Do Your Contractor Clients’ Credit Arrangements have “Unconditionally Cancellable” Clauses?
A NASBP Member recently brought to our attention a term in the Code of Federal Regulations known as “unconditionally cancellable,” which allows a bank, at any time, with or without cause, to refuse to advance funds or extend credit under the facility.
The 1-1-15 regulation stipulates how the Office of the Comptroller of the Currency (OCC’s) risk based capital for a bank is determined and communicated to the banks. For example, in the case of home equity lines of credit, the bank is deemed able to unconditionally cancel the commitment if it can, at its option, prohibit additional extensions of credit, reduce the line, and terminate the commitment to the full extent permitted by relevant Federal law.
This may impact surety professionals’ contractor clients, according to the Associated General Contractor of America (AGC) Financial Issues Committee (FIC), if the contractor has received a line of credit renewal with an unconditionally cancellable clause and it:
Is added by the bank in an effort to reduce its capital requirements;
Exposes the contractor to the real risk that it will not be able to draw on its line of credit when it is needed;
Will greatly negatively affect its pre-qualification capabilities (for states that pre-qualify heavy highway contractors)–states typically grant contractors a 10 times its undrawn line of capacity for bidding and award on potential state/agency/authority contracts (reducing that portion to zero effectively); and
Will greatly negatively affect a contractor’s bonding capacity using the same formula of undrawn line of credit capacity times a factor (which typically can be as high as 10 times).
AGC’s FIC recommends that contractors carefully read their bank documents and refuse to enter into line of credit arrangements that have such a clause in the agreement (i.e. seek a line of credit from another institution). Furthermore, contractor auditors must also carefully read the contractor’s credit line documents as there is a major difference between lines with and without this clause. In the meantime, please alert your clients to this important information as it may not be readily known or understood.
For more information, contact NASBP Director of Government Relations Larry LeClair at lleclair@nasbp.org.
