This is the so-called "yank-the-bank" provision which gives the Parent the right to replace a Lender if the illegality, increased costs or tax gross up provisions apply or if a Lender does not consent to a decision in respect of which a certain level of consent (but not the required level of consent) has been obtained.
The provision was inserted into the Leveraged Facilities Agreement in 2005. It is a result of the perception that the increasing diversity in syndicate composition carries with it an increased risk, first of delay in obtaining consents and waivers and, secondly, of the change in circumstances provisions being triggered. It is now a standard provision in leveraged facility agreements. However, in reality it would probably be rare for a "yank-the-bank" provision to be exercised for two main reasons:
• Clause 41.3 requires the Lender being replaced to be removed at par: therefore to exercise the right in practice, the debt must be trading at par or above (otherwise, the Borrower is unlikely to find a replacement); and
• exercise is likely to be expensive. Borrowers may incur fees in finding a replacement Lender.
Nevertheless, inclusion of the provision is useful as a tool for managing Lenders to whom its provisions apply.
Borrower Notes
There are a number of issues Borrowers should consider in relation to Clause 41.3 as drafted.
Timing
The first issue is the amount of notice the Parent is required to give to the Agent in order to exercise its right to replace a Lender. Clause 41.3 contemplates that this will simply be a set period of days (the number is left blank for the parties to agree). Borrowers will want this period to be as short as possible. Borrowers may argue that a set notice period is inappropriate (especially if the proposed replacement is as a result of the applicability of the illegality, increased costs or tax gross up provisions). If the Borrower chooses to prepay rather than replace the relevant Lender, the prepayment provisions usually operate such that the Borrower may specify in its notice of prepayment the date upon which the prepayment takes effect (with a long stop of the end of the next Interest Period: see Clause 11.6 (Right of cancellation and repayment in relation to a single Lender or Issuing Bank) above). Borrowers can argue that
there is no reason to impose different requirements if the Lender is being replaced rather than prepaid.
Clause 41.3 (at paragraph (b)(iii)) contemplates that the replacement right in relation to Non- Consenting Lenders will be exercised within a certain period of the Non-Consenting Lender notifying the Agent and the Parent of its failure or refusal to consent. This provision should be deleted. It has a significant impact on the usefulness of the provision given that one of its primary objectives is to deal with Lenders who fail to respond to requests for consent. If Lenders insist on a long stop date, the period should be long enough to enable negotiation with replacement Lenders (say one to three months) and the period should run from the date upon which the Parent makes the request for consent to the outgoing Lender (or perhaps the date upon which the Parent notifies the Agent that such Lender has become a Non-Consenting Lender).
Scope
The scope of the “yank-the-bank” clause is often negotiated.
The LMA drafting contemplates that the right to replace a Non-Consenting Lender will apply where the amendment or waiver to which the Lender has failed to consent satisfies a two-stage test:
• the amendment or waiver requires unanimous Lender consent; and
• a requisite minimum level of consent has been obtained (e.g. Majority Lender consent). Borrowers may argue that they should have the right to replace any Lender who refuses or fails to respond to any request for consent, regardless of satisfaction of either of the above tests. Lenders will argue that the purpose of this provision is not to force them into approving every request for consent for fear of being replaced. However, a distinction can be drawn between a
Lender who refuses consent and a Lender who fails to respond to a consent request. Borrowers can argue that all Lenders who fail to respond to consent requests should be liable to be replaced as this will encourage participation in decision making: all Lenders have to do to avoid the risk of being replaced is to participate in voting. There is therefore a good reason to disapply the two-stage test above in relation to Lenders who fail to respond.
In relation to Lenders who specifically reject requests for consent, the two-fold test contemplated by the LMA drafting commonly applies, although usually in a watered down form. The Borrower is commonly given the right to replace Lenders where the following tests are satisfied:
• the amendment or waiver requires more than Majority Lender consent (not unanimity); and
• Majority Lender consent has been obtained.
It may be appropriate in some circumstances to amend this further: for example if a single Lender holds more than one-third of the Total Commitments and can veto Majority Lender decisions.
Some more recent transactions have seen Borrowers seeking to extend the scope of this provision:
• Some Borrowers have sought to apply the "yank-the-bank" clause to non-funding Lenders: Lenders who for whatever reason have failed or have indicated that they will not fund as required under the Facilities. Such Lenders will be in breach of their obligations under the Facility Agreement but the "yank-the-bank" provision may be a convenient mechanism for dealing with the problem Lender without prejudice to any other rights the Borrower may have against the Lender in question.
• Borrowers have sought rights to replace Lenders who are involved in a merger or reorganisation or who become subject to insolvency proceedings.
• Some Borrowers have successfully argued that the "yank-the-bank" right should apply if the Lender notifies the Agent that an Additional Cost Rate applies for the purposes of the Mandatory Costs calculation.
Paragraph (b)(i) of Clause 41.3 states that the right to replace Lenders shall not apply to the Agent or the Security Agent. Replacement of the Agent or the Security Agent is likely to incur greater costs than replacing any other Lender as a result of the need to transfer their administrative functions. As a compromise, Borrowers may request the right to take such action with the consent of Majority Lenders to make negotiation easier should the need arise.
Agent’s right of veto
If the Parent exercises its right to replace a Lender, Clause 41.3 allows the Parent to select the replacement Lender, but requires that such replacement Lender is acceptable to the Agent (acting reasonably) and the Issuing Bank (in relation to the transfer of a Revolving Facility Commitment). Borrowers will argue that the Agent’s/Issuing Bank’s right to approve the replacement Lender should not apply. If the assignment and transfer provisions (see Clause 29