It is important that cash reserves have not been included in many commercial credit agreements in the past. These provisions were largely the domain of sophisticated syndicated investments, particularly in sectors vulnerable to large market fluctuations, such as oil, gas and mining (where the decline in commodity prices alone can pose significant liquidity problems). In the absence of these provisions in credit agreements, lenders must examine other provisions of the credit agreement in order to obtain guidance on the defensive in order to avoid cash withdrawals. 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. “We`re seeing more anti-hortification provisions because lenders are worried that companies will pull out their revolvers and pull that money out to use later to eventually avoid bankruptcy,” said Jessica Reiss, director of leverage research at Covenant Review. When entering into amended credit agreements to provide covenant relief and liquidity, lenders may consider requiring borrowers to accept the credit agreement of an anti-liquidity provision (or, alternatively, some of the other strategies proposed above). The weakening of oil demand associated with the emergence of the coronavirus and the disagreement of crude oil production in Saudi Arabia and Russia have led to sharp declines in oil markets. This price pressure has weighed heavily on U.S.
producers and increased the spectre of restructuring. During a restructuring, cash is still king and large private equity firms have ordered borrowers to draw proactive credits to increase cash positions. Lenders concerned about RBL risk should carefully consider their rights under an RBL facility and state law, in order to assess the damages that may result from non-financing. In addition, lenders may wish to draw the attention of their treasury departments to the fact that new accounts in favour of a borrower should require a deposit account control agreement in order to prevent the creation of a new account without this restriction.. . . .