Canada: “Amend And Extends” Emerge As New Trend In U.S. Loan Markets

Last Updated: July 8 2009

Article by Andrew G. Herr , Joyce M. Bernasek and William Corcoran

A current and anticipated future lack of refinancing sources for maturing loans, coupled with the recent surge in secondary loan market prices, have lead to a new trend in U.S. loan markets: the so-called "amend and extend" transaction or "A&E." At least 15 A&Es of U.S. credit facilities have been executed since March 2009, when this nascent trend began.

A&Es are non-pro rata extensions of the maturity of revolving credits, term loans, or both. A "non-pro rata maturity extension" means that the maturity of the loans of certain lenders under a credit agreement is extended, while that of other lenders under the agreement is left unchanged. This is often accomplished by amending the credit agreement to bifurcate an existing facility into two tranches – one whose maturity is extended normally by at least one year (and at increased, current-market pricing), and the other whose maturity (and pricing) is left unchanged. Alternatively, an A&E may effectively be accomplished through the exercise of a credit agreement's existing "accordion" feature (as described below).

Why Carry Out An A&E? Why The New Trend?

A&Es permit borrowers to reduce their refinancing risk by extending the maturity of a portion of their loans. These transactions are effected in lieu of full refinancings (i.e. new credit agreements) which are generally more expensive. Importantly, as majority (rather than unanimous) lender consent amendments, A&Es do not provide non-consenting lenders with the opportunity they would otherwise would have in the context of a full refinancing effected prior to maturity to exit the credit facility altogether.

Besides these obvious benefits to borrowers, the recent surge in average secondary loan market bid prices – to the low to mid 80s from the low 60s following Lehman Brothers' bankruptcy – has also contributed to the nascent trend toward A&Es. This is because the pricing of the extended loan tranche is generally marked to market at the closing of the A&E and, in general, the nearer a below-par loan is trading to par, the lesser the pricing increase necessary to mark the loan's pricing to market. This makes A&Es easier for borrowers to bear than was the case when secondary loan market prices were at their depths in late 2008 and early 2009 (during which time loan buybacks were more attractive to borrowers and A&Es were less attractive).

In addition (and as described below), a number of A&Es have been driven by borrowers' desire to avoid anticipated future dislocations in U.S. credit markets. Furthermore, recent changes to U.S. tax law (also described below) may decrease the potential U.S. tax cost of A&E transactions occurring in 2009 and 2010.

For extending lenders, A&Es create an opportunity to increase margin and generate upfront fees. Consenting lenders (whether extending or not), and occasionally even non-consenting lenders, may also receive amendment fees. All lenders may benefit from other amendments made in the A&E, such as those tightening up existing covenants – although some borrowers have used A&Es to loosen covenants.1

Explicit Or Implicit Bifurcation Or New Tranche

A key consideration in many A&Es is how to effect a bifurcation of loans into extended and non-extended maturities. One approach is to make the bifurcation explicit. For example, the A&E may involve the creation of two tranches of loans out of a single, original tranche. Or, bifurcation of the loans may be implicit. For example, the A&E may involve the addition of a mechanism to pay down the loans of non-extending lenders on their original maturity date and simply extend the maturity date of the loans of extending lenders. Alternatively, an A&E may effectively be accomplished by having extending lenders agree to make a new tranche of longer maturity loans under a credit agreement's existing "accordion" feature and having the borrower use the proceeds to pay off the extending lenders' original, shorter maturity loans.2

Square Pegs: Implementing Non-Pro Rata Extensions Within Pro Rata Credit Agreement Architecture

In analyzing A&Es, it is important to keep in mind that U.S. credit agreements are almost universally designed to treat lenders on a pro rata basis. For instance, most U.S. credit agreements contain so-called "pro rata payment" provisions requiring payments to be made to the lenders on a pro rata basis (e.g. in accordance with outstanding amounts or amounts due and payable), and so-called "sharing" provisions requiring lenders to share any amounts received in excess of their pro rata share with the other lenders. Similarly, mandatory prepayment provisions normally require prepayments to be made to the lenders on a pro rata basis. Bifurcating loans into different maturities, or adding a new tranche of longer maturity loans, will often represent a departure from the pro rata treatment of lenders inherent in many U.S. credit agreements.

For instance, a "pro rata payment" provision which requires all payments to be made to the lenders on a pro rata basis in accordance with outstanding amounts (as opposed to amounts due and owing) would be violated if non-extending lenders are repaid on the original maturity date but extending lenders are not. If such a provision is capable of being amended only with 100% lender consent (which is the case for most "pro rata payment" provisions), the result may be to effectively prohibit the A&E, since obtaining 100% lender consent is very often a practical impossibility. By contrast, if the provision is capable of being amended with majority lender consent, an A&E may be feasible. Of course, if the provision required payments to be applied on a pro rata basis in accordance with amounts due and payable, rather than outstanding amounts, an A&E would be possible without making any amendments to the provision.

There are other examples of A&Es' departure from the normal pro rata treatment of lenders. These transactions may involve altering the pro rata application of payments contemplated in a credit agreement's mandatory prepayment provisions (such as to disentitle extending lenders from sharing in mandatory prepayments prior to the maturity of the non-extended loans) or may involve permitting (or prohibiting) future, non-pro rata optional prepayments. For example, the borrower may wish to have the right to optionally prepay (or the lenders may wish to prohibit the borrower from optionally prepaying) the more expensive extended loans without prepaying the less expensive unextended loans on a pro rata basis. Or, extending lenders may make their agreement to extend the maturity of their loans conditional on the borrower prepaying a portion of their loans (and permanently reducing associated commitments) without making any corresponding prepayment of the unextended loans (or correspondingly reducing the unextended loan commitments).

Each credit agreement and transaction is unique, and careful consideration must be given to the precise language of the agreement and the percentage of lenders whose vote is required to amend provisions that would otherwise restrict the A&E or affect the intended application of payments among loan tranches. Even increasing the pricing of the extended loans may trigger unexpected lender consent requirements, such as where the credit agreement requires "affected lender" consent for any changes (rather than just decreases) in interest rates.

The form of maturity extension selected for an A&E (i.e. implicit or explicit bifurcation or creation of a new tranche) will be based, in large part, on the parties' expectations regarding whether future loan drawdowns and prepayments will be made on a pro rata basis, and whether non-extended and extended loans will share the same interest periods. Secondary market loan trading issues may also factor into the analysis, since implicit bifurcation could significantly complicate loan trading by adding confusion over whether what is being traded is an extended or non-extended loan.

It is also of note that many A&E amendments permit assignees to extend their loans, providing additional potential tenor benefits to borrowers following the closing of an A&E.

Majority Versus Unanimous Lender Consent

As is the case with loan buybacks, it is critical to structure A&Es as majority (rather than unanimous) lender amendments, since unanimous lender amendments are often a practical impossibility. In obtaining majority lender consent, it is important to keep in mind that not all consenting lenders need agree to extend their loans. For instance, one might effect an A&E with 51% lender consent, but with only 25% of the lenders agreeing to extend the maturity of their loans.

Lender Quid Pro Quos

Besides fees, extending lenders may demand quid pro quos for agreeing to extend the maturity of their loans, such as the tightening of existing financial covenants or the insertion of new ones, the granting of collateral security or (as described above) a reduction in the amount of the loans and commitments of the extending lenders.

Recent A&Es And What The Future May Hold

Although some A&Es have involved loans maturing sooner, a number of A&Es have involved borrowers extending the maturity of loans that would otherwise not mature until 2012 or later. These borrowers have sought to "sidestep what is likely to be the biggestever wave of loan refinancing of risky companies as $440 billion in debt becomes due in a span of three years [2012-2014]," representing about 85% of the $518 billion in current leveraged loans outstanding, according to Standard & Poor's Leveraged Commentary & Data.3 This surge in leveraged loan refinancing needs, described by the Loan Syndications and Trading Association (LSTA) as the upcoming "refinancing cliff" in light of its graphical representation, stems from the U.S. lending bubble that occurred from 2005 to 2007. A&Es are expected to effectively refinance a portion of the refinancing cliff, although under some scenarios at the apex of the cliff in 2013, there may be up to US$125 billion in maturing, non-defaulted leveraged term loans with no reasonably likely source of refinancing (such as A&Es, new bank or institutional leveraged loans or high yield bonds). And, the ramp-up to and ramp-down from the apex of the refinancing cliff may involve hundreds of billions more.

So far, A&Es have largely involved higher-rated leveraged credits. However, as A&Es continue to be used in the market, it is foreseeable that they will become a viable refinancing alternative for lower-rated leveraged credits as well. Indeed, at least one A&E has been executed on a covenant-lite credit facility. In addition, at least one Canadian borrower has closed an A&E of its U.S. credit facilities and it is foreseeable that A&Es will also be executed in Canadian loan markets as well.

Forward Start Facilities – The European Analogue To A&Es

Unlike in the U.S., where it is often possible to effect an A&E with majority (rather than unanimous) lender consent, most European credit agreements would require 100% lender consent to effect an A&E. As a consequence, borrowers and lenders under European credit facilities have arrived at a different creative solution to address borrowers' desire to reduce refinancing risk: the "Forward Start Facility" or "FSF." Unlike A&Es, which involve an amendment to an existing credit agreement, FSFs involve entering into a new, longer-tenored credit agreement which sits alongside with, and is ultimately drawn upon to refinance, an existing credit agreement. The pricing of FSF lenders' original loans is effectively (i.e. through fee arrangements) marked to market upon execution of the FSF, and FSFs provide borrowers with some protection against refinancing risk in the form of a pre-committed source of refinancing for at least a portion of the borrower's existing loans. FSFs implemented to date have primarily involved investment-grade borrowers. Importantly, FSFs generally involve conditions precedent to drawing such as (potentially) the absence of a material adverse change. This means that FSFs may be less advantageous to borrowers than A&Es, under which the extension of maturity is fully accomplished at inception. (FSFs involve a number of other complexities and are generally outside the scope of this Osler Update. The authors are not aware of any FSFs implemented to date with respect to U.S. credit facilities.)

Certain U.S. Tax Considerations Of A&Es

Amending existing indebtedness to extend its maturity date can have U.S. tax consequences for both borrower and lender. If an existing debt instrument is "significantly modified," it is generally treated as exchanged for a new debt instrument for U.S. tax purposes.

Extensions of a maturity date can, in certain circumstances, result in significant modifications (and, thus, deemed exchanges) of debt. Under applicable regulations, however, deferrals that extend scheduled payments within a safe-harbor period until the end of the safe-harbor period are not generally treated as significant modifications. The safe-harbor period begins on the original due date of the first scheduled payment that is deferred and extends for a period equal to the lesser of five years or 50 percent of the original term of the instrument.

Even if the extension fits within this safe-harbor period, other changes to the agreement between the borrower and the lender, such as changes in yield and/or fee payments, can nevertheless result in a significant modification and a deemed exchange. In addition, as a result of the A&E, the borrower's unmodified debt (whether under the same credit facility as the A&E or another credit facility) might be deemed exchanged if the payment expectations of the lenders on that debt change from being speculative to adequate or adequate to speculative.

If a debt exchange is deemed to occur for U.S. tax purposes, the lender may recognize a gain or loss equal to the difference between the fair market value and the lender's tax basis in the debt instrument. Recognition of gain for the lender may be avoided, however, if the "old" and "new" instruments both qualify as "securities" for tax purposes and the deemed exchange qualifies as a tax-free recapitalization.

On the other hand, and regardless of whether the deemed debt exchange is taxable or tax-free for U.S. tax purposes, the borrower may be required to recognize cancellation of indebtedness income if the issue price of the new debt instrument is less than the adjusted issue price of the old debt instrument.4 Income recognition where the borrower continues to be obligated to pay the same principal amount may be a surprising result to many borrowers and, in the event there is tax payable on such income, these increased, nonordinary course tax outlays may cause lenders concern about the borrower's ability to repay. However, under The American Recovery and Reinvestment Act of 2009 (the stimulus package signed into law by U.S. President Obama on February 17, 2009), the tax payment date for cancellation of indebtedness income arising in connection with certain qualifying transactions occurring in 2009 and 2010 may be substantially deferred, thus potentially mitigating some of the adverse U.S. tax implications of A&E transactions.5

Given these complex U.S. tax rules, borrowers and lenders considering A&Es need to closely analyze whether a deemed exchange is likely to be triggered for U.S. tax purposes resulting from modifications to the debt pursuant to the A&E. If a deemed exchange is likely to occur, the parties should also consider whether any taxable gain or income might result, as well as whether tax payable on any income to the borrower might qualify for deferral under the new tax rules described above. Even so, with careful U.S. tax planning, A&Es will often serve the goals of borrowers and lenders alike.

Footnotes

1. See "The Risk of Junk Upends Leverage," New York Times, July 6, 2009.

2. This would still likely require an amendment to the credit agreement, since "accordion" provisions generally permit increases in existing facilities only on the facilities' original terms (i.e. such provisions do not provide for extensions of maturity or for increases in pricing).

3. "Rates Low, Firms Race to Refinance Their Debts," Wall Street Journal, June 26, 2009.

Andrew Herr is a partner in the Financial Services Group in the firm's New York office. Joyce Bernasek is a senior associate in the firm's New York office and is a member of the Financial Services Practice Group. Bill Corcoran is a partner in the Tax Department of the firm's New York office.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions