Given that a redefinition of the credit base could limit borrowing, it is likely that borrowers will draw a protective draw before redefining the credit base. In such a case, lenders may be required to invoke an essential adverse amendment clause. These clauses require the borrower that there has been no “substantial negative change” as a condition of the loan. Unfortunately, there is little legal interpretation of the essential elements of the prejudicial amendments. While a 50% price drop and a World Health Organization (WHO-certified) global pandemic appear to be seen as a major negative change, the analysis is not so simple. Lenders should consider, among other things, the impact of borrowers` hedging and the duration of the price decline when determining. Similarly, to gain access to the funds, a borrower must demonstrate that it is “solvent.” These provisions are highly negotiated and may be reasons to avoid a draw depending on their wording and the borrower`s financial situation. The third element is the defined term used to measure the borrower`s cash balance, which typically extracts a series of cash categories excluded from previous tests. The definition of cash balance is when borrowers subject to anti-cash-horting rules have the opportunity to create flexibility for their expected cash management needs.
Most credit facilities contain a “purpose” clause for which advances can be used as part of the facility. These clauses range from very general to very specific. General clauses, including language such as “advances must be used for working capital purposes,” may give the lender the right to refuse an intervention request. This will depend on a full reading of the credit contract. If you add formulations for this purpose “… in normal cases,” the question of whether or not a silver draw corresponds to this purpose merits careful verification of the face of the language itself. The COVID 19 pandemic continues to cause severe economic disruption; a sharp recession in financial markets and increased uncertainty. In this difficult economic environment, borrowers may, unless prohibited, be encouraged to receive additional credit advances and to hold cash that would otherwise have been used for repayments, acquisitions or distributions. Some borrowers may attempt to use their existing credit facilities to improve their cash positions, including borrowers using credit-based credit facilities, who face prospects of reduced availability, because: liquidity and anti-cash-horing provisions designed to counteract the situation are recurring phenomena in reserve-based credit facilities (facilities for which the availability of credit is linked to the value of reserves oil and gas to a borrower). , expressed as a “borrowing base”