Falling Markets Require Borrowing Base Reductions
Guest Writer - Dan Susie, Winstead PC
A "borrowing base" is a financing structure where loan funds are disbursed NOT on a "cost incurred" basis, but rather are disbursed based upon a limited audit or information from across the collateral pool.
This structure often appears in oil and gas financing structures, and some times in loans to production (high volume) home builders. Given the current prices of oil and gas, and of the home building market, this is the season of borrowing base reductions – because the value of the collateral no longer supports the loan or the amount outstanding.
Lenders should consider the following issues, steps and precautions in connection with any borrowing base reduction:
- In the case of a syndication, review the borrowing base determination provisions carefully to conform to the requirements of lender approval for the reduction.
- Comply with the provisions of the credit agreement with respect to the payout of the borrowing base deficiency.
- The borrowing base reduction and any change in the monthly commitment reduction amount must be confirmed in writing. Use a form of borrowing base adjustment letter approved by counsel. Where a change in the repayment terms is agreed to, amend the credit agreement rather than using a borrowing base adjustment letter, and make sure the amendment includes a release of all claims to date.
- Consider additional collateral and/or modification of the terms of the payout for those borrowers who cannot pay the entire deficiency in accordance with the terms of the credit agreement.
- If additional collateral is offered by a borrower to reduce or eliminate a borrowing base deficiency, obtain title information regarding any new properties and promptly file new mortgages to perfect liens against such collateral.
- In the case of a syndication, review the borrowing base determination provisions carefully to conform to the requirements of lender approval for the reduction.
If you have any other suggestions, or if you have any questions, please post a comment.
