Standstill Agreement: How Lenders Agree to Wait

When a business with several lenders runs into trouble, each lender's best move depends on what the others do. The first to freeze an account, set off a balance or appoint a receiver can destroy the going-concern value the rest were relying on. Once that has happened, the information needed to choose well has gone with it. A standstill replaces the race with a timetable. One lender and one borrower can reach the same result with a short letter. The agreement matters most where several creditors have to stop together.

The idea is old. In 1993 the Bank of England described the voluntary 'London Approach', under which banks that learned a company was in serious difficulty left its lines open and held off appointing receivers. Modern standstills write into a contract what that approach left to goodwill and market pressure.

Every term is negotiated, but the logic is common. A reference date stops any lender improving its position during the pause: limits are held at their level, new security is shared or not taken, and sale proceeds are often divided in proportion to exposure. Guarantors commonly sign so that the arrangement cannot be used to question their guarantees. The end is specified as carefully as the beginning. A missed milestone, a new default, false information or another creditor enforcing can each bring the period to a close early. In Australia it may be drawn as a deed, sometimes titled a deed of forbearance, and the name matters less than what it holds back.

A maker of plastic drainage pipe, constructed for this page like every figure in it, owes two banks US$24m under one facility agreement: US$14m to the first, including its overdraft, and US$10m to the second. A finance company is owed US$3m, secured on three extruders. A leverage covenant fails in March and a 13-week cash flow shows a squeeze in June. Before anyone enforces, the banks compare two estimates.

They sign for ninety days with a fee of 0.25%, or US$60,000. The estimates, the period and the fee all belong to the example and are not offered as a market norm.

The finance company had not signed. Because nothing bound it, it could have repossessed the extruders the whole plan depended on, so the banks needed it in the room. It joined in return for its monthly payments continuing. Sharing the yard money kept the second bank from wondering whether the first was getting ahead. On day 75 three parties are bidding, and on day 90 the banks extend by thirty days against a signed offer. Had no bidder appeared, both banks would have been free on day 91 to act on the March default exactly as if the ninety days had not happened.

A covenant waiver gives up the right to act on a named breach. A reservation of rights letter is one-sided: it records that the lender is giving nothing up, but promises nothing either. Forbearance is the wider word, covering reduced payments and relaxed covenants as well as time, and is often used for an agreement with a single lender. In practice the terms overlap, and the document decides what each lender has agreed.

A statutory moratorium, such as the one in voluntary administration, is imposed by law on creditors whether they agree or not, subject to its own exceptions. A standstill reaches only those who sign. The same word also appears in an intercreditor agreement, where a junior lender agrees to wait a set time before enforcing against a senior lender's wishes, and outside lending altogether, in takeovers and in disputes where parties agree to pause a limitation period.

DEFINED IN ONE PARAGRAPH → · PROBLEM LOANS AND WORKOUT → · FROM THE BORROWER'S SIDE →

The decision to sign is arithmetic before it is anything else. A workout team runs a recovery waterfall on today's assets and asks what could leak during the pause: stock sold and not replaced, debtors collected and spent, wages and, in New Zealand and the UK, tax arrears building into claims that rank ahead of the bank on working assets. If the estimate at the end of the period is not better than the estimate today, waiting is simply a slower loss.

A standstill also leaves other duties running. Directors must still consider whether the company should go on trading, under the law of their own market. Lenders take care too: security granted for old debt shortly before an insolvency can be challenged, and a lender that starts directing the business risks a shadow director argument. Inside the bank a standstill granted because of financial difficulty is usually recorded as a concession, and it rarely improves a grade. And in the borrower's accounts, ninety days is not a right to defer for twelve months, so the debt generally stays a current liability.