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Loan Forbearance Options and Waivers After Default

Crafting Forbearance Agreements That Minimize Lender Liability and Bankruptcy Risks

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WEDNESDAY, SEPTEMBER 5, 2012

Presenting a live 75-minute webinar with interactive Q&A

Andrew L. Turscak, Partner, Thompson Hine, Cleveland, Ohio Curtis L. Tuggle, Attorney, Thompson Hine, Cleveland, Ohio

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ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.

Loan Forbearance Options and Waivers After Default: Crafting Forbearance Agreements that Minimize Lender Liability and Bankruptcy Risks

Curtis L. Tuggle Thompson Hine LLP Cleveland, Ohio 44114 Curtis.Tuggle@ThompsonHine.com 216-566-5904 Andrew L. Turscak, Jr. Thompson Hine LLP Cleveland, Ohio 44114 Andrew.Turscak@ThompsonHine.com 216-566-5617

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Overview of Presentation

I.

Essential Due Diligence

II.

Reservation of Rights Letter

• III. Agreement: Forbearance or Waiver
• IV. Specific Drafting Points for Waiver Agreement
• V. Specific Drafting Points for Forbearance Agreement

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I.

Essential Due Diligence

■ Review the Lender’s most recent asset quality report for the Borrower to understand the history of the credit and contemplated exit strategies. ■ Review correspondence among the Lender and the Borrower,

• ther Credit Parties, Guarantors and Subordinated Lenders.

Keep in mind, syndicated facilities will require reviewing correspondence between the Administrative Agent and Lenders. ■ Analyze Credit Agreement, Loan Documents, Security Documents, Guaranty Agreements, and Subordinated Indebtedness Documents to identify any issues that may need to be addressed (e.g., Documentation Errors, execution of Landlord’s Waiver, issuance of Subordination Notice, etc.).

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I.

Essential Due Diligence (cont.)

■ Request UCC-1 search for the Borrower, other Credit Parties and Guarantors. ■ Review filings with the United States Patent and Trademark Office. ■ Request updated title reports and appraisals on real property subject to Mortgages. ■ Request current financial information of the Borrower, other Credit Parties and Guarantors. ■ Identify additional personal and real property of the Borrower, other Credit Parties and Guarantors that may be pledged as collateral.

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II.

Reservation of Rights Letter

■ Formal notice by the Lender to the Borrower, other Credit Parties, Guarantors, and Subordinated Indebtedness Holders of the occurrence of a Default or Event of Default. ■ Express reservation of all of the Lender’s rights and remedies under each of the Loan Documents and applicable law. ■ Specific Drafting Points:

►

Lender’s identification of the Specified Default does not imply the non- existence of any other Defaults or Events of Default.

►

Specified Default is continuing and has not been waived by the Lender or cured by or on behalf of the Borrower.

►

Lender’s acceptance of payment shall not constitute or be deemed to constitute a cure or waiver of the Specified Default.

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• III. Agreement: Forbearance or Waiver

■ Relevant Factors to Consider:

►

Seriousness of the Specified Default – Is it a Financial Covenant Default or Payment Default.

►

Overall Stability and Viability of the Borrower’s business.

►

Impact the existence of the Specified Default is likely to have on the Borrower’s business operations including, among other things, relationships with customers and suppliers.

►

Impact the waiver of the Specified Default may have on implementing and achieving the Lender’s overall Exit Strategy (e.g., impairment of the Borrower’s ability to secure refinancing or the Lender’s enforcement of Guaranty Agreements.)

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• IV. Specific Drafting Points for Waiver Agreement

■ Form of Agreement

► Amendment to Credit Agreement (Financial Covenant

Adjustments)

► Stand Alone Waiver Agreement ► Letter Agreement

• IV. Specific Drafting Points for Waiver Agreement (cont.)

■ Key Provisions for Agreement ► Specifically identify the “Specified Default” that Lender is waiving and the conditions of the limited waiver - Sample Provision:

Waiver of Specific Defaults. Borrower has notified Lender that Borrower has failed to comply with (a) the covenant set forth in Section 6.11(b) (Consolidated Total Leverage Ratio) of the Credit Agreement for the periods ending June 30, 2010, September 30, 2010, December 31, 2010, March 31, 2011 and June 30, 2011 (collectively, the “Leverage Ratio Violations”), (b) the covenant set forth in Section 6.11(e) (Minimum Consolidated EBITDA) of the Credit Agreement for the periods ending June 30, 2010, September 30, 2010, December 31, 2010, March 31, 2011 and June 30, 2011 (collectively, the "Minimum EBITDA Violations"), and (c) Section 7.01(i) of the Credit Agreement by virtue of Borrower’s failure to pay certain debts as they became due as

• f the date hereof (collectively, the "Debt Violations", and together with the Leverage

Ratio Violations, and the Minimum EBITDA Violations, collectively, the “Violations”). Borrower has requested that Lender waive the Defaults or Events of Default that exist solely by virtue of the Violations (collectively, the “Specified Defaults”).

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• IV. Specific Drafting Points for Waiver Agreement (cont.)

Lender hereby waives the Specified Defaults on the condition that, after giving effect to the terms of this Agreement, no Default or Event of Default shall exist under the Credit Agreement or any other Loan Document. This Agreement shall serve as evidence of such waiver. Borrower acknowledges and agrees that (a) the waiver granted herein applies only to the Specified Defaults that relate to the periods set forth in this Section 9 and to no other period, (b) except with respect to the limited waiver granted herein specifically relating to the Specified Defaults, Lender shall not be under any obligation to forbear from exercising any of its rights or remedies upon the

• ccurrence of any Default or Event of Default, and (c) Lender has not established any

course of dealing with respect to such limited waiver or otherwise that is inconsistent with the express terms of the Credit Agreement and the other Loan Documents. The limited waiver requested by Borrower and granted by Lender hereunder relates solely to the items specifically set forth in this Section 9. No further waiver has been requested or granted.

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• IV. Specific Drafting Points for Waiver Agreement (cont.)

►

Acknowledgement of Continuation of Liabilities - Sample Provision:

The obligations of Borrower under the Credit Agreement and other Loan Documents shall, except as expressly modified herein, remain in full force and effect, and shall not be released, impaired, diminished or in any other way modified or amended as a result of the execution and delivery of this Agreement or by the agreements and undertakings of the parties contained herein. Borrower hereby ratifies and confirms each of the Loan Documents to which it is a party and the rights granted thereunder in favor of Lender. Borrower hereby confirms that the security interests and liens granted pursuant to the Credit Agreement and other Loan Documents continue to secure the obligations of Borrower under the Credit Agreement and other Loan Documents, whether presently existing or hereafter arising, and that such security interests and liens remain in full force and effect.

• IV. Specific Drafting Points for Waiver Agreement (cont.)

► Representations and Warranties

• General Representations and Warranties – Sample Provision:

Borrower hereby acknowledges and confirms that (i) all of the Recitals set forth herein are true and correct; (ii) as of the close of business on November 17, 2011, Borrower was liable to Lender under the Credit Agreement and other Loan Documents in an aggregate approximate principal amount of $17,177,980.00, plus accrued but unpaid interest thereon, plus the costs and expenses of Lender incurred in connection with the obligations and indebtedness of Borrower to Lender, as applicable, including, without limitation, reasonable attorneys’ fees and expenses incurred by Lender in the negotiation, preparation or enforcement of this Agreement, and any documents, agreements or instruments referred to herein, all without offsets, counterclaims or defenses of any kind or nature whatsoever; (iii) the Credit Agreement and the other Loan Documents are in full force and effect and are enforceable in accordance with their respective terms; (iv) Borrower does not have any claims, defenses, causes of action, counterclaims or offsets against Lender or any of its respective current

• r former officers, employees, agents, representatives, consultants, directors, parents, subsidiaries,

affiliates, members, managers, consultants or attorneys of any kind or nature whatsoever; and (vi) as of the date hereof, all liens, security interests, assignments and pledges encumbering the Collateral, created pursuant to and/or referred to in the Credit Agreement or the other Loan Documents, are first priority liens, security interests, assignments and pledges, continue unimpaired, are in full force and effect and secure and shall continue to secure all of the obligations described in the respective instruments in which such interests were granted.

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• IV. Specific Drafting Points for Waiver Agreement (cont.)
• Other Standard Representations and Warranties:

□

All Representations and Warranties in the Credit Agreement and other Loan Documents are true and complete on the date hereof as if made on such date.

□

Execution, delivery and performance of the Agreement will not result in the validation of any other agreements or laws to which the Borrower is subject.

□

Except for Specified Default, no Defaults or Events of Default exist.

□

Agreement constitutes legal, valid and binding obligations of Borrower.

□

Borrower has corporate power and authority to execute and perform in accordance with Agreement.

□

No consents or approval required in connection with Agreement.

□

No actions, suits or proceedings pending or threatened that have had or could have a material adverse effect or question the validity or enforceability

• f any of the Loan Documents.

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17

• IV. Specific Points for Drafting Waiver Agreement (cont.)
• Borrower must acknowledge and confirm that the Representations and Warranties are being

specifically relied upon by Lender as a material inducement to enter into Agreement.

► Release of All Claims Against Lender – Sample Provision:

Borrower hereby acknowledges and confirms that there are no existing defenses, claims, counterclaims

• r rights of recoupment or set-off against Lender in connection with the obligations and indebtedness
• wed to Lender under the Credit Agreement and other Loan Documents or in connection with the

negotiation, preparation, execution, performance or any other matters relating to the Loan Documents or this Agreement. Borrower further acknowledges and agrees that, notwithstanding anything to the contrary set forth in this Agreement, Lender does not have, nor shall have, an obligation to: (i) amend any one or more of the Loan Documents or otherwise further restructure the obligations described therein; (ii) make any further loans, advances or extension of credit to or for the benefit of Borrower, except as expressly set forth in, and subject to the terms and conditions of, each of the Loan Documents; (iii) except solely with respect to the Specified Defaults as herein provided, waive any Defaults or Events of Default; (iv) refrain from exercising any of its rights or remedies under any one or more Loan Documents upon the occurrence of any Default or Event of Default or (v) enter into any other instruments, agreements or documents regarding any of the same with Borrower, and that neither Lender, nor any of its representatives, has made any agreements with, or commitments or representations or warranties to, Borrower (either in writing or orally), other than as expressly stated in this Agreement.

• IV. Specific Points for Drafting Waiver Agreement (cont.)

In consideration of the accommodations being made available by Lender to or for the benefit of Borrower under this Agreement, Borrower, for itself and its present and former agents, employees, representatives, officers, directors, shareholders, parents, members, managers, subsidiaries, successors and assigns, does hereby unconditionally remise, release and discharge Lender and its current and former shareholders, parents, subsidiaries, affiliates, members, managers, officers, directors, servants, agents, employees, financial advisors, consultants, representatives, attorneys and their respective successors and assigns (collectively, “Released Parties”, and individually, “Released Party”) of and from any and all claims, counterclaims, demands, actions and causes of action of any nature whatsoever, whether at law or in equity, including, without limitation, any of the foregoing arising

• ut of or relating to any of the Loan Documents, any acts or omissions of any Released Party in

connection therewith (including, without limitation, extensions of credit and other financial accommodations made or not made to Borrower), the transactions described in this Agreement, the return of any checks, or any proposed financing arrangements to or for the benefit of Borrower, or any entities owned by or under the control of Borrower, which Borrower now has or hereafter can or may have for or by reason of any cause, matter or thing whatsoever, against any of the Released Parties, from the beginning of the world to the date hereof.

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19

V.

Specific Drafting Points for Forbearance Agreement

■ Many provisions contained in the Waiver Agreement are also appropriate for the Forbearance Agreement.

►

Acknowledgement of Continuation of Liabilities

►

Representations and Warranties

►

Release of All Claims Against Lender ■ Define “Forbearance Period” and “Terminating Events” ■ Specific Affirmative Covenants for the Forbearance Agreement (many of which may be appropriate for the Waiver Agreement).

►

Borrower shall retain a Financial Advisor and/or Investment Banker acceptable to the Lender.

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V.

Specific Drafting Points for Forbearance Agreement (cont.)

►

Borrower shall cause the Financial Advisor and Investment Banker to provide regular reports to the Lender and fully and thoroughly answer any questions the Lender may have.

►

Borrower shall pursue a restructuring/refinancing/sale transaction that shall result in payment in full of all obligations owed to the Lender.

►

Borrower shall enter into an agreement, in form and substance satisfactory to the Lender, that provides for a restructuring/refinancing/sale transaction that shall result in payment in full of all obligations owed to the Lender on or before December 31, 2011.

►

Borrower shall have fully and finally paid all obligations owed to the Lender

• n or before December 31, 2011.

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V.

Specific Drafting Points for Forbearance Agreement (cont.)

►

Fees and Costs – Sample Provision:

Borrower shall pay within five (5) Business Days of any written demand by Lender, all reasonable costs and expenses of Lender related to or in connection with this Agreement and any documents, agreements or instruments referred to herein, including, without limitation, the reasonable fees and expenses of the attorneys retained by Lender in connection with the negotiation and preparation of this Agreement or the enforcement of Lender’s rights and remedies under this Agreement

• r any of the Loan Documents (the “Fees and Expenses”); provided, however, that

Borrower hereby authorizes Lender to debit any one or more deposit accounts of Borrower for the Fees and Expenses on or after the seventh (7th) Business Day following such written demand by Lender. Nothing in this Agreement shall be intended

• r construed to hold Lender liable or responsible for any expense, liability or obligation
• f any kind or nature whatsoever (including, without limitation, attorneys’ fees and

expenses, other professionals’ fees and expenses, wages, salaries, payroll taxes, withholdings, benefits or other amounts payable by or on behalf of Borrower).

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V.

Specific Drafting Points for Forbearance Agreement (cont.)

►

Disgorgement - Sample Provision:

If Lender is, for any reason, compelled by a court or other tribunal of competent jurisdiction to surrender or disgorge any payment, interest or other consideration described hereunder to any person because the same is determined to be void or voidable as a preference, fraudulent conveyance, impermissible set-off or for any

• ther reason, such indebtedness or part thereof intended to be satisfied by virtue of

such payment, interest or other consideration shall be revived and continue as if such payment, interest or other consideration had not been received by Lender, and Borrower shall be liable to, and shall indemnify, defend (engaging counsel acceptable to Lender) and hold Lender harmless for, the amount of such payment or interest surrendered or disgorged. The provisions of this section shall survive execution and delivery of this Agreement and the documents, agreements and instruments to be executed or delivered herewith.

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V.

Specific Drafting Points for Forbearance Agreement (cont.)

► Lender’s Actions – Sample Provision: The authority herein conferred upon Lender and any action taken by Lender hereunder or under the Loan Documents or any document, agreement or instrument referred to herein will be taken by Lender for the protection of Lender only, and Lender shall not assume or nor shall be deemed to have assumed any responsibility to Borrower or to any other persons with respect to any such action authorized or taken by Lender, except as required by applicable law. No person shall be entitled to rely upon, or claim to have relied upon, any action taken or failed to have been taken by Lender or its respective consultants, attorneys, agents, employees or representatives.

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V.

Specific Drafting Points for Forbearance Agreement (cont.)

► Indemnification of Lender – Sample Provision: From and after the date hereof, Borrower shall indemnify, defend and hold harmless Lender and its current and former shareholders, subsidiaries, members, managers, affiliates, parents, directors, servants, agents, employees, representatives, officers, consultants, attorneys and their respective heirs, personal representatives, successors and assigns (severally and collectively, the “Indemnified Parties”) against and from any and all liability for, and against and from all losses or damages Indemnified Parties may suffer as a result of, any claim, demand, cost, expense, or judgment of any type, kind, character or nature (including reasonable attorneys’ fees and court costs), which Indemnified Parties shall incur or suffer as a result of (a) any act or

• mission of Borrower or any of its agents or representatives in connection with the

transactions described in this Agreement and any of the instruments, agreements and documents referred to in this Agreement, (b) the inaccuracy of any of the representations or warranties of Borrower or (c) the breach of any of the respective covenants set forth herein of Borrower. This indemnification shall survive execution and delivery of this Agreement.

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V.

Specific Drafting Points for Forbearance Agreement (cont.)

► Integration – Sample Provision: This Agreement and the instruments, agreements and documents referred to in this Agreement shall be deemed incorporated into and made a part of the Loan

• Documents. This Agreement shall be deemed to be a Loan Document as that term is

defined in the Credit Agreement. All such instruments, agreements and documents, and this Agreement, shall be construed as integrated and complementary of each

• ther, and, except as otherwise specifically provided in this Agreement, as

augmenting and not restricting Lender’s rights, remedies, benefits and security. If after applying the foregoing an inconsistency still exists, the provisions of this Agreement shall constitute an amendment to the Loan Documents and shall control.

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V.

Specific Drafting Points for Forbearance Agreement (cont.)

► Bankruptcy Filing – Sample Provision:

If Borrower (“Bankruptcy Party”) files or has filed against it a petition in bankruptcy or seeks relief or protection under any of the sections or chapters of the United States Bankruptcy Code (the “Code”), Lender thereupon will have the right (and Bankruptcy Party will not interpose any objection thereto and hereby waives its rights with respect thereto) to request and receive any one or more of the following: (i) immediate relief from any automatic stay imposed by Section 362 of the Code

• r any stay or other restriction on Lender’s rights under this Agreement, under the documents, instruments or agreements

referenced in this Agreement, or under any of the court’s equitable powers (and, in this regard, Bankruptcy Party hereby admits that it is unable to adequately protect the interests of Lender), (ii) a termination of the exclusive period under Section 1121 of the Code, and (iii) a dismissal of the bankruptcy case or proceeding. Nothing in this Agreement shall be deemed in any way to limit or restrict any of Lender’s rights to seek in a bankruptcy court or any other court of competent jurisdiction any relief Lender may deem appropriate in the event that a voluntary or involuntary petition under any title of the Code is filed by or against Bankruptcy Party. The properties which Bankruptcy Party has encumbered and which are subject to the security interests and liens of Lender include all cash, cash equivalents, or cash collateral, as the term cash collateral is defined in Code Section 363, which accrues from such properties or is owned by each Bankruptcy Party, and upon the filing

• f any bankruptcy case naming a Bankruptcy Party or any successor as debtor, such Bankruptcy Party, or such successor

debtor, as the case may be, has and shall have no right to use any such cash, cash equivalents or cash collateral, and no method of providing adequate protection for any such use to Lender exists. Bankruptcy Party further acknowledges and agrees that the representations, acknowledgments, agreements and warranties in this Agreement have been made by Bankruptcy Party as a specifically bargained for, material inducement to Lender to enter into this Agreement, that Lender is relying on such representations and warranties, had changed and will continue to change its position in reliance thereon and that Lender would not have entered into this Agreement without such representations, acknowledgments, agreements and warranties. Bankruptcy Party has consulted with counsel and relied upon counsel’s advice in connection with the negotiation and execution of this Agreement.

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Thank you! Any questions?