The consensual LME deal can effectively put borrowers and lenders in a race to control the vote, specifically the majority or “Required Lender” vote needed to amend the loan documents. Because the makeup of that majority can determine the outcome, borrowers, sponsors and lender factions all try to shape its membership. Incumbent lenders can band together to block or force negotiations on consent-based transactions, but their power as a group is hardly invulnerable, as many modern credit agreements grant borrowers latitude to dilute, deny or even divide the voting power of Required Lender groups.
In this article, we discuss the provisions governing assignments of term loans to “disqualified lenders,” (which have taken on new relevance in light of recent years’ LME exercises where the borrowers can proactively prohibit particular entities from becoming lenders, thereby shaping the composition of the lender group) and outline the common architecture of disqualified‑lender provisions found in most credit agreements.
- Disqualified-lender (or “DQ lender”) provisions are an important tool for sponsors and borrowers for keeping competitors from gaining access to sensitive information about the borrower’s business, and for keeping entities they perceive as aggressive, antagonistic or otherwise undesirable from becoming lenders or participants under the credit agreement.
- U.S. credit agreements typically include DQ lender provisions that allow the borrower to prohibit specific entities from becoming lenders or participants by adding them to a list (a “DQ list”) and providing that list to the agent prior to signing of the commitment letter. The borrower is also typically allowed to add competitors of the borrower and affiliates of other DQ lenders to the DQ list after signing.
- Additions to the DQ list are not retroactive and do not render trades to DQ lenders null and void. Instead, the borrower has a number of remedies available to it if a DQ lender purchases a loan, including to yank the DQ lender from the lender group at the lower of par and the DQ lender’s purchase price.
- In recent years, sponsors and borrowers have increasingly sought to expand their ability to use the DQ lender provisions to exert more control over the composition of the lender group, as another tool in their toolbox in the ongoing tug-of-war between sponsors and lenders seeking to influence the vote in connection with LME transactions.
