Reforms to benefit everyone

Lehman Brothers’ failure, and the prospect of others, has forced participants in the syndicated loan market to rethink how to protect themselves under standard credit agreement documentation. Of particular focus has been the defaulting lender provisions, which typically require lenders to forfeit certain rights if they are unable to meet their funding obligations. The concept of a defaulting lender should be expanded to better protect borrowers from the consequences of a default.

Why does the borrower care?The failure of a term loan lender is likely to have limited effect on the borrower, but the consequences of the failure of a revolving lender may be severe. The funding obligation of revolving credit lenders is a several and not a joint obligation – the other lenders do not have to fund in the place of a lender that is unwilling or unable to do so. The defaulting lender leaves a hole...