Defaulting borrowers - waivers, amendments and forbearance

We refer to our previous news alert Getting rid of bad debt in which we discuss some practical and legal issues in relation to the transfer of loans and related security.

We explained in our alert that if a borrower cannot make payments under a facility agreement, the lender has the right to call an event of default. However, declaring an event of default is not the only option available to the lender in such circumstances, and commercially, instead of declaring an event of default and possibly triggering the borrower's insolvency or a series of cross-defaults, a lender may wish to explore other alternatives (such as transferring the lender's rights under the facility agreement to a third party, as we have discussed in our previous alert).

This alert considers other alternatives available to the lender, namely, waiving the borrower's breach, amending the facility agreement and forbearance.

Waiver (or consent)

The lender may choose to waive or consent to the borrower's default. A lender may "consent" to give the borrower a one-time permission not to comply with a provision in the finance documents in the future. A waiver on the other hand, is usually given for a one-time breach that has already occurred. A waiver or consent is usually only acceptable to a lender if the consequences of the borrower’s breach are minor and something that the lender can live with or in consideration of something in return, for example, additional collaterals.

Forbearance

The lender may choose not to declare an event of default with respect to a particular default or to exercise any remedies it has under the facility agreement for a certain period (the "forbearance period") and subject to specific conditions. The forbearance period typically ends by the earlier of a specified date or the occurrence of an event of default. Unlike a waiver, a forbearance agreement will not eliminate the borrower's default. Instead, in a forbearance agreement, the borrower expressly acknowledges the occurrence of an event of default, and the lender only agrees to refrain from exercising its remedies during the forbearance period.

Amendment

Subject to the consent, waiver or forbearance that the lender may accommodate, the lender may agree to amend the facility agreement to revise a provision that is no longer appropriate (for example, because of changing conditions affecting the borrower or the market generally) or impose further obligations (for example, revised time-lines agreed, additional security, etc.).

Practical issues

We set out below some practical issues for a lender to consider.

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Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact [email protected] if you have any questions about the article.