As markets continue to respond to the COVID 19 pandemic, trading prices for many corporate and bond loans have fallen dramatically. As a result, many companies (or their private equity sponsors) seek to repurchase their debts with a discount. In addition, many companies are concerned that the effects of the COVID 19 pandemic are causing breaches or other defaults and are in discussions with their lenders and investors to obtain the necessary changes to their debt contracts. Following the 2008/2009 financial crisis, credit buybacks were made in the syndicated loan market. Prior to the crisis, most credit contracts did not consider borrower buybacks and, in fact, many credit contracts were expressly subordinated to the condition that the borrower and his related companies were not eligible agents. In the wake of this financial crisis, many credit contracts specifically considered the ability of the borrower and/or his related companies to acquire loans (usually limited to term loans) either through non-proportional purchases on the open market or through a “Dutch auction procedure” which, in many cases, must be open to all lenders in the pro-rata category of loans. Most credit contracts that allow for debt redemption also have some of the usual limitations on the borrower`s right to repurchase debt: as a general rule, holders of a majority in the principal amount of loans and commitments (the “necessary lenders”) and the administrative officer must authorize any modification or waiver of the obligations; except that, in facilities where the financial pact benefits only revolving lenders, the agreement of holders of a large portion of the loans/revolving commitments would be necessary, instead of all loans. Similarly, in most credit contracts, changes to the mandatory advance rules would also require the agreement of the lenders and the representative. The deferral of interest or the amount of capital and/or payment of such amounts in kind would generally require the agreement of all lenders or lenders involved.
Borrowers buy back debt in two ways: a Dutch auction or an open market purchase. Most credit contracts contain provisions for Dutch auctions, while purchases on an open market are a less common option for borrowers. The purchase of credit by the borrower or his related companies is likely to affect certain other provisions of a credit contract that will need to be reviewed. These provisions include: the impact on the definition of EBITDA and leverage ratios, the calculation of excess cash flows and the ability to issue incremental debt. In a Dutch auction, the borrower informs an auction administrator of his willingness to acquire a total amount of long-term loans from existing lenders at a specified price. The borrower also informs the auction manager of the range of rebates for which he would be willing to purchase the long-term credits. Each lender then informs the auction manager of its willingness to sell long-term loans to the borrower, including the amount of long-term loans that such a lender is willing to sell, as well as the discount on the by which such a lender is willing to sell. The auction manager then calculates the lowest purchase price allowing the borrower to close the auction by purchasing the total amount offered (or the lesser amount for which qualified bids are made by the lender). Dutch auctions are considered more advantageous for lenders because all lenders have the option to sell their loans, the borrower buys at the lowest cost and does not favor another party, and the borrower faces considerable economic and temporal costs that must be used by the auction manager and conduct the auction. As noted above, many credit contracts currently contain provisions allowing the borrower to voluntarily pay term loans at a discount in accordance with the