Current Issues in Syndicated Lending: Defaulting Lenders and the Failure to Fund

Most current syndicated credit agreements include a concept of a defaulting lender to address situations where a lender fails to fund its pro rata share of an advance, reimbursement, or participation under a syndicated credit agreement (any such lender, a “Defaulting Lender”). For example, the Model Credit Agreement Provisions (Effective May 2005, the “Model Provisions”) for syndicated credit agreements published by the Loan Syndications and Trading Association expressly give a borrower the right to require any Defaulting Lender “to assign and delegate, without recourse (in accordance with and subject to the [applicable assignment terms and conditions], all of its interests, rights and obligations under this Agreement and the related Loan Documents ' to an assignee” at par. (See, Model Provisions, Yield Protection, Section 3(b) Mitigation of Obligations; Replacement of Lenders) Notably, the Model Provisions do not include a formal definition of “Defaulting Lender,” and except as described above, the Model Provisions do not address Defaulting Lender issues. Unlike the Model Provisions, most syndicated credit agreements do include a formal definition of “Defaulting Lender,” and this definition frequently includes any Lender that is deemed insolvent or is in receivership within the definition. As evidenced by the Model Provisions, defaulting lender terms were typically drafted with the expectation that a Defaulting Lender would be a rare and isolated occurrence, and could be readily replaced by an assignment at par.