110 4 Debt
agreement becomes entitled to protect or enforce its rights against that borrower.
In drafting this clause, the parties should pay attention to the definition of indebt-
edness (see above).^105
Material adverse change, Eurodollar disaster, market disruption, and illegality
clauses. The agreement can become less attractive for the lender for a number of
reasons. Many of them have been listed in the agreement as events that trigger a
default and can thus lead to acceleration. On the other hand, there are specific
clauses that deal with material adverse change, illegality, and similar cases.
For the lender, the purpose of the material adverse change (MAC) clause is to
function as a catch-all term. It has become an indispensable contractual tool which
is used in any document evidencing the undertaking of a bank (financing offers,
mandate letters, underwriting letters, loan agreements). The absence of a material
adverse change will be the agreed condition of closing and a drawdown condition,
and the occurrence of a material adverse change will be an agreed termination
event or an event of default.
In a loan facility agreement, the MAC clause can take three principal forms: (1)
one which allows the lender to determine, in a more or less subjective and discre-
tionary way, whether a significant adverse change has occurred; (2) that of the
single-shot, which is triggered at the moment of the occurrence of a significant
adverse change in the financial or operating situation of the borrower; and (3) that
of the dual test, which is satisfied only (a) at the point when a material adverse
change occurs and (b) if that change is likely to prevent the contracting party from
fulfilling its obligations.^106
Due to the open nature of the MAC clause, the borrower will try to ensure that
it is qualified and diluted. For example, the scope of the clause could be limited to
the borrower’s financial condition, in which case it would not cover changes in the
borrower’s business or industry.^107
The Eurodollar disaster clause refers to the situation in which a lending bank
cannot fund itself in the Euromarkets in the normal way. In Eurocurrency lending,
a bank is presumed to fund its loan by taking short-term deposits in the interbank
market that precisely match the interest periods under the loan. The Eurodollar
disaster clause is a risk transfer mechanism. It is justified by arguments similar to
those advanced for the capital adequacy indemnity clause, the increased costs
clause, the tax gross-up and the broken funding indemnity clause (see above).^108
The market disruption clause is a similar clause. It deals with the risk for the
lender that a reference rate (EURIBOR or LIBOR) cannot be determined or that
the reference rate does not cover the lender’s funding costs.^109
The market disruption clause can contain a dynamic component which facilitates negotia-
tions between the parties; if the parties do not reach agreement within a short period of time
(^105) See ibid, pp 96–97.
(^106) Julien F, Lamontagne-Defriez JM, Material Adverse Change and Syndicated Bank Fi-
nancing: Part 1, JIBLR 19(5) (2004) p 172.
(^107) See Buchheit LC, op cit, pp 104–105.
(^108) See ibid, pp 54–55.
(^109) Diem A, op cit, § 13.