Banks and borrowers alike are paying particular attention to the Material Adverse Change (MAC) provisions in underwriting commitment letters. In particular, discussions focus on whether the test should be objective (a question of fact) or subjective (determined in the discretion of the banks).
Commercial banks are currently requiring a subjective and more discretionary test so that they do not have to negotiate with borrowers whether or not a MAC has occurred.
The MAC clause allows the banks to terminate their underwriting if any event occurs or any circumstances continue to occur which adversely affect or could adversely affect certain markets or jurisdictions where the banks may seek to syndicate their underwritings.
Commercial banks are requiring the definition of these markets to be very wide – encompassing, at a minimum, the international or any relevant domestic syndicated loan, debt or bank markets.
The LMA standard MAC provision requires that syndication must be “prejudiced”. Borrowers are understandably nervous about the scope of this clause, as determining when syndication may be prejudiced is likely to be more art than science.
There is nothing to suggest that a hair-trigger event would not prejudice syndication. If a MAC occurs, the banks will have the right to terminate their underwritings. The scope of this language could be viewed as undermining the benefit of an underwriting and borrowers may wish to resist referring to syndication being prejudiced rather than prevented.
In certain cases, borrowers may benefit from a qualification in the MAC clause whereby the MAC must prevent syndication below a threshold target hold. These sorts of thresholds are less likely to be found in today’s market.