Effect on the credit agreement: Overview, definition, and example
What is the effect on the credit agreement?
The "effect on the credit agreement" refers to how specific actions, events, or amendments impact the terms, obligations, and enforceability of a credit agreement. A credit agreement is a legally binding contract between a borrower and a lender that outlines the terms of a loan, including repayment schedules, interest rates, and covenants.
This provision is often included in loan agreements to clarify whether modifications, additional financing, or external events—such as mergers, regulatory changes, or defaults—affect the original credit terms. It helps protect lenders by ensuring that significant changes do not weaken their rights or increase their risks.
Why is the effect on the credit agreement important?
This clause ensures that the credit agreement remains enforceable and that lenders retain their legal and financial protections, even if circumstances change. Without it, borrowers might attempt to modify agreements in ways that disadvantage lenders, such as taking on excessive debt or changing ownership structures without lender approval.
For borrowers, understanding this clause is crucial to avoid breaching loan terms when restructuring debt, securing additional financing, or making business changes that could trigger penalties or defaults under the credit agreement.
Understanding the effect on the credit agreement through an example
Imagine a company has a $10 million loan agreement with a bank that restricts it from taking on additional debt without approval. The company plans to merge with another business, which will involve assuming new liabilities.
The "effect on the credit agreement" clause in the loan contract states that any mergers or acquisitions require lender consent. If the company proceeds with the merger without approval, it could trigger a default, giving the bank the right to demand immediate repayment of the loan.
By reviewing this clause beforehand, the company can negotiate with the lender to modify the agreement, avoiding legal and financial risks.
An example of an effect on the credit agreement clause
Here’s an example of how this clause might be written in a loan agreement:
“No amendment, waiver, or modification of this Agreement shall be deemed to impair or affect the enforceability of any obligations of the Borrower under this Credit Agreement unless expressly agreed in writing by the Lender. Any material change in the Borrower’s financial structure, ownership, or debt obligations that may adversely affect the Lender’s rights shall require prior written consent from the Lender.”
Conclusion
The "effect on the credit agreement" clause ensures that lenders remain protected and that loan terms remain enforceable despite changes in a borrower’s financial or operational status. It helps prevent unauthorized modifications, protects against increased lending risks, and ensures compliance with loan covenants.
Before making any major business decisions, borrowers should carefully review their credit agreements—because failing to account for this clause could result in penalties, default, or legal disputes.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.