Yank-a-Bank

What is it and what does it do?

A “Replacement of Lender” clause, colloquially known as a “yank-a-bank” provision, allows a borrower to replace a single member of the lending syndicate with a new lender in certain circumstances. The “yanked” lender assigns its loans, typically at par, to an eligible assignee who is then entitled to the full amount of its principal, along with accrued interest, fees, and other amounts owed on such obligations.

Example

If any Lender requests compensation under Section [__], or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section [__], or if any Lender is a Defaulting Lender, or if a Lender fails to consent to an amendment or waiver approved by the Required Lenders as to any matter for which such Lender’s consent is needed, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section [__]), all of its interests, rights and obligations under this Agreement and the related Loan Documents to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment).

Why is it there?

A yank-a-bank provision in loan agreements allows a borrower to replace a lender where such lender has defaulted, become insolvent, requests certain tax indemnity payments or, when a lender has refused to consent to a proposed amendment or modification to the agreement. In the case of a proposed amendment, a yank-a-bank provision ensures that a single lender cannot block an amendment requiring unanimous approval in order to extract better terms from the borrower.

Why is it important (or not so important) to a Lender?

In the wake of the 2008 financial crisis, yank-a-bank provisions rose in popularity as a remedy against lenders unable to fulfill their loan agreement obligations. Lenders whose agreements have such provisions are at risk of being yanked if any of the contractually pre-determined situations (default, insolvency, refusal of consent, etc.) arise.

How does it affect a Borrower in practical terms?

A yank-a-bank provision is a useful tool for borrowers in situations where borrowers are seeking all-lender approval on a matter or facing additional costs because of certain claims made by a lender. However, borrowers need to keep in mind a few caveats. Borrowers are responsible for finding a new lender as well as the costs associated with the assignment of the yanked lender’s interest. As it is an assignment, the new lender will have to be an eligible assignee under the same rules, regulations and terms that were applicable to all lenders who originally entered the agreement. Additionally, borrowers must also be mindful of the impact that their use of a yank-a-bank provision will have on their relationship with a lender for any potential future transactions.

How is it relevant to shipping?

The shipping industry is characterized by the need for substantial investment where revenues can be volatile and ships have significant operating expenses.  Sometimes, approvals from lenders on a breach in loan documents are inevitable.  Lately, the industry has also faced a situation in which certain financial institutions have expressed a desire to exit the sector.  Amendments or waivers involving such financial institutions can be particularly difficult, and a yank-a-bank provision is one way to address a situation if another lender can step up.

How is it negotiated?

A yank-a-bank provision is not always included in a loan agreement. Borrowers will typically negotiate for inclusion of such provisions to ensure that a non-consenting lender will not prevent an amendment that would otherwise pass and to discourage lenders from requesting certain tax indemnity payments or yield maintenance. Lenders sometimes resist the inclusion of such provision for the fear that they can be pulled out of a deal for simply exercising their rights after having invested time and energy to underwrite the deal. Depending on the outcome of negotiations, a yank-a-bank provision may be limited to amendments where unanimous approval is required, and that the provision can only be invoked to yank a lender or lenders whose aggregate percentage of the syndicate is below a certain threshold.

Questions?

Please contact any member of S&K’s Maritime Practice Team.