We often see banks requiring their borrowers to enter into interest rate hedge agreements in conjunction with their credit agreements. There are a number of reasons why borrowers should take care to ensure that they have the related ISDA Agreements and Schedules considered by experienced counsel. Here are just two of those reasons.
Linkage to the Credit Agreement
ISDA Agreements often include the termination of the Credit Agreement as either an Additional Termination Event or an Event of Default. The result of such an inclusion is that if the Credit Agreement is repaid early (whether upon a sale of the company or otherwise) then the borrower will be responsible for any out of the money payments that are owing at the time of the repayment. These out of the money payments could be significant and borrowers will need to become sufficiently versed in the nature of the ISDA Agreements and the related financial repercussions at the outset of the transaction to avoid surprises down the road.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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