Lenders seek assurances about year 2000 problems
Most lenders are now requiring representations or covenants to ensure that borrowers will not have trouble repaying loans due to computer problems starting in the year 2000.
A recent survey found 84% of companies with fewer than 100 employees have done virtually nothing to ensure that their computer systems are prepared for the turn of the century. Other surveys indicate a similar level of inaction by larger companies.
Loan agreements are starting to address this problem in different ways. For example, a lender may ask a borrower for a representation that the borrower’s computer systems are “year 2000 compliant.” “Year 2000 compliant” is then defined broadly to mean that the systems will not be adversely affected by the date change to 2000. The following language is an example.
“Borrower hereby represents and warrants, and at the request of Lender, shall provide assurance acceptable to Lender, that Borrower’s computer based systems are Year 2000 Compliant. ‘Year 2000 Compliant’ shall mean that neither performance nor functionality of any computer hardware or software is affected by dates prior to, during, or after the Year 2000. In particular: (a) no value for current date will cause any interruption in operation; (b) Date-based functionality must behave consistently for dates prior to, during and after the Year 2000; (c) In all interfaces and data storage, the century in any date must be specified either explicitly or by unambiguous algorithms or interferencing rules; and (d) Year 2000 must be recognized as a leap year.”
The following is a more comprehensive representation in the same vein.
“The Company and its Subsidiaries have reviewed the areas within their business and operations that could be adversely affected by, and have developed or are developing a program to address on a timely basis, the ‘Year 2000 Problem’ (that is, the risk that computer applications used by the Company and its Subsidiaries may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date on or after December 31, 1999), and have made related appropriate inquiry of material suppliers and vendors. Based on such review and program, the Company believes that the ‘Year 2000 Problem’ will not have a Material Adverse Effect on the Company. From time to time, at the request of the Bank, the Company and its Subsidiaries shall provide to the Bank such updated information or documentation as is requested regarding the status of their efforts to address the ‘Year 2000 Problem.’”
A more moderate approach is to include a covenant that requires the borrower to provide an officer’s certificate describing the status of its Y2K compliance efforts.
“Millennium Compliance: Within 120 days after December 31, 1998, the Borrower will cause an Officer to submit a certificate to the Agent that apprises the Agent of the Borrower’s efforts with respect to (a) reprogramming any programs originally programmed by it, to the extent such programs are material to the conduct by the Borrower of its business, that must be reprogrammed to permit the proper functioning of such programs on or after January 1, 2000 and (b) seeking certifications from any vendors providing programs to it, to the extent such programs are material to the conduct by the Borrower of its business, in which such vendors certify that they are taking steps necessary to permit the proper functioning of such programs on or after January 1, 2000 or otherwise advise the Borrowers of the status of such efforts.”
The British are known for succinct legal documents. The following is an example of a Year 2000 representation from a recent UK loan agreement:
“Millennium Compliance: The Borrower and each other member of the Group has reviewed its operations with a view to assessing whether, in the receipt, transmission, processing, storage, retransmission or other utilization of data there is a risk that computer hardware or software used in such operations will not, in the case of any date or time periods occurring on or after 1st January 2000, function in the same manner as in respect of any date or time periods occurring prior to this date (a “Millennium Fault”). Based upon such review, there is no risk that there will be an adverse change in the financial condition or business of the Borrower or any member of the Group by virtue of a Millennium Fault.”