Navigating lending transactions: The 49th parallel

LISA MACDONNELL: Well, welcome everyone. It is 1 minute past the hour. So it's time for us to begin. My name is Lisa MacDonnell. I am a partner in the Toronto office of Gowling WLG, an international law firm with more than 1,500 legal professionals in cities worldwide, including all of the major Canadian cities, such as Toronto, Ottawa, Montreal, Calgary, and Vancouver.

I practice in the area of financial services, and I represent clients on all types of lending transactions, including real estate, and construction finance, agricultural finance, asset based lending, acquisition loans, life insurance, and other types of secured and unsecured lending. I regularly represent several of the big banks in Canada as well as private lenders and Canadian branches of international banks.

I often act as Canadian counsel on cross-border lending transactions. And I also act for borrowers, including large international corporations. And I believe that servicing both sides of a lending transaction, but not at the same time gives me a unique insight into what matters and impacts both borrowers and lenders.

I would also like to introduce you to my colleague, Whitney Schmidt. I met Whitney several years ago when she acted as US counsel for a Canadian bank on a lending transaction. And since that time, I regularly reach out to Whitney to act as US counsel for Canadian lenders, given both her expertise as a lending lawyer, but also her familiarity with Canadian lenders.

Whitney, do you want to tell us a little bit about yourself?

WHITNEY SCHMIDT: Sure. Thanks, Lisa. Thanks for thinking of me for this presentation today. As Lisa mentioned, we have worked regularly with Gowling on transactions for Canadian lenders with a US component to the financing transaction. A little bit about me, I'm a partner at Seyfarth Shaw, which is an AmLaw 100 firm with offices across the United States, including Chicago, where I am based, as well as in London, Shanghai, Hong Kong, and Australia.

I am co-chair of our commercial finance practice group. And I focus my practice primarily on representing banks and financial institutions on a variety of lending transactions, you know, including acquisition finance, fund finance, traditional C&I lending.

In my career, I've also had experience working on M&A transactions, as well as serving as kind of outside commercial counsel for a variety of our middle market clients and businesses. And of course, as previously mentioned, I also periodically work on cross-border transactions representing Canadian banks on US aspects of those transactions.

So Lisa is going to take it over from here to run through some of the topics that we plan to cover today.

LISA MACDONNELL: Thanks, Whitney. So you can see we've got a slide up there, giving you a very high level overview. Quite a few topics that we're going to cover in the next 30 to 40 minutes, or so. And so there's been some recent changes in law, in interest rates and in banking conditions. And these changes are impacting loans that have a cross-border component.

And so our objective today is to provide you with some observations and some anecdotes on navigating cross-border lending transactions, particularly between Canada and the United States. I'm going to be discussing some upcoming changes that are impacting bankers acceptances in Canada and other changes in interest rates, some new Canadian legislation that's impacting language requirements, as well as foreign purchasers of residential properties.

We're also going to likely talk about force majeure and hazard insurance, as well as some matters that are impacting cross-border syndicated financings. And Whitney, tell us a little bit about what you're going to speak up.

WHITNEY SCHMIDT: Sure. So I'm going to discuss the US market experience with our final steps from the transition away from SOFR or from LIBOR to SOFR, which is the new reference rate in the US finance market. Also, I'm going to talk about the upcoming implementation of the Corporate Transparency Act, as well as some observations and anecdotes that have resulted from the recent bank failures that we've experienced in the US market.

So Lisa, take it away from CDOR, all things CDOR.

[LAUGHTER]

LISA MACDONNELL: Yes. So we have a slide set up here, and it just has the definitions of some of the terms that I'm going to use to help you understand what it is that I'm speaking of. Acronyms can always be a challenge when you're trying to speak with a lawyer. So please reference what's up there on the slide.

CDOR stands for the Canadian Dollar Offered Rate. And it's a benchmark reference rate for bankers acceptances also known as BAs. And they're denominated in Canadian dollars. And it's posted daily.

Now CDOR was originally developed in the 1980s as the basis for pricing BA related credit facility. And CDOR is the rate at which the six Canadian banks, who are parties to the CDOR panel are willing to lend to borrowers with BA facilities. Now those six banks are the Bank of Montreal, Bank of Nova Scotia, CIBC, National Bank, Royal Bank of Canada, and TD Bank .

Now because CDOR is a bank lending rate, it incorporates a bank credit spread and a credit risk premium. And it's based on expert judgment as opposed to actual transactions. And so accordingly, CDOR is considered to be a credit sensitive rate. Now the big news here is that CDOR will cease publication in exactly one year on June 28, 2024.

In Canada, benchmark reform efforts have been led by CARR, which stands for the Canadian Alternative Reference Rate committee, and their mandate includes promoting the use of CORRA, which stands for the Canadian Overnight Repo Rate Average as an interest rate benchmark in Canada to replace CDOR.

Now unlike CDOR, CORRA is not a bank lending rate, but rather is the cost of overnight general collateral funding using government of Canada Treasury bills and bonds as collateral for repurchase transactions. Because the underlying transactions are collateralized by high quality assets, CORRA includes a lower credit risk component, as it's based on actual observed market transactions and is more transparent.

To encourage market participants to transition their credit facility documentation from CDOR, CORRA, CARR has published recommended fallback language for use in new and existing loan agreements back in August of 2022. Using this recommended language ensures that credit agreements contain a robust benchmark rate following the upcoming cessation of the publication of CDOR by providing an automatic hardwired transition to CORRA.

Now with the transition from CDOR to CORRA looming over all of us here in Canada, I regularly hear from lenders and borrowers alike on CDOR transition matters. And given we're now entering this final year of transition, a common question is, what should parties be looking at?

And so I turned to a prior example, the cessation of LIBOR, the London Inter office Offered Rate, which Whitney's going to speak about next. And this demonstrated that various legal, economic, and practical issues can arise when fallback language is ambiguous, or nonexistent. And so the adoption of the CDOR recommended language is one way to ensure that a credit agreement includes strong fallback language, which saves time, money, and legal resources in the future.

And so both borrowers and lenders should be reviewing existing loan agreements to see if they reference CDOR. And if so, amendments should be prepared, addressing the discontinuation of CDOR. Most, if not all Canadian banks, are following the CARR recommended language.

Now loan agreements, both existing and new agreements, should include fallback language to ensure that there is an effective replacement reference rate on the date that the publication of CDOR ceases. Parties should strongly consider using the CARR recommended fallback language with any deals specific modifications.

So for example, if your loan is a bilateral loan, meaning one lender and a borrower, as opposed to a syndicated transaction with a number of lenders and administrative agents. So those are deal specific tweaks, but the language itself is going to remain the same.

Some other considerations that we've been advising our clients include whether borrowers and lenders should consider to stop adding CDOR exposures, giving the upcoming discontinuation. It's beneficial in some cases for parties to wind up the offering as CDOR exposures, or allowing those exposures to expire in advance of June 2024.

For any CDOR exposures that mature after the discontinuation date, you should also be reviewing your options. The biggest option includes relying on fallback language, but also proactive amendments and terminations of CDOR exposures, or switches in terms of interest rates that are being used by borrowers.

In short, you should start reviewing your financial contracts if you haven't already started that exercise. New contracts should automatically include CDOR transition language. But be mindful of the existing loans. Every amendment that we are currently preparing, part of that exercise includes a review of that credit facility to see what the CDOR exposure is and what fallback language needs to be added if anything.

Now this exercise that we're doing here in Canada as it relates to the transition from CDOR to CORRA, a similar exercise is occurring right now for existing loan agreements that unbelievably still include references to LIBOR. And so the official discontinuation of LIBOR takes effect this Friday. And we've been busy preparing a number of last minute amendments for existing loans that did not include transition language from LIBOR to SOFR.

And so I'm going to turn it over to Whitney to tell us what she's seeing on the US side.

WHITNEY SCHMIDT: Lisa just listening to you talk about the current planning exercise for the next year, things that you're advising your clients to do, it's like I have total groundhog deja vu because that is exactly what we basically did. That was my 2020.

In late 2021, of course, is overlapped when deal flow was extremely busy, and we were just closing deals in general. Most of my lending clients were starting to follow the recommendations of adopting SOFR, which I'll get into exactly what that stands for. And then just over time, there were things like, OK, we're going to put in the hardwired replacement language that is recommended.

You can no longer enter into new loan facilities on LIBOR. It has to be SOFR. And then kind of naturally every time that you're touching a credit facility, is when you would address it. So as many of you are likely aware at this point, SOFR has become kind of the industry standard for the replacement to LIBOR.

SOFR is an abbreviation for the Secured Overnight Financing Rate. And it was recommended by the Alternative Reference Rate Committee, which was a Federal Reserve Board industry working group, which represented regulators, borrowers, lenders, academics, all sorts of people that kind of came up with the new replacement of LIBOR.

As I previously mentioned, most lenders started transitioning away from LIBOR in late 2021 when some of the shorter kind of interest rate periods went away. And we've been working on it for that year and a half through Friday, which is the official end date. At this point, most facilities, hopefully, have some sort of fallback language in them so that if they haven't affirmatively moved over to SOFR, basically the hardwired replacements will kick in.

I do have one borrower, my client is a participant in a deal, and the agent just hasn't finished the amendment because they're trying to kind of loop it in with some other stuff. And I think that's what we're going to rely on come, I guess, first business day, next Wednesday after the July 4th holiday in the US. So it's been an interesting time.

And generally, when you hear the term SOFR or one month, three months SOFR, is being used as a shorthand for what is technically termed SOFR for a particular interest period, usually, one, three, six months. Term SOFR is a forward-looking rate that's published by the CME group, which reflects the market's expectation for the average SOFR rates during that forward looking period.

You may also hear the terms daily simple SOFR or daily compounded SOFR, which are actually retroactive rates that are derived from kind of the overnight SOFR rate, which is then compounded or averaged over the 30, 90, or 180-day period, as we've been implementing SOFR into the market, even though the all-in rate for SOFR is typically a little bit lower than LIBOR because it's a risk-free rate versus LIBOR was a secured rate.

Lenders are typically adding in a margin. Initially, the margins were very technical and up to like seven different digits of a percentage. And largely, the market just said, guys, let's just do a flat 10% basis points. That's much easier to deal with. Borrowers don't get freaked out by weird numbers. So that's largely where the market has gone.

As I mentioned, SOFR has become kind of the industry standard. But kind of in the initial transition periods. There were a couple unsecured rates in the market, which included BSBY and AMBOR. I saw that a little bit, but I feel like that's kind of gone out of favor now.

And hopefully, as Lisa mentioned, with other benchmarks, new kind of standards for credit agreements are to have benchmark replacement language for-- in case SOFR goes away in the future, I think we've all learned from this LIBOR exercise that you have to have a fallback for reference rates that are tied to some sort of market standard.

So there are new kind of standard benchmark language for the hopeful not transition away from SOFR in the future. But at least, we have kind of the playbook in place for when that happens. So I'm going to go ahead and-- that's all we need to talk about interest rates for now, but I'm going to pass it back to Lisa to talk about our next topics, which are changes in laws in both of our countries.

LISA MACDONNELL: Yes. Thank you. Thank you, Whitney. And on that topic, just last night, I received a last minute request from a lender for a small bilateral loan facility that had been overlooked and is still referencing LIBOR. So still, a lot of activity is going to happen, I suspect, over the next 48 hours as we rush into Friday and--

WHITNEY SCHMIDT: Or next week when they try to book an interest expense. And they're like--

LISA MACDONNELL: Exactly right.

WHITNEY SCHMIDT: What is our interest rate? Uh-oh.

LISA MACDONNELL: That's exactly right. Nope. And again, you know, this has been a long ongoing process, but there's always stragglers that come out in the last few in the last few moments. I want to change gears a little bit and talk about some changes in law that have recently occurred both in Canada and the US.

And the first change in law on the Canadian side that I want to talk to you about is what is being called the French First requirement. And so as most attendees today Canada is a bilingual country. And we have two official languages, English and French. With French predominantly spoken in the province of Quebec.

Now very recently, just a few weeks ago on June 1st, Section 55 of Quebec's Charter of French Language introduced this French First rule for contracts of adhesion. Now contracts of adhesion are contracts in which the essential stipulations are non-negotiable, and they were either imposed or drawn up by one of the parties on its behalf or upon its instructions, so similar to a lot of standard form documents.

This change in law has significant implications for businesses that are operating in Quebec. And so what has changed? Previously, contracts that are predetermined by one party a.k.a. these contracts of adhesion, they could be drafted in a language other than French at the express will of the parties. And so this allowed for what is known as a language selection clause in Canada.

And it's very common in all types of Canadian agreements, lending and otherwise, and in particular, for agreements that involve the province of Quebec. And this French language-- sorry the language selection clause what it means is exactly as it sounds. The parties agree to use a particular language, such as English.

Now as a result of these changes, parties to an adhesion contract may only be bound by English or non-French. If a French version of that contract was initially remitted to the adhering party prior to the parties expressing their wish to be bound by an English version or a version in another language.

Additionally, the French version of the agreement must have been given to the other party prior to the parties explicitly expressing their willingness to conclude an English version of this agreement. And so what does this mean? There's been a number of implications that have resulted from this recent change and this push for the French First in Quebec.

And there's two issues, really, that I want to talk to you about. And the first one is exactly what I just alluded to, which is the impact on the language selection clause here in Canada, and the impact being the existing language is no longer sufficient in light of the Quebec changes in law. Businesses now will be subject to the Quebec charter, and they're going to have to adopt a two-step process in order to conclude a contract of adhesion in English.

Step one, a completed French version of the agreement must be remitted to the consumer or the adhering party. That means you have to have an agreement already prepared in French ready to go that you deliver to the client. Only one-- step one has been completed, the parties must then explicitly express their willingness to proceed in English.

What does this mean for businesses? Businesses, lenders, et cetera, they should be taking a review of their existing agreements to evaluate and update language selection clauses. So as to capture, the party's explicit and express consent to transact in English, and also very importantly, to acknowledge that French version of that agreement was provided to them.

Businesses are also being advised to establish a streamlined process to ensure that the French version of a contract of adhesion is automatically given to the adhering party before they could contract in English or any discussions are made about contracting in English.

The new law only applies to adhesion contracts and in some ways no longer applies to contracts that contain printed standard clauses. However, in the absence of any clear regulatory guidelines regarding the implications of these changes, it's unclear whether contracts that comprise standard boilerplate language with some negotiable essential elements, whether they're going to be exempt from these requirements.

There is also a lack of clarity as to which agreements may be characterized as adhesion contracts. And so as a result, there's a lot of uncertainty for businesses and lenders with respect to their obligations, and what steps they must take in order to comply with these new changes in Quebec.

Now I understand from my colleagues in Montreal that there are some limited exemptions from this requirement, including certain types of loan contracts, certain types of financial agreements for the purposes of financial risk management, so currency exchange or interest rate agreements. But if you're a lender doing business in Quebec or with Quebec customers, you should be seeking legal counsel on what steps you need to take in order to comply with the French First rule.

The second issue that I very quickly just want to talk about is that this change in law also amends Quebec's consumer Protection Act in a number of very significant ways. All businesses, even if they're based outside of Quebec, must now inform and serve Quebec clients, both consumers and nonconsumers in French.

There are also broader requirements for all businesses to communicate with Quebec employees in French. There are also stricter standards now for hiring in Quebec, both in terms of how you publish job offers and also with respect to limiting situations, where knowledge of another language other than French is required as a condition for employment.

Most significantly, there's been a change in terms of the reduction of the threshold at which businesses become subject to what's called the Francization program. And so Francization is a process that involves a detailed inspection of a business's operations and the development of tailored compliance plans. Now previously, the threshold for Francization program was businesses that had Quebec operations of 50 employees or more.

That threshold has now been cut in half 25, that the practical implication of this change is that thousands of businesses that previously had been exempt from these French language and Francization program requirements have now been brought into the fold and need to take a hard look at what their businesses need to do in order to maintain compliance with these changes in law.

And so to summarize Quebec's French First rule for contracts of adhesion represents a significant shift in the legal landscape of businesses that are operating in Quebec. And while the specific implications and the guidelines for compliance have yet to be fully clarified, it's critical for businesses and lenders to stay informed, seek legal counsel, and proactively adapt their practices to meet these new requirements.

I do want to flag to you what the implications are from a legal perspective, which is businesses are going to be subject to increased scrutiny if they do not follow Quebec's language law. Members of the public, as well as employees, can now for the first time in the history of language rights in Quebec seek redress before the court.

So in light of the significant impact on businesses that are operating in Quebec and lenders that are operating in Quebec, we highly recommend that you consult somebody in Montreal, including the Gowling WLG Montreal office to discuss the steps that need to be taken to mitigate risk and ensure compliance. I know that practically speaking, most of the large Canadian banks, they've had this on their radar for at least a year.

And so a lot of them have been proactively working to update their document, to update their documents to translate documents into French to make sure that they had the French version readily available to update their language selection clauses, and all of their documents to make it clear, again, that the parties are speaking to contract in English, but also that a French version of that contract has been provided to the client.

So a lot of this has been going on behind the scenes. But of course, there are many others who have been caught unprepared. And you still have time to change your systems and bring forth compliance with these new rules, but significant change in the Canadian legal landscape as it relates to this French First requirement in Quebec.

Whitney, on that note, after hearing about what we're doing here with the French language, what are you seeing in terms of legal changes in the US landscape?

WHITNEY SCHMIDT: Yeah. So Thanks, Lisa. So one law that's going to really impact the US business and middle market in a number of ways is the Corporate Transparency Act of 2022. The regulations for implementing the CTA go into effect January 1, 2024.

And the CTA is a new regulatory land scheme that the stated purpose of is to protect the US financial system from illicit use and impeding malign actors from abusing legal entities, like shell companies to conceal proceeds from corrupt and criminal acts. Clearly reading the statute of the words of the language, but in other words, it's further prevention of money laundering, and kind of dark money, and shell corporations.

So unless that an entity is covered by an exclusion, and I'll go through those in a minute. The CTA is going to require entities that are created or registered to do business in the United States to register and disclose information to FinCEN, which is the Financial Crimes Enforcement Network in the US, with respect to information about the entity, its name, address, location information, tax ID. But more importantly, they also have to report beneficial owners and company applicants.

So this will kind of sounds similar to what customers of banks are used to for beneficial ownership and KYC, that kind of exercise that you go to when you're actually touching a bank account, but this is even broader. This is you're forming a new LLC in the United States to do a business with your friend. Oh, we now have to report information to FinCEN about that entity.

Beneficial owners of an entity are those that exercise substantial control, senior officers, the ability to remove senior officers make or approve major decisions. They own 25% or more of the entity, or they receive substantial economic benefits from the asset, which that's a pretty broad statement.

Importantly, for law firms and other legal service providers, company applicants is the person that actually files the document to create the company. So both beneficial owners and company applicants are required to report a ton of information to FinCEN, including their legal name, date of birth, a copy of some sort of identification document, a passport, driver's license, that sort of thing.

So the biggest kind of practical takeaway of this new regulation, which a lot of people are still kind of figuring out because with a lot of laws and implementation of regulations-- regulations get issued, and then just opens up more questions about how it's actually going to be enforced, and regulated, and tweaked. But law firms, and lawyers, and other service providers that would traditionally form entities on behalf of their clients for administrative ease all the time.

You know, you're doing a new M&A deal. Let's form a new buyer entity, and maybe some entities above it to hold profits interest, or whatever. All the complicated org charts that we all see in our practices, that's going to change because law firms are not going to want to be in the business of I'm forming an entity for my client, and now, I need to give them my home address and my passport.

Like that's just additional risk that for something that used to be so administrative, and so a no-brainer almost, is just totally shifting. I know personally for Seyfarth, our internal general counsel and risk management office has basically told us in the corporate group, get out of the business. Like, we don't want to touch it.

We need to figure out other things, similarly, service providers like CT corp, CSC company, people that serve as registered agents for entities in states or also like we don't want to touch this with a 10 foot pole. So it's going to be interesting to see what happens in the next six months as this shakes out.

As I mentioned, there are exemptions for companies that don't need to comply with this additional reporting, and is generally companies that are probably already subject to some sort of reporting, you know, public companies that file with the SEC, banks investment advisors, broker dealers, tax exempt companies, insurance companies, entities that are already pretty well regulated and people know who own them.

We're really looking at privately held companies, private equity companies, their portfolio companies, those types of smaller businesses, where it is a little bit grayer of who owns this entity and digging into it.

As I previously mentioned, this is going to go into effect in 2024 to the extent that there's companies that exist today. They're going to have a year to comply with the Act until 2025 to kind of file their initial reports. Companies that are formed on January 2, 2024 will have 30 days to file their reports.

Also, in a complicated-- extra complication is that reporting companies are going to be required to update their reports to the extent their beneficial ownership form changes within 30 days, which we all know that's just a foot fault waiting to happen. You know, like no one's going to remember to do that. It's going to be one of those post-closing items on the checklist. And it's just going to be one of those things that's going to be very difficult to track and manage.

So we'll see how companies navigate that. But in thinking of smaller businesses, oh, we're giving equity in into our employees. Now we got to make sure we're reporting who our beneficial owners are, like that sort of thing is going to be part of day to day reporting.

And there's obviously going to be some tooth for enforcement. There are potential civil penalties of $500 per day for failure to timely report, criminal penalties of up to two years of imprisonment for failure to report, if it's a willful violation. We'll see how this actually shakes out from being an enforcement standpoint.

So needless to say, definitely, a law that people are not excited about, and it's going to make a lot of our day to day work more complicated. So more to come, but obviously, if this impacts you, if you have any kind of businesses in the US, seek out your trusted advisors and counsel how to navigate it.

And now I'm going to pass it back to Lisa for another Canadian law, which I'm frankly a little bit offended by because I'm not allowed to purchase real property in Canada, apparently. This was news to me before we planned this webinar. So Lisa, tell me tell me about how you [INAUDIBLE] against Americans and others.

LISA MACDONNELL: You're absolutely right. Very, very recent change in law here in Canada on January 1 of this year, the prohibition on the purchase of residential property by Non-Canadians Act came into effect. Great title. Pretty self-explanatory. And the essence here is that it prohibits non-Canadians from directly or indirectly purchasing residential property in Canada for the two-year period starting January 1 of this year, and ending December 31, 2024.

This new law, and its intended effect is part of a larger effort by the Canadian federal government to address rising housing costs in Canada, and follows a number of other recent federal tax changes relating to residential property flipping, and underused housing as well as provincial and municipal tax changes that relate to vacant homes.

The purchase of residential property in Canada by non-Canadians in the last few years has raised a lot of concerns in Canada about Canadians being priced out of the Canadian housing market. Now this law came into effect on January 1, and in a matter of months, a series of amendments took place in response to a number of real estate industry groups who raised a number of concerns about some unintended broad implications resulting from the January 1st Law.

And so I just want to highlight one of the key changes on the amendment side that stems from this January 1st Law about prohibiting non-Canadian purchases of residential property. And so one of the implications of this change in law was that it led to uncertainty as to whether loans to Canadians or non-Canadians by non-Canadian Lenders was going to be restricted.

And so while there's nothing in the amendments that actually clarifies that mortgage lending over residential property is not prohibited, the Canadian mortgage and Housing Corporation also known as CMHC recently provided some guidance being that the taking of a mortgage by a non-Canadian lender would not breach the Act unless the non-Canadian lender was providing the loan to assist a non-Canadian in acquiring residential property that would otherwise contravene this law.

Similarly, providing a loan to a non-Canadian who already owns a residential property is likely not going to be perceived as a breach of the act, unless, again, that non-Canadian is using it to purchase directly or indirectly any residential property that would otherwise be considered an offense under this act.

Many commentators on this law right now are of the general view that enforcement of the act over lenders may be viewed through the lens of the offense provisions of the act, which provide that any person or entity that aids and abets a non-Canadian to breach the prohibitions of the act, in itself, is also breaching the act.

And so from a practical standpoint, what are we seeing? How are loans being Impacted? What are the drafting changes that we're seeing? Particularly in the world of real estate finance and construction lending, we're seeing a tweak to the definition of foreign purchaser.

Previously, a foreign purchaser was defined as being a non-Canadian, who is otherwise compliant with applicable law. The reference to applicable law is no longer enough. You now need to go a step further and expand that definition to include applicable law, including but not limited to the specific piece of legislation.

That gives lenders a little bit of comfort and a little hook to hang their hat on, that they can point to say this is how we're addressing the foreign ownership issue, and how we're ensuring that foreign purchasers are in fact complying with this legislation. Many other impacts of this law, which are beyond the scope of a lending discussion, but a very, very big change that's happened in Canada.

And a lot of media attention is going to this. I'm sure until the prohibition concludes at the end of next year. Now being mindful of our time, I do want to turn this back over to Whitney. We're going to have a little discussion on what she and I are seeing in the Canadian and the US market space as it relates to force majeure clauses.

WHITNEY SCHMIDT: Sure. Thanks for that, Lisa. As we've all kind of experienced with coming out of a global pandemic, I think everyone kicked the tires on their force majeure clauses in a new way, and took a new lens on them.

A force majeure clause is just a mechanism as a risk allocation tool. And sometimes you'll see force majeure clauses, which have a laundry list of every single eventuality that could happen labor unrest, geopolitical events, alien attack, whatever. It's a laundry list. And sometimes it's better to be a little bit more less specific is almost better for from a drafting perspective.

I don't know if you wanted to talk a little bit more about that in detail, given we have about five minutes left. I think with our time, Lisa.

LISA MACDONNELL: Yeah. You know what? I think we'll skip over that, but I do just want to share a very quick story--

WHITNEY SCHMIDT: Yeah.

LISA MACDONNELL: --for those who are attending our presentation today. As it relates to force majeure what we're seeing is a creep of pandemic and epidemic language, as I'm sure you can appreciate related to COVID, a number of Canadian lenders are not accepting those changes, but we're seeing sophisticated borrowers, finding creative ways of trying to include carve outs or otherwise, expand this definition.

I recently acted on a UK-led transaction, where one of the subsidiary guarantors was looking to amend the force majeure clause to specifically reference the political climate in Russia as they had some Russian connections there. It was ultimately rejected. But again, these are different ways that we're seeing people try to work with the force majeure clause.

And hand in hand with that is some changes that we're seeing on the insurance requirements side, especially in Canada. We're starting to see a lot of requests coming in for severe weather related events. Some of those events are not common to Canada at all, but I suspect that that's a creep coming up from the US side.

And so very quickly, I acted on a large file last year. We acted for the lender, who was financing an acquisition for our borrower client, who was purchasing property in Ontario and in the state of Kentucky. As I was going through the usual due diligence on this file, the borrower was going to be assuming a large lease.

And as we went through the lease, it had a very robust insurance provision clause. And so we asked the borrower to confirm that the insurance that was in place was sufficient and met the terms of the lease. Found out no one had turned their minds to it. I was not a popular person that day because it did delay the transaction.

Recommended that the borrower obtain an insurance consultant or some other third party provider to assist them because as lawyers, we are not experts in insurance. But we can obviously retain the services of other professionals who can provide those services.

The end result was supplemental insurance was put in place. And within two weeks, the building in Kentucky was severely damaged by a tornado. And all of that supplemental insurance was really handy. So while the deal didn't actually ever close because the insurance part of it kicked in, I've got a really nice note from that borrower, thanking me for pushing forward on that insurance point. Otherwise, he was in some deep trouble.

WHITNEY SCHMIDT: You were suddenly their favorite person. That was a bit of a pain a couple of weeks before.

LISA MACDONNELL: That's exactly right. And for our last couple of minutes, I'd like to turn it back to you, Whitney to talk about what you're seeing with US Bank failures. Very hot topic.

WHITNEY SCHMIDT: Yeah.

LISA MACDONNELL: In both US and Canada. Lots of US and Canada are watching this, and interested to hear what you have to say.

WHITNEY SCHMIDT: Yeah, obviously, the last three or four months in the US market have been pretty interesting and definitely dynamic. The bank failures have obviously created concerns in our lending market. Each of the banks that did fail had kind of a unique reason why they did.

Obviously, Silicon Valley Bank was heavily tied to the tech industry. They made some poor decision making about-- they basically got upside down on where interest rates were going in a real way just-- there's reasons why the three of those failed. But obviously, looking at the market more broadly, there's been a flight to quality with size with deposits.

JPMorgan Chase, which was already huge, is now much bigger. This is leading to a lot of new conversations with my lending clients about the importance of treasury management. You know, borrowers are talking about their fiduciary obligations to actually spread out their deposits among multiple institutions. You know, it used to be-- oh, of course, we're going to move all of our treasury to you as a relationship builder.

But now, are they actually breaching their fiduciary duties by making that decision and kind of putting all your eggs in one basket, so to speak. So there's definitely been a lot of conversations around that. Anecdotally, the week that SVB failed, it was in March. I happened to be on vacation that week, of course.

And I was working on a dividend recap transaction that was scheduled to close like Monday or Tuesday of that week. It was going to be perfect. I was going to get my deal done. And then I was going to actually enjoy my vacation.

Of course, the deal slipped every day. And it ended up closing the morning of the Friday, which was the day that SVB failed. And the wire instructions for the deal on Thursday night, the four accounts or the main sponsor were SVB accounts.

And then Friday morning, of course, we not wired to SVB because they weren't taking any wires. But I keep thinking about the idea if we would have actually closed that deal on time, those sponsor managers, those business people would have just put a ton of leverage on their portfolio company, and then have their deposits frozen or potentially wiped out for a weekend, and just the panic that would have ensued.

Obviously, we now know in hindsight that the Federal Reserve stepped in and basically guaranteed deposits over our FDIC limit of $250,000 per account to basically stabilize the market and the industry. But it definitely was a weird weekend of managing people, trying to move money, and just deal with the fallout.

And we've already seen some definite changes in the market. I think syndications are much harder to get done just because banks are-- if they're not already in a relationship, they are either going to want the treasury. They're going to want something more from the borrower or more than just participating in a loan.

In the fund finance space, SVB was a very big player. So it's a good windfall for some of my clients that do capital call and subscription work. We're seeing a lot of sponsors come over, looking for new partners. So it's been a good upside for my clients. It's not great for the industry because they were obviously a very big player, but we'll see.

It's been a very interesting time. Hopefully, none of the-- no one else falls as well. I know that there's a number of banks that are definitely being watched very carefully. And I think we will see some continued contraction and consolidation in our market, which is obviously very different from the Canadian market. We just have way more banks and kind of the last thing I'll end on the Signature Bank in New York was one of the banks that did fail.

And there happens to be a Signature Bank in Chicago, which is not the same bank. So I felt so bad for this bank. President had to go and release a press release that basically said, it's not us, guys. So-- and I'm looking at the time. And it looks like we're right at time. So I don't think we're going to have time for questions and answers today. But to the extent

LISA MACDONNELL: Yeah.

WHITNEY SCHMIDT: Extent that there were any of them, obviously, you feel free to reach out to Lisa or I with any questions that you may have.

LISA MACDONNELL: Yes.

WHITNEY SCHMIDT: And Lisa I'll give you the last--

LISA MACDONNELL: Yes, no, thank you. Thank you. Again, I think we saw some questions come up in the chat and feel free to email us. These are all hot topics, particularly the US Bank failures and how cross-border transactions are papering that. Love to speak with anybody one on one if they're interested in hearing about what that type of paper looks like.

But overall, thank you very much for taking the time out of your day today, and staying with us as we spoke about these cross-border matters. Appreciate your attendance and your participation. Whitney, thank you so much for joining me with this.

WHITNEY SCHMIDT: Thank you for having me.

LISA MACDONNELL: Really appreciate it. And all the best to everybody. Enjoy the rest of your afternoon. Thank you very much.