ECP Guarantor Provisions In Corporate Credit Agreements

by Stinson Leonard Street - Dodd-Frank and the Jobs Act

Many corporate credit agreements are supported by subsidiary guarantees.  Those guarantees often include not only the guaranty of the obligations under the credit agreement but also any related swap agreements.  The CFTC has issued guidance clarifying that guarantors of swap obligations fall under the Dodd-Frank Act’s requirements.  Namely, the CFTC considers guarantees of swaps the same as swaps. The CFTC provided no-action relief to guarantors from enforcement of the swap requirement until March 31, 2013.

Generally, swaps, and therefore guarantees of swap obligations, may only be entered into by eligible contract participants, or ECPs.  Among other things, an ECP must have $10 million in assets.  Not all subsidiary guarantors in corporate credit agreements will meet that threshold, so work arounds have begun to appear in credit agreements.

Often the way the provisions work is to exclude non-ECP credit parties from the swap guarantee obligation and then require some sort of a keepwell agreement to provide sufficient funds so parties can meet their obligations under the swap guarantees. Here is one example from a Form 8-K filing:

“Excluded Swap Obligation” shall mean, with respect to any Credit Party, any Swap Obligation if, and to the extent that, all or a portion of the Guarantee of such Credit Party of, or the grant by such Credit Party of a security interest to secure, such Swap Obligation (or any Guarantee thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Credit Party’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity Exchange Act and the regulations thereunder at the time the Guarantee of such Credit Party or the grant of such security interest becomes effective with respect to such Swap Obligation, unless otherwise agreed between the Borrower and the Administrative Agent. If a Swap Obligation arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such Guarantee or security interest is or becomes illegal.

“Qualified ECP Guarantor” shall mean, in respect of any Swap Obligation, each Credit Party that has total assets exceeding $10,000,000 at the time the relevant Guarantee or grant of the relevant security interest becomes effective with respect to such Swap Obligation or such other Credit Party as constitutes an “eligible contract participant” under the Commodity Exchange Act or any regulations promulgated thereunder and can cause another person to qualify as an “eligible contract participant” at such time by entering into a keepwell under Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.

“Swap Obligation” shall mean, with respect to any Credit Party, any obligation to pay or perform under any agreement, contract or transaction that constitutes a “swap” within the meaning of section 1a(47) of the Commodity Exchange Act.

9.16. Swap Obligations. Each Qualified ECP Guarantor hereby jointly and severally absolutely, unconditionally and irrevocably undertakes to provide such funds or other support as may be needed from time to time by each other Credit Party to honor all of its obligations under the Guarantee in respect of Swap Obligations (subject in all cases to Section 3 of the Guarantee). The obligations of each Qualified ECP Guarantor under this Section 9.16 shall remain in full force and effect until a discharge of the Guarantee in accordance with Section 24(a) thereof. Each Qualified ECP Guarantor intends that this Section 9.16 constitute, and this Section 9.16 shall be deemed to constitute, a “keepwell, support, or other agreement” for the benefit of each other Credit Party for all purposes of Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.

Other examples of this approach and variants can be found here and here.

You can also find ISDA standard terms addressing the same issue in the Standard Terms section of ISDA’s web site.  The documents were posted on April 19, 2013.

Check frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

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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