April 24, 2020
Because defaults, bankruptcies, or other distress may occur in the current oil and gas price environment, we wanted to discuss Forbearance Agreements.
A Forbearance Agreement is a written agreement by Bank to refrain from exercising remedies for a certain period of time while Borrower pursues alternatives to refinance, restructure, or otherwise address existing defaults or a borrowing base deficiency. A Forbearance Agreement is sometimes called a standstill agreement.
A Forbearance Agreement gives Bank time to evaluate its options and determine the best path to a performing loan or a maximum recovery.
A Forbearance Agreement gives Borrower time to address a non-conforming borrowing base without declaration of a deficiency, to address its financial condition, to address any existing or near-term events of default, to resolve or come up with a plan to resolve financial problems, and to develop a backup plan that may include a pre-negotiated bankruptcy or a balance sheet restructuring.
A benefit to both Bank and Borrower is the Forbearance Agreement avoids, at least for the short-term, declaration of default, litigation, and bankruptcy that might derail workout options.
A Forbearance Agreement will be signed by Bank, Borrower, and all Guarantors.
A Forbearance Agreement will contain acknowledgments by Borrower and Guarantors of specific existing events of default which are not waived, debt amounts (including accrued interest and fees), and validity and enforceability of the loan documents. It will also provide for the reservation of Bank’s rights and remedies.
A Forbearance Agreement may address any business issues that Bank and its credit officers wish, but some items that might be addressed include:
- the cure of any errors or deficiencies in loan documentation and perfection;
- an increase to the mortgage coverage percentage or requirement;
- the addition of deposit account control agreements covering specific deposit accounts;
- the addition of specific security in hedge accounts or hedge transactions;
- the addition of cash hoarding and defensive draw provisions;
- an opportunity for Borrower to implement a liquidation plan for non-core assets, gathering assets, or all its oil and gas properties;
- revised covenants prohibiting Borrower from entering into additional hedge transactions or terminating existing hedge transactions;
- new covenants requiring Borrower to terminate existing hedge transactions and pay the proceeds to Bank;
- the tightening or short-term loosening of financial covenants;
- specific milestones regarding equity contributions, sales, or restructuring;
- the payment to Bank of forbearance fees;
- the tolling of applicable statutes of limitation for the enforcement of the notes and security documents;
- the indemnity of Bank by Borrower and Guarantors; and
- the release of all claims by Borrower and Guarantors.
We remind you that new mortgages, deposit account control agreements, assignments of hedge transactions, and other security documents executed or filed within 90 days prior to a bankruptcy filing may be voided as a preference, so the earlier they are executed, the better for Bank. There are also circumstances under state and federal bankruptcy and insolvency law where mortgages, deposit account control agreements, assignments of hedge transactions, and other security documents granted while insolvent within the prior one or two years could be voided as fraudulent transfers.
Term of Forbearance Agreement and Remedies:
A Forbearance Agreement will set forth a specific term for the forbearance with an expiration date. It will also provide for the early termination of forbearance for any breach of such Forbearance Agreement, for an event of default other than existing specified defaults, or if Borrower takes actions inconsistent with goals of the Forbearance Agreement.
Upon termination of a Forbearance Agreement, Bank may exercise all available rights and remedies under the security documents, including foreclosure under mortgages and security agreements and control of cash in deposit accounts. A Forbearance Agreement might also provide that if Borrower is unable to comply with the terms of the forbearance or meet required milestones, then Borrower will sign and deliver a deed in lieu of foreclosure covering material oil and gas properties in favor of Bank.