April 3, 2023

Debt Download

Welcome to Goodwin’s Debt Download, our monthly newsletter covering what you need to know in the leveraged finance market. This month, we focus our coverage on the turmoil in the banking industry resulting from the failures of Silicon Valley Bank and Signature Bank and the takeover of Credit Suisse by UBS, including some thoughts on documentation considerations and suggestions in light of the changing landscape.

Note: Some of the links in this newsletter may redirect you to a subscription-only resource.

In the News - Banking Industry Turmoil

In Other News

Goodwin Insights

The consequences of the recent turmoil in the banking sector have rippled through many aspects of ordinary-course business operations. Here we focus on its impact on credit agreements and other related documents and provide some thoughts on where we are today and where we see things going for existing and new credit facilities (please note that this is not legal advice, but rather general observations and any possible action taken would require review of actual relevant documentation and consultation with necessary legal, tax and other advisors):
  • Cash Management. Companies should review with their professional advisors whether they are managing cash and risk effectively, particularly in this uncertain environment. This Goodwin article offers best practices for adopting cash management policies that can better protect companies. When adopting a cash management policy, it is important for companies to review their third-party debt documents for covenants or restrictions on cash management. For example, prior to the current banking crisis, it was not uncommon for lenders to early stage and lower middle market companies to require that the borrower keep all cash deposits in accounts with such lender. Many lenders, including SVB, a division of First Citizens, have been amenable to amending (or waiving defaults relating to) such cash management covenants in light of the current banking turbulence, so long as a percentage of a company’s cash is kept on deposit with the lender, therefore allowing the borrower to diversify its risk by keeping cash at other banks and financial institutions. These lenders and any existing credit document will also likely require deposit account control agreements (DACAs) to be in place with any other banks to give the lender proper perfection in accounts at other banks. We recommend ensuring that enough lead time is allowed to put any such DACAs in place, typically 30-90 days after the date of opening an account. Also, in credit agreements that have liquidity tests or leverage tests or baskets with cash netting, any requirement that the cash or cash equivalents be “unrestricted” in such tests or baskets should carve out any restricted access caused by bank failures or FDIC receiverships. Further, attention should be focused on the criteria to qualify as “cash equivalents” in credit agreements.
  • Fund Facilities. Before they failed, SVB and Signature Bank provided loans and lines of credit to private equity, venture capital and other similar investment funds secured in many cases by such fund’s (or its general partner’s) right to call capital from investors (aka subscription or capital call facilities). It is common for the agreements governing such subscription facilities to require that the relevant fund borrowers cause their respective investors to fund all capital calls exclusively and directly into an account with the lender and to have any distributions from investments flow through an account with the lender. Unlike credit agreements for operating companies, however, fund facility agreements typically do not require fund borrowers to keep the proceeds of capital calls in such account and also permit fund borrowers to maintain bank accounts at other institutions. Although most fund borrowers use the proceeds of capital calls relatively quickly upon receipt, in some situations they are required to hold cash longer than initially anticipated (e.g., if an M&A transaction is delayed after a capital call is made). Accordingly, fund borrowers, like their operating company counterparts, should consider whether they should diversify where they maintain their cash. Although the majority of previous SVB fund borrowers will continue to have access to their loans and accounts — now through First Citizens — fund borrowers across the industry nonetheless have begun examining the creditworthiness of their lenders in consideration of whether to seek alternatives. Because many of these facilities are structured as 364-day revolvers, subscription facility borrowers in search of new lenders typically will wait until maturity to switch. For fund borrowers considering changing lenders prior to maturity and for which refinancing is not an attractive or available option, it is important to review the provisions of their credit agreements relating to the ability to assign agency (or lenders, in the case of a single-lender facility) to another counterparty, as assigning an existing facility to the incoming lender can sometimes be a path to streamlining the transition process and lowering costs. Funds that are registered investment advisors should be aware of any disclosure requirements or risk factors.
  • Potential Document Considerations for New Facilities. Although the situation continues to evolve, our initial thoughts on potential document considerations for new facilities include:
    • As mentioned above, careful attention should be paid to any cash management covenants or requirements, including any minimum amounts required to be maintained with any particular lender, requirements to diversify where bank accounts are held, and deposit bank liquidity or ratings requirements. Companies may want to consider keeping payroll accounts in a separate bank from their lender banks (note that while payroll accounts are excluded from collateral and any control agreement covenant, covenants in bank credit agreements with a minimum amount of accounts and cash requirements to be maintained with such banks typically do not exclude payroll accounts from such requirements). If a company is interested in utilizing any sweep arrangements as part of its cash management program, ensure that the credit agreement contains the necessary flexibility to allow for such arrangements. Lastly, consider including flexibility that, to the extent a lender faces certain liquidity issues, cash management covenants are no longer in effect.
    • Consider including a debt covenant basket/carve-out allowing financial sponsors or other investors to temporarily put money into portfolio companies to fund payroll for a certain period of time. Be mindful of related credit agreement provisions that might restrict the repayment of such indebtedness. In addition, be mindful of any carve-out to the affiliate transactions negative covenant that is based on “arm’s length” that also requires any such transaction to be in the “ordinary course”. These recent events provide good reason why the arm’s length basket to the affiliate transactions negative covenant should not be subject to an ordinary course condition.
    • As companies seek additional investments and custodial arrangements for their liquid assets — including participation in the DDA-MMDA and CD options of IntraFi Network Deposits (formerly ICS and CDARS) — the definition of “Cash Equivalents” should be reviewed to ensure that such investments or arrangements are permitted under their credit facilities and that companies get credit (e.g., for cash netting or liquidity covenant purposes) for any such investments or arrangements. Also, companies should make sure any control agreement requirements are not too stringent by requiring that money or accounts above the $250,000 that swept from the primary financial institution to other member institutions be covered by a control agreement (best practice would be to include specific carve-outs from any control agreement requirements). Please note that if companies are considering IntraFi Network Deposits, companies and lenders are likely going to focus on having a record with the primary financial institution of knowing exactly what member institutions are being sent money beyond $250,000 that is being maintained at the primary financial institution and how to obtain such money if the primary financial institution fails or is in receivership.
    • Consider creating a “super holdco” structure in all deals where an extra holding company sits above the credit group, free from the senior credit agreement restrictions, to allow for potential holdco financing in the future. Note that any structuring considerations should be discussed with legal and tax professionals.
    • For credit agreements that have an event of default tied to a “Material Adverse Effect”, consider adding a carveout in the definition of Material Adverse Effect to address bank failure risk.
    • Consider carving out from the clean audit requirement in credit agreements any potential qualification included by auditors for bank failures or cash management diversification risk. While we do not know whether auditors will start to include any sort of carve-outs from the aftermath of the turmoil in the banking industry, it would be prudent to be proactive on this front with any new credit agreements being negotiated.
    • Consider additional borrower protections relating to replacing defaulting lenders (perhaps the ability to yank a defaulting lender below par value based on the trading level of the debt at the relevant point in time), having faster time periods to designate a defaulting lender and to yank a lender, or designating disqualified lenders retroactively.
    • Borrowers should consider requesting limited setoff rights, particularly when cash becomes unavailable due to a bank failure or receivership.
    • With the purchase by First Citizens of certain assets and liabilities of SVBB and the purchase by New York Community Bancorp of certain assets and liabilities of SBB, it is important to note that the FDIC is now again only insuring a maximum of $250,000 of deposits maintained by any customer at First Citizens and New York Community Bancorp (including those deposit accounts previously maintained at SVBB and SBB that were acquired by First Citizens and New York Community Bancorp, respectively).
  • Protecting Against Wire Fraud Scams. Given the increase in wire transfers as customers open new accounts and move money to different banks, it is important to remember that companies are targeted for fraud when engaged in this process and companies must remain vigilant throughout. Check out Goodwin’s article on Protecting Against Wire Fraud Scams.

Please reach out to anyone on the Goodwin Debt Finance team, or your usual Goodwin contact, to discuss any of the options above or for any other questions you have on your existing or new credit facilities.

In Case You Missed It – Check out the Goodwin Bank Failure Knowledge Center which includes helpful FAQs, US and UK Model Form Bridge Financing Documents, thoughts on cash management options and recordings of our webinars.


For inquiries regarding Goodwin’s Debt Download or our Debt Finance practice, please contact Dylan S. Brown, Nikolaus J. Caro, and Robert J. Stein.

Was this newsletter forwarded to you? You can receive it directly by subscribing here.