4.2 Management of Risk: General Remarks 93other appropriate cases test of “materiality” may be added.^27 (d) The firm should
generally ensure that the events-of-default clause does not give too much discre-
tion to the lenders.
Sixth, the firm should examine the remedies available to lenders upon the oc-
currence of an event of default. For example, automatic acceleration without any
grace period might cause a liquidity crisis. The firm can therefore try to ensure
that remedies will not be triggered automatically (grace period). The firm should
understand what it means that remedies are “cumulative” and not “exclusive”.^28 In
addition, the firm might prefer a clause according to which the lenders’ obliga-
tions will be suspended during the period that the event of default continues rather
than terminated.
For example, the following clause would protect the interests of borrowers, because the ob-
ligations of the lender would be suspended rather than terminated: “If any of the following
events shall have occurred and be continuing, the Bank may by notice to the Borrower sus-
pend in whole or in part the right of the Borrower to make drawings under the loan”
(NORDISKA Sec. 9.02).^29
Also the following clause would protect the interests of borrowers, because it lays down
a grace period: “If any of the following events shall occur and shall continue for the period
specified below (thirty days), then at any subsequent time during the continuance thereof,
the Bank, at its option, may, by notice to the Borrower and the Guarantor, declare the prin-
cipal of the loan then outstanding to be due and payable immediately together with the in-
terest and other charges thereon and upon any such declaration such principal, together with
the interest and other charges thereon, shall become due and payable immediately” (Gen.
Con. IBRD, Article 7).^30
Generally, the borrower should try to reduce the risk inherent in the drafting and
interpretation of the contractual framework. For example, where the contractual
framework contains both a loan agreement and a security package, the borrower
can require a “loan agreement override” meaning that the negotiated position evi-
denced by the loan agreement should prevail over any inconsistency in the secu-
rity documents.^31
Covenant risk. Loan facility contracts typically contain covenants (see Volume
II) that help to monitor the borrower, require the borrower to maintain financial
thresholds, and give lenders certain rights when the borrower’s finances deterio-
rate.
Such covenants can be too restrictive if they prevent the borrower from carry-
ing on its business in the normal way. If covenants are too restrictive, there is a
high risk of covenant default triggering the lender’s remedies.
(^27) Agarwal VK, Negotiation and Drafting Clauses in Loan Agreements: Events of Default,
UNITAR, DFM Document Series, Document No 15, Geneva (March 2001).
(^28) See, for example, DCFR III.–3:102.
(^29) Agarwal VK, Negotiation and Drafting Clauses in Loan Agreements: Events of Default,
UNITAR, DFM Document Series, Document No 15, Geneva (March 2001).
(^30) Ibid.
(^31) Gayle C, op cit, p 301.