Draft Debt Restructuring

Debt Restructuring Agreement

When to use this

A debt restructuring agreement is the master document governing a consensual reorganization of a borrower's obligations when those obligations cannot be met on their original terms. Trigger scenarios:

• Borrower is in default (or imminent default) under one or more facilities and seeks to avoid insolvency proceedings.
• Lenders want a controlled workout rather than accelerating and forcing a distressed sale.
• Multiple creditors need to coordinate their positions (bilateral restructuring vs. multi-creditor inter-creditor arrangement).
• A distressed M&A transaction requires the target's debt to be restructured as a condition of closing.
• Post-acquisition integration of a leveraged buyout under financial stress.

When not to use this skill alone: if insolvency proceedings are already commenced, the restructuring agreement must operate within the formal framework (DIFC Insolvency Law, UAE Federal Bankruptcy Law 9/2016, UK Insolvency Act 1986, etc.) — involve local insolvency counsel and note that automatic stays, set-off rights, and super-priority may apply.

Required inputs

Optional inputs

• Third-party professional advisor (financial advisor / independent business review) report
• Lock-up agreement (binding commitment from majority creditors to support the restructuring)
• New money facility terms (DIP-style financing in formal proceedings)
• Management incentive plan changes
• Regulatory / MENA central-bank notifications required

Document structure

1. Recitals

Identify the borrower, the original credit facilities (by reference to facility agreements), the current outstanding amounts, and the commercial background for the restructuring.

2. Definitions

Define "Existing Facilities", "Restructured Terms", "Effective Date", "Longstop Date", "Majority Creditors" (voting threshold), "Standstill Period", "Restructuring Conditions", "Inter-Creditor Agreement" (if separate).

3. Restructured terms — per facility / per class

For each facility, set out the new agreed terms:

Extension of maturity

• New maturity date.
• Amortization schedule (bullet vs. term).
• Payment-in-kind (PIK) toggle option if any.

Interest renegotiation

• Rate change (fixed ↔ floating; margin compression; PIK interest option).
• Capitalisation of arrears (often converted to principal).

Debt-to-equity conversion

• Conversion amount.
• Valuation basis for equity issued.
• Dilution mechanics; cap table post-conversion.
• Regulatory approvals (change-of-control, foreign ownership limits in MENA).

Haircuts / write-downs

• Amount forgiven per creditor.
• Condition on which haircut is permanent vs. contingent (clawback on recovery above threshold).

4. Security package

• Confirmation, amendment, or enhancement of existing security.
• New security (pledges, mortgages, assignments).
• Release of security on pre-conditions (satisfaction of certain conditions).
• Perfection steps required in each jurisdiction.

5. Standstill provisions

• Period during which creditors agree not to accelerate, enforce security, or commence insolvency proceedings.
• Events ending standstill early (material breach, false representations, further defaults).
• Permitted actions during standstill (routine operations, protective registrations).

6. Inter-creditor provisions (or reference to separate ICA)

• Priority ranking: super-senior / senior secured / senior unsecured / subordinated.
• Voting thresholds for material amendments (typically 66.67% or 75% by value).
• Payment waterfall during standstill.
• Enforcement instructions: who controls enforcement of security; directing creditor.
• Anti-embarrassment: restrictions on creditor transfers during standstill.

7. Conditions precedent to effectiveness

• Receipt of all required consents and regulatory approvals.
• Execution by minimum threshold of creditors.
• Delivery of updated security perfection evidence.
• Independent business review (if required).

8. Representations and warranties (borrower)

• Financial statements are true and fair.
• No undisclosed liabilities.
• No insolvency events.
• No material adverse change since last accounts.

9. Undertakings (borrower during standstill and post-restructuring)

• Financial covenants (leverage, DSCR, liquidity).
• Information undertakings (monthly management accounts, audited annual financials).
• Positive covenants: maintain insurance, pay taxes, preserve assets.
• Negative covenants: no new debt, no asset disposals above threshold, no related-party transactions.
• Change-of-control trigger.

10. Events of default / termination triggers

List events that end the standstill or accelerate restructured debt:

• Non-payment under restructured terms.
• Breach of undertakings (with grace period).
• Insolvency of borrower or key guarantors.
• Material misrepresentation.
• Cross-default to other indebtedness above threshold.

11. Closing mechanics

• Longstop date.
• Escrow of documents pending satisfaction of conditions.
• Simultaneous vs. sequential closing for multi-facility deals.

12. Governing law and dispute resolution

• Choice of governing law; arbitration clause (DIAC, LCIA, ICC common for MENA).
• Service of process in each relevant jurisdiction.

Jurisdictional notes

Common mistakes

1. Failure to identify all debt — an undisclosed facility that did not accede to the standstill can accelerate and file for insolvency, unraveling the consensual restructuring.
2. Ambiguous inter-creditor priority — disputes over enforcement priority are the primary source of restructuring litigation; every tranche needs explicit ranking.
3. Missing regulatory approvals — debt-to-equity conversions in MENA may require foreign-ownership approvals (MISA, ADIB, UAE Cabinet), competition approvals, and sector-specific regulator consents.
4. Inadequate perfection of new security — security created in the restructuring must be perfected per local law (UAE/KSA mortgage registration, Lebanon pledge law); unperfected security is valueless against third parties.
5. Standstill enforcement gap — without a lock-up agreement signed before the standstill, a minority creditor can breach the standstill before it becomes effective.
6. Sharia finance structures — murabaha and ijara facilities cannot be restructured using conventional interest-renegotiation mechanics; a Sharia-compliant restructuring supplement is required.

Related skills

• [[draft-loan-agreement]] — underlying facility agreement that the restructuring amends
• [[draft-guarantee]] — guarantor arrangements often modified as part of restructuring
• [[draft-share-purchase-agreement]] — if debt-to-equity conversion is the restructuring mechanism
• [[review-financial-covenants]] — analysis of existing covenant package before proposing amendments
• [[kb-insolvency-mena]] — insolvency law knowledge pack for UAE, KSA, and LB