Syndicated Credit Facility Restructuring and Workoutsmedia.straffordpub.com/...and-workouts-2019-10-29/... · 10/29/2019 · Practical Effects of Divergent Interests (When It Goes

Syndicated Credit Facility Restructuring and

WorkoutsNavigating Divergent Interests Among Lenders, Confidentiality, Voting Rights, and the Role of the Agent

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TUESDAY, OCTOBER 29, 2019

Presenting a live 90-minute webinar with interactive Q&A

Alison R. Manzer, Partner, Cassels Brock & Blackwell, Toronto

James C. Schulwolf, Partner, Shipman & Goodwin, Hartford, Conn.

Jeffrey A. Wurst, Partner, Ruskin Moscou Faltischek, Uniondale, N.Y.

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Syndicated Credit Facility Restructuring and Workouts: Lender Strategy, Decision-Making and the Role of the Agent

Navigating Divergent Interest of Lenders, Confidentiality Among Lenders, Avoidance of Privilege Waivers and More

October 29, 2019

Speakers

Jeffrey A. WurstRuskin Moscou Faltischek, [email protected]

James C. SchulwolfShipman & Goodwin [email protected]

Alison R. ManzerCassels Brock & [email protected]

Follow my Blog at:

www.WurstCaseScenario.com6

Who are the Lenders and How do Their Interests Diverge?

● Types of Lenders

a) Banks, Mezzanine Funds, Hedge Funds, etc.

b) Revolving Lenders, Term Lenders, and Equipment Lenders

c) Sellers, Bondholders, and Government Agencies

● Different Motivations

a) Getting Your Money Back

b) Trading/Arbitrage

c) Loan-to-Own

d) Keeping the Borrower Alive

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Who are the Lenders and How do Their Interests Diverge?

● Different Regulatory (or Non-Regulated) Regimesa) Capital/Reserve Requirements and Risk Ratings

b) Unregulated Entities

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Key Terms of the Syndicated Loan Agreement –What Matters When It Goes Wrong

Exculpatory Provisions – Do/Should They Hold Up● What The Standard Terms Say

a) no duty or obligation except explicitly stated

b) no discretionary action by the Agent (lender approval)

c) limited duty to disclose

● The Restructuring Issues

a) need for increased monitoring and credit support

b) need for speed and management of conflict among lender agendas

c) increased reliance on agent management

● Provisions That Address

a) “troubled” loan clause allowing early action

b) revised voting levels among lenders

c) increased agent responsibility, increased liability protection

d) increased reporting requirements from borrowers and to lenders

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Defaulting Lenders – Preventing Obstruction1. What The Standard Terms Say

a) Defaulting Lenders can be replaced

b) payment required to buy out - outstanding balance – usually some penalty

c) sanctions are limited without discount

● The Restructuring Issues

a) Defaulting lender can try to use to exit

b) can cause funding of protective advance issues

c) reduces ability to work through

d) Potential for abuse

● Provisions That Address these Issues

a) right to call for advance and make a default claim against the lender

b) penalty buyout (discount)

c) prohibit transfer to weaker lender

d) subordinate on payment

e) no vote

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Agent Responsibilities on Restructuring● What The Standard Terms Say

a) no change for restructuring period

b) agent ability to delegate

c) agent ability to resign

● The Restructuring Issues Your Should Consider

a) speed of decision making

b) need for further funds

c) concern for expertise and continuity

● Revisions That Address the Issues

● a) ability to change agent or roles for expertise

● b) increase agents fees for extra time

● c) increase discretion and protection for decisions

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● Basicsa) Required Lenders For Significant Votes

i) Generally

ii) By Loan Type – Revolver, Term, Specialty

b) Sacred Rights Protected – The “MAE” list

● Ensuring Voting and Approvals are Effective in Managing a Restructuring

a) Counting Heads, Lining up Needed Votes

b) How to Get Clear Directions to Agent

c) Agent Discretion

d) Avoiding the Squeaky Wheel

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Voting Rights

Voting Rights

● Variations Needed for Troubled Loan Circumstances

a) Yank-a-Bank and How to Document for It

b) Ability of Required Lenders of One Loan Type to Make Decisions

c) Increase Reporting

d) Shorter Notice and Response Times

e) Using Telephone and Email Rather than Meeting

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Common Interest Agreement

● What Are They, When and How Used

● Joint Representation Confidentiality and Attorney-Client Privilege

● Negotiating Common Interest Agreements

● Accidental Privilege Waivers

● Maintaining Confidentiality

● Purpose: Working Together Toward a Common Goal

● Improved Communications

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Complexities

Practical Effects of Divergent Interests (When It Goes Bad)

1. dump and run – or - work it out

2. protective advances – or – good after bad

3. other relationships – or – this is it

4. love the industry – or – hate the industry

5. portfolio in trouble – or – just a “blip”

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Complexities

Arrival of New Lenders (Credit Trading, Sloppy Exit)

1. often allowed at any stage, required consent varies on default

2. borrower consent falls away,

3. Agent and lender consent on default

4. divergent purposes – need to understand and manage

5. preserving right to exit

6. need a basis for control

7. Considerwhether strategic competitors can be approached

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Role of Agent and Inherent Risks

Agent Management Challenges

● Communications Can Be Dangerous in A restructuring

● What can, should, or must be disclosed

● Second-Guessing by Co-Lenders – How Do You Control

● To act or not to act – Consensus or Disarray

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Lessons from GM

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This is still one of the greatest examples of NOT getting it right

Follow the issues and consider what could have been done differently.

Committee Of Unsecured Creditors v JPMorgan Chase Bank, N.A., et al

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In a 78 page reasoned decision, the Bankruptcy Court (Gerber) concluded:

The Court concludes, based on the undisputed facts andunder the applicable law, that JPMorgan did not authorizethe termination of the UCC-1 with respect to the Term Loan,and that anything JPMorgan said or did in connection withthe payoff of the Synthetic Lease was not effective inbringing the UCC-1 securing the Term Loan to come to anend.


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Upon Certification of Question of Law from the United States Court of Appeals for the Second Circuit, the Delaware Supreme Court answered

[F]or a termination statement to become effective under § 9‐509and thus to have the effect specified in § 9‐513 of the DelawareUCC, it is enough that the secured party authorizes the filing tobe made, which is all that § 9‐510 requires. The Delaware UCCcontains no requirement that a secured party that authorizes afiling subjectively intends or otherwise understands the effect ofthe plain terms of its own filing.

Before a secured party authorizes the filing of a terminationstatement, it ought to review the statement carefully andunderstand which security interests it is releasing and why. . . . Ifparties could be relieved from the legal consequences of theirmistaken filings, they would have little incentive to ensure theaccuracy of the information contained in their UCC filings.


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The Second Circuit Court adopted the answer of the Delaware Supreme Court and reversed Judge Gerber’s decision, stating:

From these facts it is clear that although JPMorgan never intended toterminate the Main Term Loan UCC‐1, it authorized the filing of aUCC‐3 termination statement that had that effect. “Actual authority . . . iscreated by a principal’s manifestation to an agent that, as reasonablyunderstood by the agent, expresses the principal’s assent that the agenttake action on the principal’s behalf.” Restatement (Third) of Agency §3.01 (2006); accord Demarco v. Edens, 390 F.2d 836, 844 (2d Cir.1968). JPMorgan and Simpson Thacher’s repeated manifestations toMayer Brown show that JPMorgan and its counsel knew that, upon theclosing of the Synthetic Lease transaction, Mayer Brown was going tofile the termination statement that identified the Main Term Loan UCC‐1for termination and that JPMorgan reviewed and assented to the filing ofthat statement. Nothing more is needed.


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Timeline

June 1, 2009: GM filed its petition

July 31, 2009: the Creditors’ Committee brought its adversary against JPMorgan and co-lenders to avoid pre and post-petition transfers

March 1, 2013: the Bankruptcy Court dismissed the complaint and certified appeals directly to the Second Circuit.

October 17, 2014: the DE Supreme Court issues its Answer to the question certified by the Second Circuit.

January 21, 2015: the Second Circuit adopted the decision of the DE Supreme Court and Reversed the Bankruptcy Court’s decision dismissing the avoidance complaint.

May 20, 2015 Creditors’ Committee filed its Amended Complaint


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From November 2015, through June 2017,Cross Claims are asserted against JPMorgan.

Wells Cap is a defendant in this adversary proceeding, not through anyfault of its own, but solely due to the unauthorized and reckless acts andabdication of responsibility by JPMorgan. JPMorgan recklessly and withgross negligence caused the filing of an improper UCC terminationstatement purporting to terminate the principal financing statement thatperfected the security interest that protected Wells Cap and otherlenders (collectively, the “Term Lenders”) in connection with the TermLoan. JPMorgan caused this filing in its capacity as an administrativeagent for a different set of lenders and in connection with a transactionthat was entirely separate from the Term Loan. JPMorgan’s actions weretaken wholly outside of the authority granted to it in connection with theTerm Loan, in violation of the duties that JPMorgan owed to Wells Cap,and with full knowledge that none of the conditions for filing such atermination statement was present.


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JPMorgan asserts defenses to Cross Claims:

The claims asserted in the …Cross-Complaint are barred by provisions ofthe Term Loan Agreement, including: (a) section 8.04 of the Term LoanAgreement, which provides that JPMCB “shall be entitled to rely, and shallbe fully protected in relying” upon “advice and statements of legal counsel(including, without limitation, any counsel to the Borrower)”; (b) section 8.02of the Term Loan Agreement, which permits JPMCB to execute any of itsduties “by or through agents or attorneys-in-fact” and states that JPMCB“shall not be responsible for the negligence or misconduct of any agents orattorneys-in-fact selected by it with reasonable care”; (c) section 8.03 of theTerm Loan Agreement, which provides that JPMCB shall not be liable “forany action lawfully taken or omitted to be taken by it or such Person underor in connection with this Agreement or any other Loan Document (exceptfor its or such Person’s own gross negligence or willful misconduct)”; and (d)section 8.06 of the Term Loan Agreement, which provides that each lender“expressly acknowledges” that JPMCB has not “made any representationsor warranties to it,” and that each lender “represents that it will,independently and without reliance upon the Agent . . . continue to make itsown credit analysis, appraisals and decisions” with respect to the TermLoan.


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More defenses:

The claims asserted in the Wells Cap Cross-Complaint that are notpredicated on express provisions of the Term Loan Agreement arebarred because, under section 8.01 of the Term Loan Agreement,“[n]otwithstanding any provision to the contrary elsewhere in thisAgreement or in any other Loan Document, the Agent shall not have anyduties or responsibilities, except those expressly set forth herein ortherein, or any fiduciary relationship with any Lender or any Affiliate ofsuch Lender, and no implied covenants, functions, responsibilities,duties, obligations or liabilities shall be read into this Agreement or anyother Loan Document or otherwise exist against the Agent.” Amongother things, section 4.03 of the Collateral Agreement (as defined in the…Cross-Complaint) provides that General Motors, not JPMCB, “shallmaintain the security interest created by this Agreement.” The TermLoan Agreement and related documents do not require JPMCB tomaintain the security interest, and no such duty should be implied.


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SECTION 8.01. Appointment. Each Lender hereby irrevocably designates andappoints the Agent as the agent of such Lender and each such Lenderirrevocably authorizes the Agent, as the agent for such Lender, to take suchaction on its behalf under the provisions of this Agreement and the other LoanDocuments and to exercise such powers and perform such duties as areexpressly delegated to the Agent by the terms of this Agreement and the otherLoan Documents, together with such other powers as are reasonably incidentalthereto. Notwithstanding any provision to the contrary elsewhere in thisAgreement or in any other Loan Document, the Agent shall not have any dutiesor responsibilities, except those expressly set forth herein or therein, or anyfiduciary relationship with any Lender or any Affiliate of such Lender, and noimplied covenants, functions, responsibilities, duties, obligations or liabilities shallbe read into this Agreement or any other Loan Document or otherwise existagainst the Agent. Each party to this Agreement acknowledges that theSyndication Agent and the CoDocumentation Agents shall not have anyduties, responsibilities, obligations or authority under this Agreement insuch capacity.


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SECTION 8.02. Delegation of Duties. The Agent may execute any of itsduties under this Agreement and any other Loan Document by orthrough agents or attorneys-in-fact and shall be entitled to advice ofcounsel concerning all matters pertaining to such duties. The Agentshall not be responsible for the negligence or misconduct of anyagents or attorneys-in-fact selected by it with reasonable care.


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SECTION 8.03. Exculpatorv Provisions. Neither the Agent nor any of its officers,directors, employees or affiliates shall be (i) liable for any action lawfully taken oromitted to be taken by it or such Person under or in connection with thisAgreement or any other Loan Document (except for its or such Person's owngross negligence or willful misconduct) or (ii) responsible in any manner toany of the Lenders or any Affiliates of such Lenders, for any recitals, statements,representations or warranties made by any Loan Party or any officer thereofcontained in this Agreement or any other Loan Document or in any certificate,report, statement or other document referred to or provided for in, or received bythe Agent under or in connection with, this Agreement or any other LoanDocument or for the value, validity, effectiveness, genuineness, enforceability orsufficiency of this Agreement or any other Loan Document or for any failure ofany Loan Party to perform its obligations hereunder. The Agent shall not beunder any obligation to any Lender or any Affiliate of such Lender to ascertain orto inquire as to the observance or performance of any of the agreementscontained in, or conditions of, this Agreement or any other Loan Document, or toinspect the properties, books or records of any Loan Party.


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SECTION 8.06. Non-Reliance on Agent and Other Lenders. Each Lender expresslyacknowledges that neither the Agent nor any of its officers, directors, employees,agents, attorneys-in-fact or affiliates has made any representations or warranties to itand that no act by the Agent hereinafter taken, including any review of the affairs ofthe Borrower, shall be deemed to constitute any representation or warranty by theAgent to any Lender. Each Lender represents to the Agent that it has, independentlyand without reliance upon the Agent or any other Lender, and based on suchdocuments and information as it has deemed appropriate, made its own appraisal ofand investigation into the business, operations, property, financial and other conditionand creditworthiness of the Borrower and made its own decision to make its Loanshereunder and enter into this Agreement. Each Lender also represents that it will,independently and without reliance upon the Agent or any other Lender, and basedon such documents and information as it shall deem appropriate at the time, continueto make its own credit analysis, appraisals and decisions in taking or not taking actionunder this Agreement or any other Loan Document, and to make such investigationas it deems necessary to inform itself as to the business, operations, property,financial and other condition and creditworthiness of the Borrower. Except for notices,reports and other documents expressly required to be furnished to the Lenders by theAgent hereunder, the Agent shall not have any duty or responsibility to provide anyLender or any Affiliate of such Lender with any credit or other information concerningthe business, operations, property, condition (financial or otherwise), prospects orcreditworthiness of the Borrower which may come into the possession of the Agent orany of its officers, directors, employees, agents, attorneys-in-fact or affiliates.


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The deadline to assert cross claims had been extended outas far as October 31, 2019.


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Oakland Police and Fire Retirement System, the City of Oakland, and The Employees’ Retirement System of the City of Montgomery, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,v.Mayer Brown, LLP, Defendant

N.D. Illinois, Case No. 15 C 6742

“A complaint for negligence, to be legally sufficient, must set out facts that establishthe existence of a duty owed by the defendant to the plaintiff ....” Pelham v.Griesheimer, 92 Ill.2d 13, 18 (1982). Under Illinois law, the traditional rule was that anattorney did not owe a duty to a non-client, and therefore was liable only to his client,not a third person. Id. at 19. However, as the parties agree, the Illinois SupremeCourt articulated a new rule in Pelham, holding that a non-client may establish a dutyowned to him by a defendant attorney by proving “that the primary purpose and intentof the attorney-client relationship itself was to benefit or influence the third party.” Id.at 21 (“We conclude that, for a nonclient to succeed in a negligence action against anattorney, he must prove that the primary purpose and intent of the attorney-clientrelationship itself was to benefit or influence the third party.”). Defendant contendsthat the consolidated complaint does not plausibly allege, and cannot plausiblyallege, that GM’s primary purpose in retaining it was to influence or benefit plaintiffsor JPMorgan as plaintiffs’ agent.

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Global Settlement of the GM Avoidance Action

On June 13, 2019, one month less than ten years after the filing of the adversary complaint that challenged JP Morgan’s and the co-lenders’ security interests, and ten years and 2 weeks after General Motors filed for protection under Chapter 11 of the Bankruptcy Code, the Adversary Proceeding, which resulted in JP Morgan and its syndicate of lenders being determined to be unsecured creditors, and the resolution of cross-claims by nearly 400 co-lenders, an order approving a global settlement was entered.

The trust established to administer the funds recovered has been extended until December 15, 2021.

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Syndicated Credit Facility Restructuring and Workouts: Lender Strategy, Decision-Making and the Role of the Agent

Last thoughts.

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Speakers

Jeffrey A. WurstRuskin Moscou Faltischek, [email protected]

James C. SchulwolfShipman & Goodwin [email protected]

Alison R. ManzerCassels Brock & [email protected]

Follow my Blog at:

www.WurstCaseScenario.com