SGS 3- EVENTS OF DEFAULT
EVENTS OF DEFAULT
Global comment – Whilst it is acceptable that some of the Events of Default apply to the
Obligors, those Events of Default which apply to the Group should instead only apply to the
Borrower. The syndicate is only lending to the Borrower and not the Borrower’s subsidiaries (of
which there are none).
Obligor – borrower and guarantor
Group – borrower and its subsidiaries, present and future
Purpose
The more parties that are covered i.e. the Group, the greater the protection for the syndicate
because if an EoD is triggered in a subsidiary, this may actually affect the ability of the borrower
to repay, and the syndicate will wish to take advantage of this to call an event of default.
Compromise
The syndicate will not want subsidiaries to be excluded from the scope of application because
the definition of Group applies to future subsidiaries too and the syndicate will want to protect its
position insofar as it is capable of doing so.
A strong borrower may be able to restrict application so that the EoDs only apply to Material
Subsidiaries rather than the Group at large. This is defined as those subsidiaries who contribute
to more than 5% of the borrower’s NAV.
23 Events of Default
Each of the events or circumstances set out in Clause 23 is an Event of Default (save
for Clause 23.12 (Acceleration)).
23.1 Non-payment
An Obligor does not pay on the due date any amount payable pursuant to a Finance
Document at the place and in the currency in which it is expressed to be payable unless:
23.1.1 its failure to pay is caused by:
(a) administrative or technical error; or
(b) a Disruption Event; and
23.1.2 payment is made within two 30 Business Days of its due date. [Borrower comment: As
non-payment is for technical reasons, the banks are facing no material risk and the
Borrower needs a realistic time to identify and rectify the error.]
Purpose of the relevant clause in its original form per the syndicate’s perspective
An event of default for non-payment under any of the Finance Documents is the most important
EoD for the lender because the borrower’s failure to pay may hint at issues about its
creditworthiness which is a huge risk for the lender in getting the principal back.
Further, the lender will be concerned about matched funding costs; if the lender borrowed
money on the interbank market to provide the loan, it will have its own repayment obligations. If
the borrower doesn’t re-pay on time then the bank will also incur costs in finding funds to repay
its own loan
, Effect of the borrower’s proposed amendment
The borrower has extended the grace period for technical errors relating to non-payment from 2
to 30 business days. During this grace period, only a potential event of default would be
subsisting.
What would be the syndicate’s position on the proposed amendment?
The syndicate would not accept the amendment made on the grounds that if there is an
administrative or technical error, this should be capable of very quick remedy i.e. not requiring a
month to fix. A syndicate takes non-payment seriously for the reasons explained above and
therefore would want to call an EoD as soon as possible.
What would be the compromise wording of the EoD clause?
The syndicate will not accept the amendment. A consolatory compromise may be to grant an
additional day, and for the grace period to run from the date of notification of the non-payment
by the Borrower to the Agent.
23.2 Financial Covenants
Any requirement of Clause 21 (Financial Covenants) is not satisfied.
Purpose of the relevant clause in its original form per the syndicate’s perspective
This clause is an event of default if any of the financial covenants in the Finance Documents
are breached.
The lender sets the parameters on the grounds to which it is lending to the borrower. If these
cannot be met, then this would imply a big shift in the borrower’s ability to make repayments on
the loans.
These types of breach also cannot be remedied and thus the risk of non-payment is significant
for the lender.
Effect of the borrower’s proposed amendment
The borrower has deleted this event of default completely and therefore any breach of the
financial covenants would be subject to the ‘other obligations’ event of default instead (which is
more generous than what this EoD would be e.g. grace period).
What would be the syndicate’s position on the proposed amendment?
The syndicate will not accept deletion of this clause because they will not want the financial
covenants to be covered by a blanket grace period as is given under ‘other obligations’.
What would be the compromise wording of the EoD clause?
The clause would have to be reinstated, however if the borrower wishes to get more leeway,
then these should be individually negotiated in the actual financial covenants clause. For any
breaches that are capable of remedy, a short grace period may be acceptable to the syndicate.
This is a compromise because then a blanket grace period will not apply.
EVENTS OF DEFAULT
Global comment – Whilst it is acceptable that some of the Events of Default apply to the
Obligors, those Events of Default which apply to the Group should instead only apply to the
Borrower. The syndicate is only lending to the Borrower and not the Borrower’s subsidiaries (of
which there are none).
Obligor – borrower and guarantor
Group – borrower and its subsidiaries, present and future
Purpose
The more parties that are covered i.e. the Group, the greater the protection for the syndicate
because if an EoD is triggered in a subsidiary, this may actually affect the ability of the borrower
to repay, and the syndicate will wish to take advantage of this to call an event of default.
Compromise
The syndicate will not want subsidiaries to be excluded from the scope of application because
the definition of Group applies to future subsidiaries too and the syndicate will want to protect its
position insofar as it is capable of doing so.
A strong borrower may be able to restrict application so that the EoDs only apply to Material
Subsidiaries rather than the Group at large. This is defined as those subsidiaries who contribute
to more than 5% of the borrower’s NAV.
23 Events of Default
Each of the events or circumstances set out in Clause 23 is an Event of Default (save
for Clause 23.12 (Acceleration)).
23.1 Non-payment
An Obligor does not pay on the due date any amount payable pursuant to a Finance
Document at the place and in the currency in which it is expressed to be payable unless:
23.1.1 its failure to pay is caused by:
(a) administrative or technical error; or
(b) a Disruption Event; and
23.1.2 payment is made within two 30 Business Days of its due date. [Borrower comment: As
non-payment is for technical reasons, the banks are facing no material risk and the
Borrower needs a realistic time to identify and rectify the error.]
Purpose of the relevant clause in its original form per the syndicate’s perspective
An event of default for non-payment under any of the Finance Documents is the most important
EoD for the lender because the borrower’s failure to pay may hint at issues about its
creditworthiness which is a huge risk for the lender in getting the principal back.
Further, the lender will be concerned about matched funding costs; if the lender borrowed
money on the interbank market to provide the loan, it will have its own repayment obligations. If
the borrower doesn’t re-pay on time then the bank will also incur costs in finding funds to repay
its own loan
, Effect of the borrower’s proposed amendment
The borrower has extended the grace period for technical errors relating to non-payment from 2
to 30 business days. During this grace period, only a potential event of default would be
subsisting.
What would be the syndicate’s position on the proposed amendment?
The syndicate would not accept the amendment made on the grounds that if there is an
administrative or technical error, this should be capable of very quick remedy i.e. not requiring a
month to fix. A syndicate takes non-payment seriously for the reasons explained above and
therefore would want to call an EoD as soon as possible.
What would be the compromise wording of the EoD clause?
The syndicate will not accept the amendment. A consolatory compromise may be to grant an
additional day, and for the grace period to run from the date of notification of the non-payment
by the Borrower to the Agent.
23.2 Financial Covenants
Any requirement of Clause 21 (Financial Covenants) is not satisfied.
Purpose of the relevant clause in its original form per the syndicate’s perspective
This clause is an event of default if any of the financial covenants in the Finance Documents
are breached.
The lender sets the parameters on the grounds to which it is lending to the borrower. If these
cannot be met, then this would imply a big shift in the borrower’s ability to make repayments on
the loans.
These types of breach also cannot be remedied and thus the risk of non-payment is significant
for the lender.
Effect of the borrower’s proposed amendment
The borrower has deleted this event of default completely and therefore any breach of the
financial covenants would be subject to the ‘other obligations’ event of default instead (which is
more generous than what this EoD would be e.g. grace period).
What would be the syndicate’s position on the proposed amendment?
The syndicate will not accept deletion of this clause because they will not want the financial
covenants to be covered by a blanket grace period as is given under ‘other obligations’.
What would be the compromise wording of the EoD clause?
The clause would have to be reinstated, however if the borrower wishes to get more leeway,
then these should be individually negotiated in the actual financial covenants clause. For any
breaches that are capable of remedy, a short grace period may be acceptable to the syndicate.
This is a compromise because then a blanket grace period will not apply.
