Anyone who perceives the syndicate agent appointment and related provisions in credit agreements as mere boilerplate, relatively unworthy of close attention, is likely doing themselves a disservice. The following is a brief overview of a few occasionally overlooked points.
Agent for Non-Signatories
The parties on whose behalf the agent is to act (collectively, the “creditors”) must formally appoint the agent as their agent. On occasion, not all secured creditors will actually sign the credit agreement (collectively, “non-signing creditors” (as distinguished from “signing creditors”)), such as cash management or hedging providers. Before any non-signing creditor is entitled to the benefits of the collateral security, such non-signing creditor should be required to deliver a simple agreement pursuant to which the agent is appointed as its agent and it agrees to the exculpatory and indemnity provisions of the credit agreement in favour of the agent. Alternatively, signing creditors might, on behalf of (and explicitly acting as agent for) any of their affiliates which are non-signing creditors, formally appoint the agent as agent for such affiliates as well as for themselves under the credit agreement.
Scope of Duties
Credit agreements typically include specific provisions to the effect that the agent has no independent duties except as may be specifically provided for in the loan documentation. The agent and the creditors should consider how to best describe the duties (and powers) of the agent in the credit agreement so that the agent can react appropriately to creditor direction. The agent will typically be authorized to take direction from a majority (or whatever the appropriate level of voting might be) of the signing creditors as to matters not expressly provided for in the loan documentation (including, for example, credit bidding). Prohibiting any creditor from taking any action to protect or enforce its rights arising out of the loan documentation without first obtaining the prior consent of the agent and a majority (or whatever the appropriate level of voting might be) of the signing creditors may offer an additional level of protection to the agent in the event of disagreement between creditors.
Reimbursement and Indemnification of Agent
It is conventional for the agent to be fully protected by the signing creditors against liability to the creditors, the borrower(s) and any guarantor(s) (collectively, the “loan parties”), and/or any third parties (except, in all cases, to the extent of gross negligence or wilful misconduct on the part of the agent). This indemnity will usually also cover all losses suffered and expenses incurred by the agent, including the non-payment of any fees owed to the agent. It is also conventional to provide for reimbursement and indemnification by the loan parties of the costs and expenses of the agent and of the creditors.
Related issues to consider from the agent’s perspective include:
- specifying that the agent’s indemnities apply notwithstanding the comparative, contributory, or sole negligence of the agent;
- specifying that the agent’s indemnity from the creditors applies to claims by creditors against the agent;
- authorizing the agent to refrain from acting on the direction of the creditors if in the opinion of the agent its indemnities are insufficient or the ability of the agent to potentially make a claim thereunder has been impaired; and
- ensuring that the obligations secured by any liens granted in favour of the agent (the “secured obligations”) include loan party obligations in respect of reimbursement and indemnification, and that such liens are granted to the agent in its own capacity as well as for the benefit of the creditors.
The agent will, however, usually have to accept any risk associated with collecting from the creditors their respective shares of any amounts owing to the agent pursuant to its indemnity from the creditors.
The agent should also ensure that the secured obligations include contingent obligations. This way, unless a reserve (or letter of credit or similar protection) is provided for its benefit, the agent could potentially refuse to discharge its liens upon termination of the credit agreement if there remains a reasonable possibility that it may need to claim against the loan parties for reimbursement and/or indemnification. This may be particularly useful to the agent in a bankruptcy or insolvency scenario if the creditors propose to settle their claims against the loan parties notwithstanding the agent’s potential exposure to continuing contingent liability. It is similarly desirable, albeit uncommon, for the agent to be specifically authorized to withhold reserves from distribution proceeds after default in respect of future amounts anticipated to become payable to the agent pursuant to reimbursement and indemnification provisions of the loan documentation.
Provisions Surviving Termination
More generally, the agent should ensure that all reimbursement and indemnification obligations in its favour survive not only termination of the credit agreement but also the resignation or dismissal of the agent (accordingly extending to any post-transaction activities of a former agent in connection with an agency succession) or departure of a creditor from the syndicate.
The agent should also consider bargaining at the outset that any creditor sponsored entity emerging in a bankruptcy or insolvency scenario from a bid by the creditors shall assume (ideally on a secured basis) the reimbursement and indemnification obligations of the loan parties.