Commercial Credit Agreements: Could the Provisions Regarding Increased Costs and Capital Adequacy Be Triggered by Dodd-Frank?

Sullivan & Cromwell LLP - July 27, 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law by President Obama on July 21, 2010 (“Dodd-Frank” or the “Act”) may have consequences for borrowers and lenders under the terms of their credit documentation. Certain provisions customarily included in commercial credit agreements permit each lender to calculate amounts necessary to compensate the lender for any increased costs or reductions in the lender’s return on capital occasioned by changes in law or regulations, including capital adequacy requirements, and to charge those costs to the borrower. These provisions typically have not been utilized in other circumstances where they might have been argued to apply, but the pressure imposed by Dodd-Frank on bank earnings may result in a greater incentive for banks to seek to pass on costs to their customers.

We believe that agents and borrowers would be well advised to review proactively their existing credit agreements to determine whether some of the costs associated with Dodd-Frank may be argued to be assessable under a particular credit agreement. The provisions can and do vary considerably in their language and scope. Although these provisions originally were directed to changes in law affecting the cost of lending by reference to the eurodollar interbank market, the language in a number of credit agreements is not so limited. It could be read to permit any of the lenders under a syndicated credit facility to assert a claim for increased costs or reduced returns arising from the Act as a change in law.