Glenn Agre partner Shai Schmidt was quoted in Octus’ coverage of a new development in liability management exercises: threats by corporate borrowers and their advisors that holdout lenders’ stub debt pieces may not be repaid at maturity.
Shai noted:
“We have seen many LMEs where borrowers and majority lenders agreed to extend the grace period for making interest payments under the credit agreement governing the stub debt. Those parties have taken the position that such an amendment does not violate the sacred right mandating unanimous lender consent for changing the stated date for making interest payments. Courts haven’t yet opined on this issue.”
He added:
“Threatening not to repay principal at maturity—whether by extending a grace period or simply refusing to pay—may seem like a natural addition to a borrower’s bag of ‘sticks’ as it tries to garner support for an LME. But a borrower’s obligation to repay the money it borrowed on the loan’s maturity date is enshrined as a sacred right under every credit agreement and is viewed by the lender community as a fundamental expectation that cannot be eviscerated by a subset of lenders. While the specter of not being repaid at maturity can be an effective (albeit coercive) negotiating tactic, making good on this threat would also significantly increase the likelihood of litigation. Market participants seem to recognize this, which is perhaps why we have yet to see this threat materialize.”
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