Lender responses to pre-emptive draws by borrowers on operating credit facilities: Cash hoarding

11 minute read
02 April 2020

Economic background

The full economic impact of the COVID-19 pandemic (the "Pandemic") remains an unknown.

It is most likely that, in its wake, covenants under Canadian-based credit facilities will be breached, giving rise to default under those agreements. These breaches and defaults will vary from agreement to agreement as will the impact of each breach and event of default on future borrowings under those credit agreements. The earliest defaults will include failure to make scheduled interest and principal payments, technical cash flow insolvency, as well as a wide range of EBITDA, tangible net worth, leverage and other financial covenant breaches.

The primacy of cash: Liquidity is key

In the most challenging financial times, the key measure of the immediate health of any borrower is liquidity - cash flow. It is the lifeblood of a company.

In the face of the Pandemic, some borrowers projecting near-term liquidity constraints may attempt to pre-emptively drawdown on their credit facilities in order to reserve cash until they need it later.

Cash hoarding – pre-emptive drawdowns under existing operating credit facilities

Although extraordinary times call for extraordinary measures, the basis for any contractual relationship between a lender and its borrower is that the terms of the contract must be honoured. Amendments, accommodations and forbearances are a matter of negotiation and documentation, not self-help on short notice. Borrowers tempted to rely on the adage "it is easier to ask for forgiveness than permission" risk their long term relationship with their lender and are better advised to rely upon transparent, pro-active and good faith negotiation to secure the continued availability of working capital. Building trust is an important tool in any crisis.

What does a lender do if its borrower (that has a significant amount of availability under a credit) suddenly decides to drawdown a very large amount of the facility well in excess of its immediate cash flow needs?

A borrower might decide, if it has availability under an existing credit facility, to be aggressive and drawdown much if not all of that availability to provide them with a "cash cushion" based upon the concern that its lender may restrict availability in the future. A borrower may do this because it believes that it has potential credit agreement covenant breaches on the horizon that might permit its lender to refuse a future draw request.

This tactic, commonly referred to as "cash hoarding" can be a source of significant potential prejudice to a lender and can erode trust just before it is needed most. Lenders face a difficult strategic decision: Should they permit cash hoarding to proceed or look to legal recourse to stop these drawdowns. This choice can give rise to potential liability for the lender and should be carefully evaluated.

A given lender's concern for "reputational risk" - its preference to be perceived as being patient and supportive in the face of the Pandemic - may have limits. When borrowers as "first movers" take an aggressive posture to make a request for a cash hoarding draw, those borrowers may be testing the patience of their lenders even in the Pandemic context.

Direct anti-cash hoarding provisions

If the credit agreement contains an anti-cash hoarding provision, this might on its own, prevent a borrower from seeking to drawdown opportunistically on its operating facility. In such circumstances, it is prudent for a lender, with the aid of its legal counsel, to review the scope of the anti-cash hoarding provision, since not all such provisions are created equal.

Importantly, anti-cash hoarding provisions have not historically been included in many commercial credit agreements. Such provisions were largely the domain of sophisticated syndicated facilities, particularly in industries susceptible to significant market fluctuations such as oil, gas and mining (where market declines in commodity prices can on their own cause significant liquidity issues). In the absence of these provisions in the credit agreements, lenders will have to look at other provisions in the credit agreement for guidance on defensive steps to prevent cash hoarding drawdowns.

Purpose clauses

Most credit facilities include a clause defining the "purpose" for which advances under the facility may be used. These clauses range from very general to very specific. General clauses including language such as "advances are to be used for working capital purposes" may or may not give the lender the right to refuse a drawdown request. It will depend on a full reading of the credit agreement. If you add wording to that purpose "...in the ordinary course of business" the question of whether or not a cash hoarding draw fits within that purpose is worthy of a careful review on the face of the language itself.

Each "purpose" clause must be reviewed for both its language and its context.

Material adverse change events of default

Many credit agreements include Material Adverse Change clauses that may trigger an automatic event of default ("MAC Clauses"). The question for a lender to consider is whether the Pandemic can trigger a MAC Clause (whether or not the credit agreement contains a force majeure clause). Lenders have been historically hesitant to rely upon MAC Clauses because they can be inherently "grey". This is because MAC Clauses vary broadly and are open to interpretation and because often there are other events of default upon which to rely. However, this cuts both ways. It is conceivable that a broadly worded MAC Clause might very well be triggered by the Pandemic.

The timing of noting a MAC Clause default is critical. Where there is a concern that a borrower may make a cash hoarding drawdown, the earlier the lender evaluates the timing issues the better chance such a drawdown can be avoided and instead a cooperative dialogue opened with the borrower to find a less confrontational approach. Seasoned counsel can help with this. Again, the contract needs to be carefully reviewed by legal counsel to identify whether the use of the MAC Clause is advisable in the circumstances.

Use of conditions precedent to draws to deny a hoarding draw

Many credit agreements include one or more provisions that require that the credit agreement be in good standing as of the date of the drawdown (rather than as of the date of the last compliance certificate under the credit agreement). A typical provision will state that before a drawdown under the credit facility is permitted, there must not exist, as of the date of the drawdown, any event that would constitute an event of default. Some go further to provide additionally that no event of default is likely to exist thereafter and/or that the drawdown itself must not create an event of default. Where a lender believes that an event of default already exists or is likely to exist because of the drawdown, then that lender may be able to prohibit the drawdown.

Force majeure clause

More sophisticated credit agreements contain force majeure clauses that excuse a lender (or syndicate member) from advancing credit under the contract if certain conditions relating to the lender's own circumstances are met, such as a "lending market disruption". The use of these types of provisions are generally not a consequence of the circumstances of the borrower. These clauses are often found in domestic and cross-border syndicated deals and vary widely. The application of a force majeure clause is again dependent upon its wording. Legal counsel should review these clauses to determine if and when they are triggered by the Pandemic in some manner.

Other considerations

As the credit facilities approach their maturity date, the risk of cash hoarding to the lender increases, particularly if the cash has been spent prior to the maturity date. Similarly, if a clean-down clause exists in the credit agreement and the clean-down date is approaching, the same elevated risk exists.

Responses by lenders and alternatives to cash hoarding drawdowns

Lenders may wish to be proactive by signaling their patience and willingness to be creative and as responsive as reasonably possible to the liquidity needs of their borrowers. A well-managed borrower who has a history of trust with the lender will signal that it wants to have that history respected.

Some strategies to negotiate solutions may include:

  • Lenders might negotiate with their borrowers for additional "urgent cash" - as opposed to "excessive cash" - based on the projected cash flow needs of the borrower. In entering into these additional borrowing arrangements, lenders may give serious consideration to a requirement that borrowers agree to the insertion of an anti-cash hoarding clause to the credit agreement.
  • A borrower can develop a 13- week cash flow to which the lender agrees to and may build a forbearance or amendment around. This cash flow might include a forecasted borrowing limit on a weekly basis (with an allowed negative variance).
  • When appropriate, engaging a financial advisor (for the borrower or the lender) to provide enhanced transparency, aid the borrower in defining and implementing liquidity preservation measures and provide a circumstantial guarantee of trustworthiness of the financial information being presented by an already strained borrower.
  • Seeking liquidity support from quasi-government agencies such as BDC, EDC and FCC (either by way of subordinate emergency liquidity loans directly from the agency or by loan guarantees from the agency to the lender to support the lender providing the borrower with emergency liquidity).


Cash hoarding motivated drawdowns are arguably both aggressive and disruptive to the borrower-lender relationship and may result in less workout support when it is needed most.

When entering into amended borrowing arrangements to provide covenant relief and liquidity, lenders may consider requiring that borrowers agree to the addition of an anti-cash hoarding provision to the credit agreement (or in the alternative, some of the other strategies suggested above).

Lenders should not assume that cash hoarding draws cannot be blocked. Rather, lenders may look at stressed credits with excess availability now that are at risk of a cash hoarding drawdown and, where permitted by the credit agreement, either take proactive steps to pre-empt such drawdowns or address them as they happen. At the same time, where appropriate lenders may wish to reach out to borrowers and offer creative liquidity solutions in order to build mutual trust and cooperation with a goal of finding ways to address immediate and future liquidity needs and help corporate customers survive the Pandemic.

Gowling WLG's Financial Institutions & Services group have considered a range of alternative strategies that can be deployed to address these issues and would be pleased to assist in that regard.

The authors would like to thank Tom Cumming, Partner (Calgary), Elizabeth Burton, Partner (Calgary), Jean-François Vadeboncoeur, Partner (Montreal), Dom Glavota, Partner (Toronto), Christopher Alam, Partner (Toronto), Colin Brousson, Partner (Vancouver) and Kate Yurkovich, Articling Student (Toronto), for their editorial contributions to this article.

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