What's the waiver like?
28 November 2023
28 November 2023
Once an enforcement event occurs, the security agent will be entitled to (i) deliver drawdown notices to the investors in lieu of the general partner, (ii) receive the proceeds of the resulting capital contributions, and (iii) if necessary, take enforcement measures against defaulting investors.
Against this background, the strength and effectiveness of the investors' funding obligation is key to the credit decision.
This obligation arises from (i) the limited partnership agreement governing the fund and (ii) the subscription agreement entered into by the investors.
When stepping into the shoes of the general partner and delivering drawdown notices to the investors, the security agent must be certain that the investors' obligation to fund capital calls is absolute and irrevocable.
To this end, investors must be required to waive their rights of defence, counterclaim or set-off of any kind.
Such waiver may be captured in a separate investor letter or in the fund documents themselves.
Bankable provisions in a limited partnership agreement would therefore be along these lines:
(b) (i) Each Limited Partner hereby agrees that the General Partner shall have the right, in connection with any financing or other transaction contemplated by this Agreement, to directly or indirectly pledge, mortgage, charge, assign, transfer or grant security interests (x) in any or all of the assets of the Partnership, including the Partnership’s ownership rights in Investments and to distributions therefrom and the Limited Partners’ Unfunded Capital Commitments, as security for any financing, guarantee obligation, letter of credit liability or hedging or derivative or other transaction incurred by the Partnership, or the General Partner pursuant to this Section [•] (a Financing Transaction); and (y) any bank accounts (or other accounts) into which the Limited Partners are required to fund their Capital Contributions (any such account, a Collateral Account), to any lender or provider under a Financing Transaction with respect to any of the General Partner’s or Partnership’s rights under this Agreement, including the right to (A) issue Drawdown Notices or otherwise require any Limited Partner to make Capital Contributions, to the extent that any applicable grace or cure period in the credit facility documentation relating to the payment of such Capital Contributions has expired and an event of default has occurred under such Financing Transaction documentation (the proceeds of which shall be used to pay amounts due in respect of any such financing); (B) receive such Capital Contributions; and (C) enforce all available remedies and powers of the General Partner or Partnership against Limited Partners that fail to make such Capital Contributions pursuant to Drawdown Notices (any credit facility so secured primarily by the Unfunded Capital Commitments and related rights of the Limited Partners, a Subscription Secured Credit Facility).
(ii) In addition to the above, each Limited Partner agrees and acknowledges that, so long as any of the foregoing indebtedness or other financial obligations remain outstanding, (x) all payments made by such Limited Partner pursuant to this Agreement or its Subscription Agreement shall be made to the applicable Collateral Account and any payments not made to the applicable Collateral Account will not satisfy such Limited Partner’s obligations to fund its Capital Commitment; (y) it shall, notwithstanding anything to the contrary herein, remain absolutely and unconditionally obligated to fund the Capital Contributions under this Agreement that are called by the General Partner, the Partnership or by the lenders or providers under a Financing Transaction on their behalf (including those required as a result of the failure or excuse of any other Limited Partner to fund its Capital Commitment) without set-off, counterclaim or defence, including any defence of fraud or mistake and any defence under any bankruptcy or insolvency law, including Section 365 of the US Bankruptcy Code, provided that such agreement to fund shall not act as a waiver of any claim that such Limited Partner may have against any other Partner or the Partnership; and (z) that the lender or provider under a Financing Transaction is extending credit, providing letters of credit or hedges or swaps in favour of the Partnership in reliance on such Limited Partner’s funding of its Capital Contributions as its primary source of repayment. Each Limited Partner further acknowledges and agrees that, in connection with any obligation under a Financing Transaction, (A) any termination, reduction or release of its Capital Commitment may require the consent of the lender or provider under such Financing Transaction; and (B) all claims it may have against the Partnership, the General Partner or any Affiliate thereof shall be subordinate to all payments due to the lender or provider under such Financing Transaction.
(c) (i) In connection with any Financing Transaction entered into by the Partnership, each Limited Partner agrees (A) to confirm, from time to time, the amount of its Capital Commitment and Unfunded Capital Commitment, as applicable, to the lender or provider under such Financing Transaction; (B) to honour capital calls made by the lender or provider under such Financing Transaction in the case of a default on the borrowing by the Partnership; (C) to confirm that, after receiving notice from the General Partner or Partnership, as applicable, and the lender or provider under such Financing Transaction that a Collateral Account has been established for the funding of Capital Contributions while such borrowing is in place, any Capital Contribution it makes will not satisfy such Limited Partner’s obligation to fund its Capital Commitment unless such Capital Contribution is paid into such account; (D) to provide such financial statements or other information as the General Partner or the lender or provider under such Financing Transaction reasonably requests; (€) to execute and deliver such other acknowledgements, consents, documents, certificates or other instruments as may be reasonably requested by the General Partner or the lender or provider under such Financing Transaction (including (aa) an acknowledgement that it shall not pledge, collaterally assign, charge, mortgage, transfer, encumber, or otherwise grant a security interest or other lien in, its Partnership interest to any other Person, (bb) an acknowledgement (including directly in favour of such lender or provider under such Financing Transaction) of its obligations to make Capital Contributions pursuant to this Agreement and an acknowledgement of or agreement to such other matters as such lender or provider under such Financing Transaction may reasonably request (including an acknowledgement of such lender's or provider's ability to issue and enforce Drawdown Notices and exercise related rights, remedies and powers of the Partnership or the General Partner with respect to such Limited Partner’s Capital Commitment, if applicable), (cc) such documents or other instruments as are required to acknowledge and perfect any security interest in its Partnership interest and (dd) an acknowledgement or certification confirming the amount of its remaining uncalled Capital Commitment); (F) to provide all information and representations necessary to ensure that the lending arrangement will not constitute a non-exempt “prohibited transaction” under ERISA or Section 4975 of the Code; and (G) that, for the purposes of enforcing any rights, claims or remedies that any lender or provider under such Financing Transaction may have pursuant to this Section [•], each lender or provider under such Financing Transaction shall be deemed to be an intended third-party beneficiary of this Agreement. It is understood and agreed that no Limited Partner shall be required to pledge its Interest in the Partnership (or grant any security interest in any of its other assets) as security for any financing incurred by the Partnership pursuant to this Section [•].
(ii) In the event that, as a result of any such pledge, mortgage, charge, assignment, transfer or grant of security interest, a Limited Partner makes a payment directly to a lender or provider under a Financing Transaction as required pursuant thereto, such payment shall be deemed, for all purposes of this Agreement, to be a Capital Contribution of such Limited Partner to the Partnership if such payment would have been considered a Capital Contribution if it had been paid to the Partnership.
Only a robust waiver can provide adequate protection for the lenders. But what is the position in Luxembourg?
A waiver (renunciation) may be expressed or implied. The latter is inferred from conduct, but in either case the waiver must be unequivocal.
The person waiving the right must have a clear understanding of the nature and consequences of the waiver. To this end, the right waived must be determined or determinable.
Does this mean that only existing rights can be waived?
In certain instances, case law recognises the right of an individual to waive a future or potential right. However, in the absence of a general theory of waiver, it is difficult to predict when someone can validly give up a right that doesn't exist at the time the waiver is granted.
Luxembourg law provides welcome certainty, by acknowledging that, in the context of a pledge over receivables, the beneficiary of such security interest must be able to rely on the value of the claims pledged. Pursuant to article 2.5 of the Law of 5 August 2005 on financial collateral:
the debtor of a claim provided as financial collateral may waive, in writing or in a legally equivalent manner, its rights of set-off as well as any other exceptions vis-à-vis the creditor of the claim provided as collateral and vis-à-vis persons to whom the creditor assigned, pledged or otherwise mobilised the claim as collateral. Such waiver shall be valid between parties and enforceable against third parties – including an insolvency practitioner.
This removes any uncertainty regarding the validity of waivers of future rights of set-off and counterclaim granted in the fund documentation.
We know from experience that fund sponsors are traditionally reluctant to provide investor letters or to ask their investors to acknowledge any notice.
A way to get around this is to make it clear that the waiver of right of set-off, counterclaim or defence set out in the limited partnership agreement is intended to benefit any present and future lenders as third-party beneficiaries (see 2(c)(i)(G) above).
By virtue of article 1121 of the Luxembourg Civil Code, the person making the stipulation is no longer entitled to may withdraw it once the third party has declared its intention to take advantage of it. Such declaration can easily be documented in the pledge agreement over the uncalled capital commitments.