Funding Indemnity Letter

Summary

This template is a Funding Indemnity Letter that lenders may request from the borrower as protection against any losses incurred due to the borrower's failure to borrow a requested Term SOFR rate loan on the closing date (where the closing does not occur). This template includes practical guidance and drafting notes. At the outset of any loan transaction, the parties need to address potential break funding costs in connection with the initial drawdown of the loans on the closing date. If the borrower expects the initial funding of loans to be made with Term SOFR-based loans, and the break funding protections of the credit agreement are not effective yet, lenders will be reluctant to set up Term SOFR loans in case the closing does not occur on time and they incur potential breakage costs. As a result, either the borrower will be required to fund initially into base rate loans and convert to Term SOFR-based loans after closing, or the borrower will need to sign a short agreement with the arranger agreeing to cover potential break funding costs of lenders in the event the closing is delayed or does not take place. Although credit agreements include break funding provisions to indemnify lenders, the credit agreements must be signed and effective before the lenders are afforded this protection. This pre-funding letter provides the same type of protection for lenders if the financing does not close. For additional information, see Tranches of Loans and Loan Mechanics in Credit Agreements. See also Yield Protection Clauses in Credit Agreements.