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Jainisha Amin

The snooze/lose provision in a European leveraged loan agreement (”SFA”) is intended to encourage lenders to respond to consent requests in a timely manner or risk being disenfranchised.

The typical snooze/lose provision in an SFA provides that the commitment of any lender who fails to respond to a consent request within a set period (usually 10 business days) will be disregarded when determining whether the relevant majority, super majority or all lender threshold has been reached. The snooze/lose provision can be found under the ‘Amendments and Waivers’ section in an SFA; it is a fairly formulaic clause and usually not subject to much negotiation, except in respect of the length of the snooze/lose time period.

In the current market, borrowers are considering amendment and extension processes given the difficulties in refinancing their existing borrowing. A lender’s failure to respond to a consent request can have significant consequences depending on the circumstances surrounding the consent request, the extent of any proposed amendments to the SFA, and the relevant voting threshold necessary to pass key amendments. For an in-depth discussion of amendment and extension processes, covenant ‘stripping’ and releases of guarantees and security, see our recent 9fin Educational — A&E and exit consents: snooze to lose covenants and security. (Clients can read this here. If you are not a client but would like to request a copy, please complete your details here.)

Generally, in the context of a key ‘majority lender’ or ‘super majority’ lender matter (such as a covenant strip or security/guarantee release), the snooze provision is straightforward: non-responding lenders are simply disregarded in the determination of whether the majority lender or super majority lender threshold has been met. In the context of amendments that would typically require the consent of each lender or participating lenders - for example, maturity extensions - reliance on the snooze provisions can become more complicated (and technical). With this in mind, we consider the development of snooze provisions below.

The traditional LMA-style SFA envisages the parties negotiating whether certain fundamental all Lender matters will be subject to the snooze/lose provision. For example, amendments to effect a maturity extension, an increase in commitments, a reduction in margin/principal, and/or an extension in the availability period can be excluded from the scope of the snooze/lose provision, so a lender who fails to respond to a consent request relating to these matters will not be disenfranchised. Instead, a non-responding lender’s commitment will be treated in the same manner as a dissenting lender in respect of any consent request, and the 100% voting threshold will not be met if there is either a dissenting lender or a non-responding lender.

In SFAs for larger credits (including those which are high-yield bond style), all matters (including fundamental ones) are subject to the snooze/lose provision. The commitment of any lender who fails to respond to a consent request within a certain number of business days will be disregarded when ascertaining whether any relevant percentage (including, for the avoidance of doubt, unanimity) of total commitments has been obtained to approve that request. A ‘relevant percentage’ is either >50% by commitments (or the more traditional 66⅔%) for Majority Lenders, 80% for Super Majority Lenders, or unanimity for all Lenders.

Even if a matter (such as a fundamental one) requires all Lender consent, a non-responding lender will be disenfranchised and dragged along in any amendment process (provided there are no dissenting lenders).

Certain snooze/lose clauses include additional language that a non-responding lender’s commitments shall not be included when ascertaining whether the agreement of a specified group or a class of lenders has been obtained. In order to understand why this additional language might be necessary, we need to consider that fundamental matters (such as an increase in commitments, a maturity extension, and a reduction or deferral of amounts owing to lenders) under a typical European SFA are no longer ‘all Lender’ matters. Instead, such matters are considered ‘Structural Adjustments’ and can usually be made with Majority Lender plus participating Lender consent.

Snooze/lose provisions that include language referring to either ‘a specified group’ or ‘a class’ of lenders may be used by borrowers to push through Structural Adjustments (such as maturity extensions) without the explicit consent of each participating Lender. In doing so, borrowers will be deeming ‘participating Lenders’ to be a ‘specified group’ or ‘class’ and disenfranchising them if they fail to respond to the relevant consent request. Each non-responding lender will be dragged along as a participating Lender in any amendment process provided the Majority Lender threshold is also met.

Lenders may argue that this is an extremely aggressive interpretation of the snooze/lose clause as it removes individual decision from lenders on fundamental matters; such matters should require positive consent from lenders for them to be considered ‘participating’. However, borrowers may argue that the end position is no different to when non-responding lenders could be dragged along on fundamental matters which used to require all Lender consent (assuming the snooze/lose provision did not include the LMA-style negotiating option).

Some snooze/lose provisions have evolved over the last few years and are now akin to ‘delay and it’s okay’ clauses, which means that any non-responding lender is deemed to be an approving lender. Therefore, rather than being disenfranchised, the non-responding lender’s commitments are included when determining whether the relevant approval threshold has been reached. This more borrower-friendly ‘delay and it’s okay’ provision enables borrowers to more easily reach the relevant voting threshold when conducting an amendment process, without having to rely on the interpretation of the snooze/lose provision discussed above. This is particularly notable where the amendment relates to a fundamental matter such as a maturity extension.

As with traditional snooze/lose provisions, lenders who fail to respond to a consent request in time may be caught off-guard if the relevant voting thresholds are met. In order for lenders not to find themselves unwittingly dragged along in an amendment process relating to a fundamental matter, they have to reject a consent request within the snooze/lose period.

Below is a checklist of points to consider when reviewing a snooze/lose provision.

Is the snooze/lose provision LMA-style i.e. with certain (fundamental) all Lender matters not subject to the snooze/lose? Or does the snooze/lose apply to all matters, as would be expected in larger European leveraged loan agreements?

How is the snooze/lose provision formulated:
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What is the Majority Lender and Super Majority Lender threshold in the loan agreement? For Majority Lenders, a simple majority is now common, but for Super Majority Lenders, 66.67% (rather than 80%) would be a borrower friendly formulation.

Consider what amendments can be made with Majority Lender and Super Majority Lender consent and how easily a borrower can reach key voting thresholds to make substantial amendments, in particular:
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What is the snooze/lose period and is it long enough for lenders to deal with the consent request, in particular, where the proposed transactions are complicated and/or the amendments are significant? A 10-business day period would be market standard.

Is there an express delay and it’s okay provision? This is borrower friendly as it means that non-responding lenders will be deemed to have consented to the amendment.

You snooze, you lose

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