Best Practices When Hiring a Successor Agent for a Distressed Credit Facility

Administrative agents or facility agents on distressed credit loans periodically resign or are removed by the lenders. An administrative agent or facility agent may resign or be removed for a number of reasons, including because it has sold its position in the credit, it is reluctant or unwilling to take certain actions that would damage its relationship with the borrower, or because of a perceived or actual conflict of interest. 

Administrative agents or facility agents handle the routine responsibilities and duties necessary for the orderly administration of a syndicated loan. Once a syndicated loan closes, payments between the borrower and lenders are made through the administrative agent or facility agent. Other duties of the administrative agent or facility agent include coordinating with the lenders and lenders' counsel, setting interest rates, maintaining the register, and processing any loan trades. In a restructuring or bankruptcy scenario, the administrative agent or facility agent may also coordinate with lender ad-hoc steering committees, file proofs of claim, communicate with the claims agent, and disburse proceeds from the sale of collateral. Acting at the direction of the lenders, administrative agents or facility agents declare events of default, enforce remedies, and foreclose on collateral. 

The resignation or removal of an administrative agent or facility agent can interrupt the orderly administration of a credit facility if not handled correctly. Fortunately, credit facilities are flexible, and the process of appointing a new administrative agent or facility agent, often referred to as a successor agent or replacement agent, can be managed smoothly.  

Why Would an Administrative Agent or Facility Agent Resign or be Removed? 

Not a Lender. The most common reason an administrative agent or facility agent resigns is that it has sold the position it once held in the credit. Many lenders are not willing to serve as an administrative agent or facility agent on loan facilities in which they are not a lender. This scenario often occurs when the administrative agent or facility agent acted as the arranger of the loan, but the circumstances under which the administrative agent or facility agent originally decided to make the loan have changed. Many banks will sell their position in a syndicated loan to distressed debt investors if the borrower’s loan becomes distressed or otherwise becomes too risky for the bank. 

Conflict of Interest. An administrative agent or facility agent may resign because of a conflict of interest or the perception of a conflict of interest. For example, when a party acts as the administrative agent or facility agent on multiple loan facilities for a borrower, and the borrower is in default under one or more of the loan facilities, a conflict of interest between the creditor groups may require that the administrative agent or facility agent resign on one or more of the loan facilities. 

Disagreement with Lenders. An administrative agent or facility agent may also resign if lenders direct it to take action that it is not willing to take. An administrative agent or facility agent may not be willing to follow the direction of the lenders because of liability concerns or because the agent has a long-standing business relationship with the borrower that it is reluctant to damage. The existing administrative agent or facility agent may be willing to provide the borrower with more flexibility or concessions than other lenders due to its relationship with the borrower. By resigning, the administrative agent or facility agent can acquiesce to the will of the other lenders while maintaining its relationship with the borrower. 

Removal by Lenders. Administrative agents or facility agents may also be removed by the lenders under some credit agreements. The motivation for lenders to remove an administrative agent or facility agent generally relates to a disagreement between the agent and the other lenders on a major issue. For example, if lenders direct an administrative agent or facility agent to enforce remedies against the borrower and the agent does not promptly carry out the lenders' directions, the lenders may decide to remove the agent. Credit agreements that permit the removal of the administrative agent or facility agent by the lenders require lenders holding a majority of the outstanding loans to consent to the removal of the administrative agent or facility agent for it to be effective. 

The Administrative agent or Facility Agent in a Restructuring or Distressed Credit 

The administrative agent or facility agent is the agent of the lenders. The role of the administrative agent or facility agent is spelled out in the credit agreement, and on healthy credits, the agent's role is limited to carrying out those administrative responsibilities specifically set forth in the credit agreement, plus periodically assisting with ad-hoc matters such as processing amendments. However, on distressed credits, there is a need for the lenders, as the economic stakeholders of the credit, to exercise their business judgment regarding defaults, waivers, forbearances, restructurings, enforcement of remedies and the like. It is critical on distressed credits that the administrative agent or facility agent work hand in glove with the lenders to carry out the lenders' directions. This expands the scope of the administrative agent or facility agent's role from the narrow confines of the credit agreement to the much broader potential array of options available to the lenders as they seek to maximize their recovery. It is imperative that the lenders select a successor or replacement agent that is able to promptly give effect to the lenders' directions and has the experience and systems in place to effectively carry out the will of the lenders. 

How is the Resignation or Removal Process Initiated? 

If the administrative agent or facility agent is resigning voluntarily, the resignation process begins by an administrative agent or facility agent delivering a notice of resignation to the borrower, and lenders informing them of its intent to resign. Customarily, there is a thirty-day notice period, and the existing administrative agent or facility agent is automatically discharged from its duties once the notice period has passed. Appointing a new administrative agent or facility agent before the existing agent is discharged is preferable as the existing agent will have the register, direct lines of communication with the lenders, and can assist in the collection of signature pages and other administrative tasks related to the appointment of a new agent. While some existing administrative agent or facility agents will voluntarily extend the notice period if the other parties are making progress in appointing a new agent, it is best to begin the process of appointing a new agent as soon as possible. 

If a credit agreement allows for the removal of the administrative agent or facility agent by the lenders, the process of removing an agent is substantially the same as with a voluntary resignation except that the removing lenders provide notice of the administrative agent or facility agent’s removal to the borrower, lenders, and administrative agent or facility agent. As with the voluntary resignation provisions of a credit agreement, the removal provisions customarily provide for a thirty-day notice period before the removal is effective and the agent is discharged from its duties under the credit agreement. A administrative agent or facility agent removed by the lenders is unlikely to cooperate more than is absolutely necessary, so it is advisable for the lenders to select a new agent before delivering a removal notice to the existing agent. 

Appointing a New Administrative Agent or Facility Agent 

Required Consents. The new administrative agent or facility agent is typically appointed by lenders holding a majority of the debt outstanding in the syndicated loan facility for the appointment to be effective, though some agreements have a higher threshold. The borrower, if not in default, will often need to consent to the appointment of a new administrative agent or facility agent. Issuing banks on syndicated loan facilities that include a letter of credit facility may also need to consent to the appointment of a new administrative agent or facility agent. 

Successor Agent Agreement. In order to appoint the new administrative agent or facility agent, the new agent and lenders holding a majority of the debt will enter into a successor agent agreement whereby the lenders holding a majority of the debt confirm that the resignation of the existing agent is effective, appoint the new administrative agent or facility agent, and have the new agent accept the appointment. 

The successor agent agreement will often deal with administrative matters such as providing the new administrative agent or facility agent with the loan’s books and records, the assignment of any security interests, and the transfer of any possessory collateral. It is also common for the successor agent agreement to include minor mechanical amendments to the credit agreement such as updating the prime rate. 

Preferably, the existing administrative agent or facility agent and borrower will also enter into the successor agent agreement. However, if there are ongoing disputes between the parties, the existing administrative agent or facility agent or borrower may refuse to be a party to the successor agent agreement. The existing administrative agent or facility agent or borrower may instead be willing to enter into a side agreement with the new administrative agent or facility agent to facilitate the appointment and provide, with respect to the borrower, any necessary consents. 

Effectiveness of Appointment. The appointment of a new administrative agent or facility agent is complete upon the effectiveness of a successor agent agreement executed by the lenders, the successor administrative agent or facility agent, and if possible, the existing administrative agent or facility agent and the borrower. Conditions to effectiveness that are included in the successor agent agreement are generally limited to items like payment of the new administrative agent or facility agent’s fees and expenses. 

Conclusion 

Credit facilities are valued for their flexibility. With the right partners, this flexibility allows for the appointment of a new administrative agent or facility agent to be relatively painless. Whether you are a borrower or a lender that has found itself in a situation where a new administrative agent or facility agent needs to be appointed, there are a few steps you can take to increase the likelihood of a smooth appointment process: 

Start Early. Appointing a new administrative agent or facility agent is much easier when there is an existing administrative agent or facility agent in place. Beginning the appointment process as soon as the need for a new administrative agent or facility agent is known will increase the likelihood that the new agent will be appointed before the existing agent is discharged. The first step in this process is the selection by the lenders of who they wish to appoint as the new administrative agent or facility agent. 

Communicate. Borrowers and lenders are often accustomed to only communicating with the administrative agent or facility agent rather than directly with each other. While this normally works well, administrative agent or facility agents are usually not too concerned about the appointment of a new agent once it has given notice of its intent to resign. Borrowers and lenders can ensure that they are on the same page and prevent any duplication of effort by communicating directly with each other and the administrative agent or facility agent regarding the appointment of a new agent. 

KYC. “KYC” or “Know Your Customer” requirements are ubiquitous these days. Despite this, or perhaps because of it, many institutions drag their feet in responding to KYC requests. By responding promptly to any KYC requests, the parties can ensure that KYC does not hold up the appointment of a new administrative agent or facility agent. 

Confirm Positions. Each of the lenders and the borrower should confirm that they agree with the existing administrative agent or facility agent regarding the loan principal, accrued interest, and any fees that are outstanding. Too often it is not until the parties are ready to close on the successor agent agreement (and sometimes even later) that any loan position discrepancies are identified, potentially delaying the appointment of a new administrative agent or facility agent. 

The appointment of a competent successor or replacement administrative agent or facility agent on a distressed credit ensures that the lenders directions will be effectively and promptly carried out. When selecting a successor or replacement administrative agent or facility agent on a distressed credit, it is important to select one with experience on distressed credits as well as experience working through the appointment process and stepping into the shoes of a former administrative agent or facility agent. 

About SRS Acquiom

SRS Acquiom delivers a smarter way to run deals with solutions that reduce the administrative burden throughout the entire deal lifecycle. Our services include paying and escrow agent services, online document solicitation and reporting, professional shareholder representation, and virtual data rooms. For loan and credit transactions, we provide independent administrative or facility agent, collateral or security agent, and sub-agent services. Since 2007, we have helped sophisticated deal parties reduce administrative drag, enabling them to focus on building great businesses and maximizing value.