The “forbearance” agreement between a lender and a borrower is an important piece of an orderly sale of a company (as it sells all of its assets and pays creditors).  Whether you’re the creditor or the company, a thoughtful forbearance agreement (balanced with key interests of both sides) must be in place to begin the sale process. Striking the “balance” between the interests of the company and the first lien lender in the forbearance agreement is not easy.  Below are some tips on the perspectives of the company  and the first lien lender, as they discuss terms of the forbearance agreement.

Background.  In a struggling economy, with liquidity issues, loan covenant failures, and no up-tick in company performance in sight, many companies turn to the ultimate solution: sell the company.  Restructuring the company simply is not an option because new capital is not available (to pay-down company debt and fund operations), and existing lenders will not increase credit availability.  The only “option” for the company maybe to sell, which means the company needs both time to find buyers, and cooperation from the first lien lender(s).

Time and cooperation.

If these two intersect or balance, then an understanding the perspectives (of the company and the first lien lender) becomes a key in crafting the forbearance agreement – so the tight rope walk can begin.

Here are some of the tips presented at a recent seminar by Houlihan and Lokey (Adam Dunayer, Brett Lowry and Michael Boone) and by Winstead (Eli Columbus, Phil Lamberson and Frasher Murphy):

The Company Perspective:

• how much will the lender charge for the forbearance? (and “who” funds it?)
• what are the third party costs in putting the forbearance in place, and then in keeping it in place (legal, accounting and others)? (and “who” funds these?)
• what time line milestones (of sales) will the lender require; and are they realistic (in the current market)?
• once the sales milestones are achieved, what will be the extensions of the forbearance period (and on what terms)?
• what will be the deferral of principal payments on first lien debt?
• what about an increase in the advance rate on first lien debt (creating liquidity)?

The First Lien Lender Perspective:

• pro forma budget of short term cash flow: is it realistic?
• what new or additional covenants are needed; and what current covenants should be put on the shelf?
• what time line milestones should be imposed for sales?
• what sales information should be provided; how will sales be sourced; and what are the costs associated with the sales?
• is a delay penalty or fee realistic; and what amount?  (and “how” should it be structured?)
• how should any “credit enhanced” components of the existing debt be handled?