Limitation on Fundamental Changes Negative Covenant Clauses
(Credit Agreement)

Summary

These Limitation on Fundamental Changes Negative Covenant clauses for a credit agreement are used in syndicated loan transactions. These clauses prohibit the borrower and other loan parties from merging, liquidating, or disposing of assets, with exceptions for carve-outs or baskets. These clauses include practical guidance and drafting notes. While credit agreements usually contain an affirmative covenant requiring the borrower to maintain its existence, lenders also want to prevent changes to the borrower’s organizational structure that could affect the value of the loan group that supports the credit facilities. Reorganization transactions that do not result in leakage, such as most internal reorganizations, are permitted, while mergers that result in assets leaving the loan group must be made pursuant to carve-outs in the dispositions or investments negative covenants. Note that these sample provisions contemplate a financing that includes the following elements: • A syndicated credit facility. • Covenants that generally restrict all of the borrower’s subsidiaries and immediate parent entity (language with respect to the unrestricted/restricted subsidiaries is included in brackets). • Loans used on the closing date to fund an acquisition transaction that is structured as a merger (included in brackets). The capitalized terms used in these sample provisions should be conformed to the defined terms in the relevant credit agreement. These clauses should be read in conjunction with the practice note Negative Covenants in Credit Agreements. Certain credit agreements combine the limitations on fundamental changes and dispositions into one negative covenant. For an example of a dispositions negative covenant, see Limitation on Dispositions Negative Covenant Clauses (Credit Agreement). For a full listing of key content covering a credit agreement, see Credit Agreement Resource Kit.