Review Event: the Clause That Opens a Negotiation

Some of what a lender relies on can disappear without the borrower doing anything wrong. An owner sells. A regulator changes a licence. The customer behind half the revenue retenders its work. A lender needs an answer to these, because the loan it approved was a loan to that business on those facts. But if each is written as an event of default, a change outside the borrower's control hands the lender its remedies at once and may start cross-defaults elsewhere.

A review event sits between doing nothing and defaulting the borrower. The lender gets the right to reopen the deal. The borrower gets time and a conversation. Each side accepts that the first response to the change will be commercial, with the lender's right to leave held in reserve.

The clause lists the triggers, and these are negotiated deal by deal. Common ones are a change of control, a change in the main business, the loss of a key licence or contract, departure of key management, a qualified audit opinion, and in some documents a missed condition subsequent. The borrower usually has to notify the lender when one occurs.

Three points vary, and a reader should find each one. The first is what happens to undrawn money during the period, since many clauses suspend further drawing or rollover. The second is whether the lender may take enforcement action while the talks last; documents commonly provide a standstill, but it has to be written down. The third is the end of the road. Some agreements give the borrower a stated notice period to repay, while others treat failure to agree as an event of default, which brings the acceleration provisions back in. English law is wary of a bare agreement to agree, so a clause meant to be enforced under it needs defined consequences for failure.

Possible outcomes are as wide as the parties can agree: a higher margin, extra security, faster repayment, tighter covenants, an equity injection, a shorter term, or cancellation and repayment.

A coastal barge operator, constructed for this page like every figure in it, owes US$6.5m on a term loan secured over three barges, at 8% with principal of US$1.0m a year. A contract to carry cement to an island port brings in 40% of its revenue. The facility names loss of that contract as a review event, with 60 days to consult. The customer retenders the work and awards it elsewhere. The operator has breached nothing.

The operator gives up a barge it no longer has work for, pays more per dollar, and keeps its bank. The lender holds less debt against two barges and a better cover ratio. Earnings are assumed unchanged by the sale because the barge had worked only that contract. These ratios belong to the example and are not offered as levels a lender would require. Had the same clause been an event of default, the operator would have opened the same conversation with the bank already holding a right to demand repayment, and a default on its record at any other financier with a cross-default clause.

An event of default gives remedies as soon as it occurs and any grace period has passed. A review event gives a right to reconsider, and repayment comes only at the end of a process. Default is the language for things the borrower did or failed to do. Review suits things that happened to it, though the line is a matter of negotiation and not of law.

It differs from its other neighbours too. A material adverse change clause is general and often judged by the lender, whereas a review event is a specific listed fact that can be seen to have occurred. A change-of-control mandatory prepayment generally requires repayment by its own terms, without a consultation period. An annual review on a facility that is repayable on demand gives the bank a look at the whole file, on no particular trigger, and it needs no clause of this kind because the bank can already ask for its money.

DEFINED IN ONE PARAGRAPH → · READING YOUR FACILITY LETTER → · MATERIAL ADVERSE CHANGE →

The argument happens at the term sheet: which events go in which list. A borrower with one dominant customer or a licence it cannot replace has good reason to ask for those to be review events, and a lender has good reason to ask how quickly the money could be repaid if talks failed. The answer depends on whether the assets could be sold or the debt refinanced within the period, so a period too short for either gives the borrower little of real value.

Australian small-business borrowers have a related protection. Under the Banking Code of Practice, a subscribing bank's standard-form loan to a customer within the Code's small-business test can be acted on, for a default other than a missed payment, only on listed grounds, which include losing a necessary licence and an unconsented change of ownership. The event must be material, and the bank generally gives at least 30 days' notice to remedy where remedy is possible. Specialised loans, such as property development, may also carry tailored covenants. The Code's list is framed around defaults, so whether it reaches a review event that is not a breach turns on the clause. Larger negotiated facilities depend on their own words.

AUDITED, REVIEWED OR COMPILED → · CROSS-DEFAULT →