What is a credit agreement amendment?
A credit agreement amendment is a modification or deletion to an existing credit agreement between a borrower and capital provider. Credit agreement amendments are a type of contract amendment that are common in debt capital. After borrowers and capital providers negotiate a term sheet and execute (i.e., sign) a credit agreement, one or both sides may realize that there were parts of the original credit agreement that need to be changed—perhaps to allow for greater financial or operational flexibility. That's where credit agreement amendments come in.
After COVID-19, for example, many borrowers and capital providers agreed to amendments that temporarily waived financial covenant compliance. These amendments gave borrowers financial relief while also preserving the credit agreements that were already in place.
For example, companies like Marriott, Spirit, Live Nation, and Columbia Sportswear negotiated amendments to credit agreements in order to give themselves the ability to weather the economic uncertainty of the hospitality, travel, entertainment, and retail industries.
Why do borrowers and lenders agree to credit agreement amendments?
Borrowers and capital providers might modify an existing contract for any number of reasons: perhaps there was an internal inconsistency in the original credit agreement, or perhaps new circumstances have rendered the original constraints of the credit agreement impractical (see COVID-19 example above).
At a high level, however, the main reason that borrowers and capital providers execute amendments is to ensure that their credit agreement can stay in place. That can't happen, for example, when a borrower trips a covenant and is technically in an event of default. By altering the rules of the credit agreement, borrowers and lenders can ensure the preservation of the debt agreement that's already in place.
Other factors that may drive interest in borrower-lender renegotiation include changes in broader regulatory structures, rising interest rates, or changes in the way banks and other capital providers think about their business models or geographical exposure.
Of course, depending on the situation, either the borrower or lender may have more leverage in the negotiation of a credit agreement amendment. Borrowers might agree to a credit agreement amendment in order to maintain access to their source of working capital, while private credit funds might agree to a credit agreement amendment so that they can continue to put capital to work (rather than jeopardize an existing deal).
What are common areas of negotiation and pushback in credit agreements and credit agreement amendments?
Not surprisingly, the areas of common negotiation in credit agreement amendments tend to be the same ones that come up in credit agreement negotiations. Here are three of the key areas of renegotiation that law firms come across:
The use of standard language around contingencies and obligations. Borrowers and capital providers alike may want to ensure broad standardization across their credit agreements. Neither side wants to have to manage too many disparate timelines, reporting formats, or asset KPIs. (This is analogous to the world of sales contracts, where a very large vendor or procurer is likely to be able to negotiate a standard set of contract terms with a smaller buyer/vendor.)
The definition of financial covenants. Capital providers want to minimize their financial risk, so they are likely to push for restrictive minimum liquidity covenants, financial reporting covenants, and cashflow reporting obligations, among other financial covenants. Borrowers, on the other hand, want to limit their operational and financial constraints, so they are likely to push for more flexible covenants and financial reporting timelines.
Credit agreement fees. Borrowers may not expect the fees associated with the compliance, financial, and legal requirements needed to raise and manage debt capital. (This is especially true of fintech startups and other high-growth companies whose core competency is, for example, software and not capital markets.) Capital providers, on the other hand, often have standard arrangements and fee structures that underpin their internal financial and risk modeling, and that they would prefer not to deviate from.
How can technology help firms manage credit agreement and credit agreement terms?
There are three key ways in which software designed specifically for debt capital management can help borrowers and capital providers manage credit agreement and credit agreement amendment terms:
Credit agreement digitization. Credit agreements are long documents written in legalese, but they often contain a core set of key terms that can be digitized (i.e., turned into structured data) and quickly referenced. Software that provides a "SparkNotes" version of key credit agreement and credit amendment terms (e.g., reporting requirement frequency, minimum liquidity threshold, etc.) can save borrowers time and money by giving them instant access to the credit agreement information that matters most.
Asset tracking. Asset-backed credit facilities, or loans secured by a portfolio of cashflow-generating assets, require borrowers to track, monitor, and demonstrate compliance with a set of asset performance indicators, such as eligibility criteria and concentration limits. By implementing software that plugs into borrower source systems and provides a real-time view into asset health, borrowers and capital providers can simplify and accelerate the asset-tracking process.
Deliverable tracking. Credit agreements contain a schedule of due dates and set of templates for deliverables like Servicer Reports, Quarterly Financials, and Compliance Certificates. Debt capital software can help borrowers and capital providers see the status of all deliverables in one place, as well as what activity has taken place throughout the lifecycle of the credit facility.
Want to learn more?
Successfully tracking the terms and conditions of an executed credit agreement or credit agreement amendment is one of the key financial and legal responsibilities of a Head of Capital Markets or CFO at a high-growth startup. If you're interested in learning more about software that can help you streamline your capital markets and financial operations, just schedule a demo or take a self-guided product tour of Finley from one of our credit agreement compliance experts. We'd love to chat!