Refinancing bad debt

We refer to our previous news alerts Getting rid of bad debt and Defaulting borrowers – waivers, amendments and forbearance.

We explained in our alerts that if a borrower cannot make payments under a facility agreement, the lender has the right to call an event of default. However, declaring an event of default is not the only option available to the lender in such circumstances, and commercially, instead of declaring an event of default and possibly triggering the borrower's insolvency or a series of cross-defaults, a lender may wish to explore other alternatives (such as transferring the lender's rights under the facility agreement to a third party, waiving the borrower's breach, amending the facility agreement and forbearance, as we have discussed in our previous alerts).

This alert considers refinancing a loan as another alternative available to the lender.

Refinancing

A "refinancing" is when the borrower pays off an existing loan by taking a new loan, often on different terms. In essence, refinancing is replacing an existing loan with a new loan.

A loan may be refinanced by the same lender or a different lender. Generally, a refinancing is documented by drafting new finance documents, including a new loan agreement and new security and guarantees.

A refinancing may be initiated by the borrower if it finds a cheaper source of funding from a different lender. A loan may be refinanced by the same lender instead of doing a loan extension because the lender prefers to book-off the existing loan before creating a new loan due to credit requirements.

Practical issues

We set out below some practical issues for a lender to consider.

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