Pub. 6 2018 Issue 2

Issue 2. 2018 21 in the market or economy, in determining whether the original loan covenants are still appropriate. Lenders may examine whether borrower has signed any sig- nificant new contracts/leases, raised additional capital, etc. Based on this new information, lenders may need to adjust the financial covenants (whether upward or downward) to ensure that they are still realistic. For struggling loans, lenders may ask for more frequent financial reporting to help determine whether the borrower is moving in the right direction. However, lenders can do more than simply refine existing finan- cial and reporting covenants. For example, lenders can consider collapsing the remaining commitment for construction projects which are completed “under budget.” This is an easy way to increase the loan-to-value ratio and decrease the likelihood of default. For securitized loans with dramatic post-closing chang- es, lenders might require an updated appraisal of the collateral. This can give the lender a better understanding of its risk expo- sure, along with the estimated profitability of the project. If the borrower is missing expectations, lenders can bargain for more protections. For example, lenders can request additional collateral in the form of a blocked account, a security interest in new inventory, or other property of the borrower or guarantor. Lenders can also negotiate for a “pay-down” of the principal amount to re-margin the loan, a capital call to infuse some addi- tional capital into the project, and much more. 3. Obtain Guarantor Consent This point is simple, but it can prevent serious problems. At closing, loan guarantors agreed to certain terms and conditions. Changing these terms after the loan is consummated can render the guaranty unenforceable. Moreover, guarantors may argue that a modification was, instead, a novation which releases the guarantors from their former obligations (see e.g. First Am. Com- merce Co. v. Washington Mut. Sav. Bank, 743 P.2d 1193 (Utah 1987). But these risks can be effectively mitigated by requiring guarantor consent as a condition precedent to the modification. The guarantor consent may include representations and war- ranties relating to the modification. For example, guarantors can re-affirm all obligations arising under all guarantor doc- uments (i.e. the original guaranty, environmental indemnity agreement, and other guarantor documents). Guarantors may represent and warrant that they have received and reviewed a copy of the modification agreement, and manifest their con- sent to the terms thereof. Finally, guarantors may be required to waive all legal claims that may have arisen since their origi- nal execution of the guaranty. 4. Don’t Forget the Security Documents Modifying secured loans can invite additional risks to the lend- er. Thus, it is important for lenders to have a clear understand- ing of the security documents, and be willing to modify them as needed to preserve their lien. When the collateral includes real property, lenders may review the terms of the original recorded security instrument to make sure such terms are consistent with the modification. And, where changes are required (i.e. loan parties, maturity date, loan amount, legal description), the recorded document should typically be modified. These modifications do not need to be complicated, and most title companies can quickly review the form of the modification document for free. The process for other types of security documents is very similar. The lender may review financing statements, collateral assignments, deposit account control agreements, and more in search of inconsistencies with the modification documents. Most of these documents can be modified within the loan modification agreement; however, financing statements can be modified via UCC Amendment (sometimes known as a Form UCC3). And lenders should be aware that changes in the debtor’s name may prevent after-acquired property from being subject to the lender’s lien (see UCC 9-507). Although it takes extra effort, preserving the lender’s interest in the collateral may be the most important piece of a modification. 5. Consider Changes in Law and Lender Policy In many cases, the lender’s standard form loan documents have been updated since the original loan documents were prepared. Lenders may want to consider whether these subsequent chang- es to the form loan documents should be incorporated into the modification. Interest rates are a current example of this, as we have recently seen lenders add an interest rate floor to account for the historically low rates of the past few years. And, with the future of the London Interbank Offered Rate (LIBOR) in jeopardy, loans that rely on LIBOR may be modified to include the lender’s alternate rate calculation language. Beyond interest rate issues, lenders may want to examine wheth- er their approved compliance language has changed since loan closing. For example, provisions in the original loan documents covering “know your customer” laws, capital adequacy, flood insurance, anti-money laundering, and more can be reviewed to make sure they are up-to-date. The High Volatility Commercial Real Estate (HVCRE) provisions in the loan documents may also be suspect, since Congress has recently made changes to this regulatory regime. Further, with many states allowing in- dustry in the cannabinoid market, lenders may want to consider adding representations and warranties regarding compliance with state and federal controlled substances laws. 6. Conclusion Unlike the proverbial “old dog,” old loans can easily learn new tricks. Through effective modification agreements, existing loans can be updated to meet the needs of the loan parties and to account for unforeseen market changes. Although future needs are difficult to predict at loan closing, modifying the loan as these issues arise is a good way to strengthen and modernize the loan. By being thoughtful and deliberate with these modifica- tions, lenders can strengthen the lender’s position while accom- modating borrower needs. And the tips described above may help lenders do just that. n Braden Johnson is an attorney in the Salt Lake City office of Snell & Wilmer where he focuses his practice in commercial finance, real estate acquisitions and securitized lending. He also has experience with public finance, international lending and tribal lending. Con- tact Braden at 801.257.1826 or bwajohnson@swlaw.com.