of the syndicated facilities, enabling the borrower to increase the amount of the facility by adding a new FSF tranche that would share the existing security with the old tranches. As no new security is created in favour of the FSFs, the claw-back risk would be mitigated. However, this possibility needs to be expressly contemplated in the loan documents prior to the execution of the FSFs.
A recent restructuring of around €3bn, which involved around 70 domestic and international banks, contemplated an alternative structure, anticipating the potential extension of the maturities without having to implement an FSF. The syndicated agreements, which also qualified as refinancing agreements in order to fall within the scope of protection of the Spanish Insolvency Law, included a new exception in the unanimity clause. This exception allowed each lender to individually waive its right to receive its pro rata share in the scheduled repayments, and to individually extend the maturity of the amounts while still benefiting from the transaction security interests. This solution allowed each lender to create a sort of FSF for its share in the existing syndicated facility, ensuring that the transaction security guarantees the repayment of the participation at its extended maturity.