When negotiating the ISDA agreements, corporations as well as their counsels mostly focus on some specific legal terms. These terms are commonly known to be highly problematic to the end users. At the same time, there are also other terms that most of the banks mostly propose in order to facilitate a very easy and swift negotiation along with credit & legal approval procedures. These are often accepted at face value without any close exploration.
These terms normally seem to be harmless & actually sound very positive in terms of idea making process. However, the reality is quite harsh. It may not be what it seems like. The principle behind Right to Transfer without Consent According to Section 7 of ISDA Master Agreement Act, either party has the permission to transfer ISDA or any other obligations and rights under them. However, the default position under any standard ISDA documentation is “the party may transfer its rights & obligations under the ISDA act, while subjecting to prior written consent of other party.
But, it will never be applicable in case of specified circumstances that are directly related to either mergers & acquisitions, as well asset transfers, and also amounts owed in connection with early level terminations”. Most of the financial institutes mainly seek a chance for transfer provision in order to allow specifically the unilateral right to transfer their obligations and rights under ISDA without any prior consent.
There are some specific banks that go further while proposing not only any unilateral transfer rights but also permission to transfer rights & obligations to any 3rd party. In case the corporations push back, a compromising situation is offered by the banks. These financial institutes will most commonly offer to require that the transferee be totally a bank affiliate who possesses exactly the same credit rating as the bank during the transfer time.
This seems to be a nice compromise but there are reasons that may not work in favor of the situation. The corporation should have the right choose the exact bank counterparty it faces, regardless of the credit rating & bank affiliation. Incorporation of the loan covenants as per the 5th part of ISDA Negotiation Schedule, most of the banks often include a certain provision entitled as “Incorporation by Reference of Terms of Credit Agreement” or “Incorporation of Loan Covenants”.
According to this provision, the banks can refer to the certain affirmative & negative covenants (i.e., to do or not to do agreements) contained in parties’ loans and credit agreements, thus seeking to incorporate these covenants in ISDA. The banks usually justify such provision usage by highlighting the fact that “it will definitely shorten the credit approval process by using credit underwriting associated with the particular loan”.
While a lot of companies may think that this is a great and profitable idea and is totally harmless, it may not be such easy to accept after undergoing the terms and conditions. Yes, it has certain benefits but then, there are critical jargons to face too. Such type of provision can easily undermine other negotiated terms in ISDA, like that of cross-acceleration.
Also, if ISDA contains CSA (Credit Support Annex), the incorporation of loan covenants then arguably constitutes excessive & unnecessary protection as well as security to the bank. This ultimately results in incorporation of loan covenants becoming unnecessary as the breach of covenants in a loan or credit agreement that results in acceleration of loan obligations has already been captured by Cross Default (Section 5(a)(vi) of the ISDA Master) & often is covered by Credit Support Default (Section 5(a)(iii) of ISDA Master) and/or Additional Termination Events (Part 1(h) of ISDA Schedule).However, if the breach of loan or credit agreement covenant would not give rise to default under the loan or credit agreement, then there is no chance of it going under the ISDA.