Refinancing the Borrower Through an Assignment and Assumption: When, Why, and How (Part II of II)

In Part 2 of this two-part series (for Part 1, please see the May issue of The Secured Lender), Jason I. Miller continues to focus on key provisions typically found in an assignment and assumption agreement, i.e., conditions precedent and limited representations and warranties, and contrasts an assignment and assumption against a traditional payoff.

Jason I. Miller is a partner at Otterbourg P.C. He concentrates his practice in the area of commercial finance, with a particular focus on asset-based lending and cash flow financing. He represents major national and international commercial banks, finance subsidiaries of banks, mezzanine lenders, independent factors and finance companies.

As mentioned in Part 1, an assignment and assumption structure can be a strategic arrangement for a secured lender seeking to efficiently and speedily close a refinancing of a loan. Part 2 focuses on technical aspects and specific provisions related to and found in an assignment and assumption agreement (the "Agreement").

Conditions Precedent

The obligations of each of the parties under the Agreement should be subject to the satisfaction of certain conditions precedent.

Assignors and existing agent should condition signing the Agreement on the following:

• Receipt of the fully executed Agreement.
• No court orders issued that would prevent the parties from entering into the transaction contemplated by the Agreement.
• The existing Agent receives the aggregate purchase price. To the extent that certain existing third-party obligations need to continue to be supported by letters, the outstanding letters of credit issued by the LC issuers will need to be cash collateralized in the manner required under the credit agreement or replaced by new "back-to-back" letters of credit issued by a new issuer. The amount of any such cash collateral should be included in the aggregate purchase price.
• The existing Agent specifies wire instructions for payment. Assignee and New Agent should condition signing the Agreement on the following:
• Receipt of a copy of the Agreement.
• Receipt of executed notices to, and consents from, third parties, such as participants, landlords, warehouseman, bailees, counterparties to intercreditor and subordination agreements, and depository banks.
• Receipt of original promissory notes executed by the Borrowers, if any, and receipt of possessory collateral such as original stock certificates and original promissory notes evidencing indebtedness owing to the Borrowers.
• No court orders issued preventing the parties from entering into the transaction contemplated by the Agreement.
• Evidence that all subordinated thirdparty debt has a maturity date at least 90 days past that of Assignees’ debt or an amendment executed on or before the closing amending the third-party debt’s maturity date.
• The New Agent and Assignees will want to review any third-party loan agreement to confirm it permits the amount of the Assignees’ maximum loan amount (whether or not increased on the closing date). An amendment to the third-party loan agreement may be necessary to increase the amount of permitted debt. Similarly, if the Assignees are providing financing under the new credit facility in excess of the maximum amount provided by the Assignors and such new maximum amount is in excess of any maximum debt cap under any applicable intercreditor agreement, receipt of a form of amendment to the intercreditor approved by the other lender party to the intercreditor agreement (to the extent such a lender has the right to consent to such increase).
• If any of the Assignors is a finance company financed by an institutional lender, receipt of a satisfactory consent to the assignment executed by such Assignor’s lender, if applicable.

Similarities Between the Agreement and a Payoff Letter

A typical payoff letter includes a detailed calculation of the amount that is necessary to pay off the existing lenders and cash collateralize any outstanding letters of credit, if applicable. This calculation is usually expressed in a line-by-line list of items that make up the outstanding amount of obligations under the credit agreement (e.g., outstanding principal, accrued and unpaid interest, unpaid fees and expenses, the aggregate amount of any issued and undrawn letters of credit, and any reserves and holdbacks). Within the context of the Agreement, the payoff concept is substituted for a purchase price concept. That is, the aggregate purchase price is the amount necessary to be paid to the Assignor for all outstanding obligations under the credit agreement, as if the transaction was a traditional payoff. In essence, the Agreement and the aggregate purchase price serve the same purpose. To streamline the process and avoid the need for a "payoff letter" document, the calculation of the aggregate purchase price can be set forth in a schedule to the Agreement.

Authorization to File UCC Financing Statements and Further Assurances

For the Agreement to be effective, the existing Agent must authorize the New Agent to file, on behalf of Existing Agent and Assignors, UCC financing statement amendments. These amendments will reflect the assignment by the Existing Agent to the New Agent or Assignees of all UCC financing statements. Specifically, they should name the New Agent as the assignee secured party of record and any applicable Borrower or Guarantor as debtor. As a "belt and suspenders" conservative approach, the New Agent may want to file a new initial UCC financing statement as well. In addition, the New Agent should be authorized to file assignments of mortgage/deed of trust and intellectual property assignments.

The Agreement should also contain an assurance that the Existing Agent agrees to execute and deliver to the New Agent, at the Borrowers’ cost and expense, any other agreements, releases, terminations, assignments, documents, or instruments reasonably requested by the New Agent or Assignees to reflect the assignment of the liens of Existing Agent in the collateral to New Agent or Assignees, as applicable. These authorizations are virtually identical to those you would ordinarily find in a payoff letter.

Agreement to Remit Proceeds of Collateral

It always takes time for account debtors who have been notified of new payment instructions to start making payments in accordance with those instructions. As such, as in a payoff, it is necessary to include a provision pursuant to which the Existing Agent and Assignors agree that any checks, remittances, and other items or proceeds of accounts receivable and other collateral received by any of them are held in trust for the benefit of the Assignees, and then properly remitted to the Assignees.

Full Releases from Borrowers and Guarantors

Just as in a payoff, the Existing Agent and Assignors will want to receive a broad release and indemnity from each of the Borrowers and Guarantors, together with a waiver of claims and a covenant not to sue. The Borrowers and the Guarantors will likely request that the release and waiver provisions be mutual. A carve out may be necessary if letter of credit obligations are being cash collateralized.

Limited Representations and Warranties by the Parties

As mentioned, the Assignors and Existing Agent make the assignment without representation or warranty except as expressly set forth in the Agreement. They will want to limit the representations and warranties they make and what they cover.

The Assignors and Existing Agent should make the following representations:

• Each Assignor is the legal and beneficial owner of the interests being assigned.
• Assigned interests are free and clear of any lien, encumbrance, or adverse claim.
• Both the Assignors and Existing Agent have the full power and authority to execute the Agreement and to consummate the transactions contemplated.
• All documents executed by them will be valid, binding and enforceable against them.
• Their performance of their obligations under the documents will not conflict with, result in a breach of or default under, or be adversely affected by any agreements, instruments, decrees, judgments, injunctons, orders, laws, rules, regulations, etc.

At the same time, the Assignors and Existing Agent will make it clear that they assume no responsibility for the following:

• Any statements, representations, or warranties made in or in connection with the loan documents
• The execution, legality, validity, enforceability, genuineness, sufficiency, or value of the loan documents or any collateral therein.
• The financial condition of the Borrowers, any of their subsidiaries or affiliates, or any other person obligated in respect of any loan document.
• The performance or observance by the Borrowers, any of their subsidiaries or affiliates, or any other person of any of their respective obligations under any loan documents.

The Assignees and the New Agent should make the following representations:

• Both parties have the full power and authority to execute the Agreement and to consummate the transactions contemplated.
• All documents executed by them will be valid, binding and enforceable against them.
• The performance of their obligations under the documents will not conflict with, result in a breach of or default under, or be adversely affected by any agreements, instruments, decrees, judgments, injunctons, orders, laws, rules, regulations, etc.
• Each Assignee meets all of the requirements to be an assignee under the terms of the credit agreement.
• The parties have received a copy of the credit agreement, and have been accorded the opportunity to receive copies of the most recent financial statements delivered per the terms of the credit Agreement, and any other document and information necessary to make a credit analysis and decision to enter into the Agreement.
• Independently and without reliance upon Existing Agent or Assignors and based on such documents and information they have deemed appropriate, they have made their own credit analysis and decision to enter into the Agreement and to purchase the assigned interests.

The Borrowers and Guarantors should make the following representations:

• As of a date certain, the outstanding principal amount owing under the loan documents, together with all accrued interest thereon and unpaid fees and expenses.
• None of the obligations under the credit agreement is subject to any defense, deduction, offset, or counterclaim by the Borrowers.
• The loan documents are legal, valid, and binding obligations enforceable against the Borrowers and Guarantors.
• The liens granted by the Borrowers and Guarantors under the loan documents are valid, duly-perfected, first-priority liens, subject only to permitted liens.
• The Borrowers and Guarantors ratify, confirm, and reaffirm the security interests and liens granted pursuant to the loan documents.
• The Borrowers and Guarantors have had the benefit of the advice of legal counsel.

With today’s competitive landscape, an assignment and assumption agreement can be a successful alternative deal-documentation strategy for secured lenders who want to close a refinancing as quickly and efficiently as possible. There are many factors to consider before a secured lender can determine if an assignment and assumption of the existing lenders’ loan and loan documents is the right approach. Thorough diligence, advice of counsel and an analysis of these factors will help lenders in seizing these opportunities where they exist.

Reprinted from the October 2017 issue of The Secured Lender.