The most recent installment of this Workouts 101 series discussed lenders' business review of loans when they are considering workouts, and gave an overview of early stage moves frequently used by lenders. This post provides an overview of the negotiations and documentation of a workout agreement from the lender's side.Negotiating the workout. Based on its business and legal reviews concerning the loan, and any additional information provided by the borrower, the lender and its counsel will negotiate a workout. Typically, the parties work off one or more expressly non-enforceable terms sheets which set out the basic terms and conditions. Usually the basic framework of the workout deal is based on ideas proposed by the borrower. Many lenders are concerned that if they make the first offer of workout terms, but ultimately are not able to agree on all terms for a loan modification or workout with the borrower, the borrower may later claim that the project failed because the lender overstepped its appropriate boundaries by telling the borrower what to do. Regardless of who makes the first offer, however, many issues need to be addressed, including the following:

changes in timing and amount to the payment terms of the loan;
the possible addition of supplemental collateral or guaranties;
tax issues affecting borrower and lender (note that both portfolio lenders and the beneficial owners of trusts holding CMBS loans usually face tax consequences from modifications of loans).

Documenting and closing the workout.

the basic terms of the deal modifying the loan,
express modifications of the loan documents,
covenants by borrower parties to do certain things (pay reduced amounts, meet certain financial standards, and the like),
acknowledgements, admissions and estoppels by borrower to confirm the outstanding loan amounts and limit potential claims against lender,
releases, waivers and covenants by borrower not to sue lender, and
reaffirmation of the existing loan documents by all parties, including any guarantors and other secondary obligors.

Long lead items. Conclusion and caveat.

Instant Insights /

Workouts 101, Part 6: Lenders' Negotiations and Documentation

Related Stories

Recommended For You