Banks Increasingly Using Clause to Trigger Defaults

20 February 2012 (PLANSPONSOREurope.com) - Banks are increasingly making use of a clause in syndicated corporate loan agreements that trigger an automatic default by the borrower if it acquires any company with a defined-benefit pension scheme, legal advisers have warned, according to reports.

The Financial Times reports the clause was first drafted in model loan agreements circulated late in 2005 by the Loan Management Association, a trade body of European banks that make syndicated loans.

However, although the clause was little used in the early years, it is increasingly common now.

This follows a legal ruling – upheld on appeal last October – that the Pension Regulator can lead a queue of creditors in a bankruptcy case because its claims are technically “expenses” associated with winding up an employer.

Christopher Clayton, partner at Begbies Traynor, said the clauses were now being used as a precaution. “Given the potentially large deficits in some DB schemes I am not surprised banks will want to insert better protection into their loan documentation.”
Lesley Browning, partner at Norton Rose, adds the clause was driven by the concern of the lender over the impact of pension liabilities on the company’s ability to repay other debts.
 

PLANSPONSOREurope Staff
editors@plansponsoreurope.com