We often see banks requiring their borrowers to enter into
interest rate hedge agreements in conjunction with their credit
agreements. There are a number of reasons why borrowers should take
care to ensure that they have the related ISDA Agreements and
Schedules considered by experienced counsel. Here are just two of
Linkage to the Credit Agreement
Agreements often include the termination of the Credit Agreement as
either an Additional Termination Event or an Event of Default. The
result of such an inclusion is that if the Credit Agreement is
repaid early (whether upon a sale of the company or otherwise) then
the borrower will be responsible for any out of the money payments
that are owing at the time of the repayment. These out of the money
payments could be significant and borrowers will need to become
sufficiently versed in the nature of the ISDA Agreements and the
related financial repercussions at the outset of the transaction to
avoid surprises down the road.
Assignment by the Lender
For secured hedges, lenders will often include an Additional
Termination Event should the lender assign its loan. That opens up
the possibility that a lender would have the power to essentially
unilaterally cause the termination of an ISDA Agreement by
assigning its loan to a third party. If that termination occurs at
a point when the borrower is in an out of the money position then
it could be a very costly assignment to the borrower. One way to
address this issue is to provide in the terms of the Credit
Agreement a restriction on the lender's ability to assign its
loan (or its portion thereof for syndicated deals) where the result
of such an assignment would be to permit the lender to terminate
the related ISDA Agreement.
Richard Borins practice focuses on banking,
structured finance and public and private securitization.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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