Anti-storage provisions are the norm in credit agreements for oil and gas companies during volatility fluctuations, so the clause gained promence during the reserve-based borrowing base renewal season. Given the booming nature of the oil and gas industry, many borrowers who currently accept the inclusion of anti-cash provisions in their credit agreements will continue to look to the future what, from the lenders` perspective, will be needed to get rid of the same anti-cash rules in the future. Borrowers need to realize that while adding anti-liquidity rules may now only require a majority vote of the lender, their subcontractor will likely require a 100% lender`s voice in the future, as remoteness would deprive lenders of economic benefits. This means that a single holdout vote within the lender group could prevent the borrower from returning to an unlimited cash management environment after commodity prices improve. The holdout lender(s) may have reasons to block the withdrawal of anti-cash storage rules that have nothing to do with the borrower`s finances. While the “yank a bank” provisions (under which the borrower can replace a non-favorable lender with a new adherent lender, as long as the new lender that accepts the non-favorable lender) must provide a solution in this context, they require a willing replacement lender to be useful and may include the payment of additional fees or expenses. Pending such a decrease in the availability of credit, borrowers sometimes make defensive recourse to improve their liquidity, finance current operations and create additional leverage with creditors, given the decrease in reserves and possible bankruptcy and insolvency proceedings. This increases credit and reputational risk for creditors when considering whether or not to respond to requests for advances. Many creditors review their existing anti-hortiary provisions when they are included in their credit documents and consider amending their credit documents to include anti-horting provisions. Lenders who refuse to finance a draw face risks. During the 2008 economic downturn, lenders received a $1.85 billion loan as part of a construction loan to Fountainbleau Las Vegas. In the end, the borrower went bankrupt and was followed by litigation that resulted in a $300 million transaction due to the breach of the lender`s financing obligation.
The current round of anti-cash inventory amendments appears to have been partially affected by Whiting Petroleum`s insolvency application announced on April 1, 2020. Whiting said he held $585 million in cash at the time of the insolvency application. Given that most reserve-based credit facilities are now typically secured by all of the borrower`s assets, including its cash, Whiting`s lenders likely have a mortgage priority over that $585 million. However, it seems likely that limiting Whiting`s ability to deduct the entirety of his revolver would have been preferred by his priority lenders over maintaining a bankrupt secured debt. b. “Cash Balance” Carve-Outs. When negotiating anti-cash provisions, borrowers should consider all contexts in which they may need to keep cash on their balance sheet for the duration of the loan, including contexts that may be unique to their respective activities and are therefore not accounted for in publicly available precedents for the anti-cash reserve – and should look for carve-outs in their definition of “cash-credit” so that these contexts are taken into account by the New Cash-Horting Tests. For example, if a borrower has a significant contingent commitment – such as a surety compensation obligation – for which he must set aside cash without that obligation actually being paid in a short period of time, he may need a certain carve-out for this. . . .