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Navigating the Perils and Pitfalls of Syndicated Lending: Crucial Insights for Co-Lenders

In today's dynamic business landscape, syndicated lending has emerged as a popular financing option for companies seeking substantial capital. However, as with any complex financial arrangement, syndicated lending comes with its own set of challenges and potential pitfalls, especially from the perspective of co-lenders. This article explores the crucial aspects of syndicated lending, focusing on consent rights, sacred rights, waterfall provisions, pro-rata sharing, agent and specialty service provider entitlements, co-lender removal and addition, and the roles, rights, and responsibilities of various parties involved.

Consent Rights and Sacred Rights

Consent rights and so-called "sacred rights" have become increasingly important for co-lenders in syndicated lending transactions. In recent years, there has been a rise in "lender-on-lender violence," as some court decisions have brought these issues to the forefront. It is essential to understand the different thresholds for lender consent rights, ranging from the "required lender" threshold (typically more than 50% of lenders) to the "super majority" threshold (usually 66.67% of commitments or outstanding amounts) and the 100% lender consent level for certain critical matters.

However, it is crucial to recognize that sacred rights may not be as sacred as they seem. Creative lawyers can find loopholes to circumvent these rights, as the default option is often required lenders consent. Lenders should carefully review credit agreements, particularly the anti-subordination provisions and waterfall-related sacred rights. Vigilance is key when it comes to language that could potentially undermine lenders' rights, such as "except as expressly permitted herein" clauses or broad exceptions for debtor-in-possession financing.

Waterfall and Pro-rata Sharing

Understanding waterfall provisions and pro-rata sharing is paramount in syndicated lending, as these directly impact lenders' returns. Various considerations come into play, such as the treatment of consent expenses, hedging costs, account management fees, additional costs like letters of credit and swing lines, agent fees, and the handling of defaulted lenders.

Co-lenders should diligently scrutinize the credit agreement to determine whether agent fees are reasonable and aligned with market norms. Attention should also be given to "accordion" features, which allow for additional obligations to be added to the waterfall. Ensuring that such additions are limited to the provisions in effect at the time of signing the agreement is crucial.

Removal and Addition of Co-Lenders

The removal and addition of co-lenders have become increasingly relevant topics in syndicated lending. With the prevalence of "accordion" provisions, it has become easier for new lenders to join a transaction through a joinder or exercise of the accordion feature. However, this often means accepting the document as-is, with limited room for negotiation.

Co-lenders should be aware of the potential risks associated with commitment reduction provisions, which may allow the borrower or agent to remove a lender without their consent. Carefully reviewing these clauses and considering the practical implications, such as the impact on payment obligations and the ability to participate in future syndicates, is advisable.

Roles, Rights, and Responsibilities

In a syndicated lending arrangement, various parties have different roles, rights, and responsibilities. Understanding the interplay between these aspects and the lenders' access to credit support, fees, and cost reimbursement is crucial. The different roles that have emerged in recent years include lead arranger, managing agent, collateral agent, administrative agent, paying agent, book runner, syndication agent, and documentation agent.

Co-lenders should assess whether these roles come with actual responsibilities and compensation or are merely titular. Evaluating the fees associated with each role and determining their reasonableness and alignment with the provided services is essential. Additionally, specialty services, such as cash management, hedging, and letters of credit, can offer lucrative opportunities for lenders and should be carefully considered.

When Things Go Wrong

Despite the best efforts of all parties involved, things can go wrong in a syndicated lending arrangement. Bank failures, for instance, can have significant implications for co-lending relationships. The FDIC's temporary stay and ability to reject burdensome contracts can impact borrowers, co-lenders, and agents. When a failed bank is part of a syndicate, challenges arise, such as the ineffectiveness of defaulting lender provisions and the inability to invoke certain rights due to the stay.

"Up-tiering" or "down-tiering," also referred to as involuntary subordination, is another potential pitfall. Recent court cases have highlighted instances where majority lenders were able to amend loan documents to subordinate old debt to new debt, effectively disadvantaging minority lenders. Careful review of subordination provisions and awareness of the potential risks associated with majority lender actions are crucial.

Errors and mistakes in syndicated lending can also lead to significant consequences. The famous Revlon case involving Citibank's erroneous \$894 million payment and the General Motors case, where an inadvertent UCC release led to years of litigation, serve as cautionary tales. Diligence and supervision at all levels are essential to avoid costly mistakes.

Conclusion

Navigating the complex and evolving landscape of syndicated lending requires careful consideration and proactive measures by co-lenders. Understanding the intricacies of consent rights, sacred rights, waterfall provisions, pro-rata sharing, agent and specialty service provider roles, co-lender dynamics, and potential pitfalls is crucial for protecting interests and mitigating risks. Staying informed, diligent, and working closely with experienced legal professionals can help co-lenders successfully navigate the challenges of syndicated lending transactions. As the legal landscape continues to evolve, lenders must remain vigilant and adaptable to achieve their financing objectives while minimizing potential downsides.