Majority Lenders: Who Decides in a Syndicated Loan

A syndicated loan or club facility is one agreement with several lenders, each holding a share. Over its life the borrower will ask for changes: a covenant waived after a bad quarter, an acquisition permitted, a reporting date moved. If every change needed every lender, the smallest participant could hold the borrower and the other banks to ransom over a routine consent. If a bare majority could change anything, the largest lenders could cut everyone's margin in return for something only they wanted.

The agreement resolves this by splitting decisions into two classes. Ordinary decisions go to the majority lenders. A reserved list goes to every lender, because those terms are each lender's own bargain: how much it lent, at what price, and when it is paid back.

The definition does three things. It sets the share: commonly two-thirds in agreements drafted from the Loan Market Association's forms, the usual starting point in the UK. Australian and New Zealand syndications start from more than one form, the Asia Pacific Loan Market Association's among them, and some Australian documents call the group the majority financiers; there the figure is whatever the document says, and it is read rather than assumed. It sets what is counted: commitments, or once the loans are drawn, participations in the outstanding loans, or a mix of the two. And it sets the wording at the line, which differs between documents. Some say commitments must be more than 66⅔ per cent of the total; others say at least two-thirds. Agreements written in the US style often use a lower test, commonly described as required lenders holding more than half.

Refinements follow. Some agreements require the majority to include at least two lenders, so that the largest bank cannot carry a vote alone. A lender that has failed to fund is often excluded from the count. Many agreements add a snooze-and-lose clause, under which a lender that does not answer a request within a set period drops out of the calculation for that request.

The reserved list varies, but its usual contents are a change to the majority lenders definition itself; extending a payment date; reducing an amount payable, including margin and fees; changing the currency; increasing a lender's commitment; releasing a guarantor or security; and changing the pro rata sharing and amendment clauses. Some documents narrow the consent needed for a given item to the lenders it actually affects, and some put security releases to a higher threshold rather than to everyone.

A food distributor, constructed for this page like every figure in it, has a US$90m club facility from three banks. After a weak year it breaches its leverage covenant and asks for a waiver. It also asks to push final maturity out by a year.

The waiver is a majority matter, and the outcome turns on which bank objects. If C objects, it is outvoted. If B objects, the result rests on one phrase of the definition, because A and C together hold exactly two-thirds. Clubs built in round commitments produce exact fractions more often than one might expect. Under the 'more than' wording B, with exactly a third, is a blocking minority on its own.

The extension is a reserved matter. C, with a sixth of the facility, can stop it alone. The distributor's choices each have a price. It can win C round, often with a fee or a margin step-up offered to all three. It can replace C under a yank-the-bank clause, if the agreement has one and a buyer for C's share can be found. Or, if the agreement allows lender-by-lender extensions, A and B can extend their commitments while C is repaid on the original date, which needs cash or a new lender for US$15m.

Had the agreement carried a snooze-and-lose clause and B simply failed to reply in time, B's US$30m would have dropped out of the count, and A and C would have held 60 of 60 for the waiver. Silence can decide a vote.

The majority lenders vote governs the facility agreement. It is not the only vote in a secured deal. Where a security trustee holds the security for the lenders and the hedge counterparties, the security trust deed or intercreditor agreement sets its own instructing group, which may count hedging close-out amounts beside the loans and can differ from the facility majority. Enforcement is decided there.

The vote also differs from the agent's discretion. An agent bank administers the facility and acts on the lenders' instructions; it does not decide a waiver itself, and its own share votes like anyone else's. In a bilateral facility there is no vote at all, which is one reason a borrower moving to a club finds amendments slower.

DEFINED IN ONE PARAGRAPH → · THE YANK-THE-BANK CLAUSE → · COVENANT WAIVER →

For a participating bank the first question on any request is whether its vote is needed. A bank holding a sixth of a club may decline a waiver its credit committee dislikes and still see it pass, and its paper should say so; a bank holding a third may find that its refusal is the decision. The same arithmetic shapes how much of a deal a bank chooses to hold at syndication, because a share large enough to block a majority matter buys a seat at every negotiation.

For the borrower and its advisers, the work is classification. A request drafted as a covenant reset may in fact reduce an amount payable or move a payment date, and then it needs every lender. Reading the reserved list before the request goes out is cheaper than discovering the veto afterwards. After a default the vote turns harder: the majority can instruct the agent to accelerate, and a minority that would rather wait has, under most agreements, no way to stop it.

LOAN COVENANTS, EXPLAINED → · READING YOUR FACILITY LETTER → · THE BANK'S LAWYERS AND YOURS →