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By: Daniel A. Rabinowitz and David S. Berg KRAMER LEVIN NAFTALIS & FRANKEL LLP
This article explains how to modify a standard credit agreement to account for a borrower that is an insurance company or an insurance holding company. Examples illustrate the specific types of provisions that may be appropriate for such a borrower. The guidance includes drafting and negotiation points for both borrower’s and lender’s counsel.
IN STRUCTURING THESE TRANSACTIONS, LENDER’S COUNSEL should be aware that, as a general matter, unsecured loans made to an insurance company or an insurance holding company will be subordinated by law to insurance policy claims. In all U.S. jurisdictions insurance policy claims rank senior to unsecured bank debt and other general, unsecured creditor claims in a liquidation proceeding. Where the borrower is an insurance holding company that relies on its operating subsidiary for liquidity, bank debt would be structurally subordinated to policy claims at the subsidiary level. We would note also that when you are lending to such an insurance holding company, you should be mindful of regulatory restrictions on the subsidiaries’ ability to distribute profits up to the borrower as a dividend.
An insurance company or, to a lesser extent, an insurance holding company, is subject to a regime of state law rules and regulations not applicable to other borrowers. For this reason, a standard set of representations and warranties may be insufficient or inappropriate for this kind of borrower. Below are suggestions on how to revise or supplement these provisions in a manner appropriate to insurance borrowers.
To read the full practice note in Lexis Practice Advisor, follow this link.
For information on balance sheet covenants and cash flow covenants, see
DRAFTING REPRESENTATIONS AND WARRANTIES (CREDIT AGREEMENT)
RESEARCH PATH: Finance > The Credit Agreement > Representations, Warranties and Covenants > Practice Notes > Representations and Warranties
For an example of a standard representations and warranties section for a credit agreement, see
REPRESENTATIONS AND WARRANTIES PROVISIONS (CREDIT AGREEMENT)
RESEARCH PATH: Finance > The Credit Agreement > Representations, Warranties and Covenants > Forms > Representations and Warranties
For a discussion of the standard representations and warranties found in loan agreements, see
COMMONLY NEGOTIATED REPRESENTATIONS AND WARRANTIES (CREDIT AGREEMENT)
For an explanation on why lenders often require negative covenants and related definitions in credit agreements, see
NEGATIVE COVENANTS (CREDIT AGREEMENT)
RESEARCH PATH: Finance > The Credit Agreement > Representations, Warranties and Covenants > Practice Notes > Affirmative, Negative and Financial Covenants
FINANCIAL COVENANTS (CREDIT AGREEMENT)
For assistance in drafting a limitation on indebtedness negative covenant clause, see
LIMITATION ON INDEBTEDNESS NEGATIVE COVENANT PROVISION (CREDIT AGREEMENT)
RESEARCH PATH: Finance > The Credit Agreement > Representations, Warranties and Covenants > Forms > Covenants
For detailed information on the different forms of conditions precedent utilized in closing and funding credit agreements, see
DRAFTING AND NEGOTIATING CONDITIONS PRECEDENT (CREDIT AGREEMENT)
RESEARCH PATH: Finance > Closing and PostClosing Mechanics > The Closing Process > Practice Notes > Closing Deliverables