Formal Forbearance Agreement

While the Supreme Court of Canada mitigated to some extent the decision in Transport North America v. New Solutions Financial 2004 SCC 7, such a draconian outcome, in which the lender accidentally exceeds the penalty interest rate, can therefore still be jeopardized. Assuming that the Tribunal is satisfied that the credit agreement is not without other problems, it may interrupt the determination of criminal interest rates and enforce the balance of the loan. This approach has been used to bring the offensive interest rate down to a level just below the criminal ceiling, but it has also been used to completely separate the interest rate component. [27] If the level of the applicable interest rate and other charges is of concern, it may be useful to insert a provision recognizing that the total interest due must not exceed the penalty rate. It is important not only that the debtor/guarantors acknowledge the validity and enforceable of the lender`s security, but this may also be the last opportunity for the lender to remedy any shortcomings in its position. Before negotiating leniency terms, the lender should have its credit and security documents checked by a lawyer and be aware of any shortcomings in its position, whether it is the non-provision of guarantees and other documents provided for in the credit agreement, the identification of unregistered or uninsered interest in securities or the painful realization that collateral is not sufficiently feasible; to cover the entire facility. Given that the debtor wants time or other arrangements, the lender should have the necessary leverage to enforce the compliance necessary to remedy the technical deficiencies. In situations where full recovery is questionable or where, for other reasons, the lender wishes to induce the debtor to expedite payment, discounts may be negotiated under the forbearance terms. A graduated discount, which has decreased over time, provides an incentive for advance payment.

When a discount is negotiated, it is important to structure it on the basis that the payment of the amount expected by the lender is a condition precedent and there are no other defaults to prevent an anticipated agreement and satisfaction. Once the lender and debtor have reached a mutually acceptable plan or approach, more specific leniency conditions can be addressed. While the nature and extent of leniency terms can only be limited by the imagination of the parties, most agreements include that when an operational lender finds that its customer is at risk, it will generally require an increase in prevailing interest rates, particularly if the lender continues to allow the debtor to turn the operating facility. This is a common practice and it is not uncommon for operational lenders to insist that interest rates that were previously prime plus one increase to Prime plus 4 or 5 in recognition of increased risk classification. Such a rise in interest rates puts additional pressure on the debtor when free cash flow has a premium. However, the debtor should understand that if it were forced to enter the market to obtain an operating loan, interest rates would be significantly higher and might only be available through a DIP lender as part of a formal bid. Interest rate hikes can encourage the borrower to obtain financing from another lender, which can in any case be part of the lender`s strategy. . .

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