Legal Considerations in Today's Financial Markets
December 2008/January 2009

As economic markets tighten, tribes and tribal businesses are confronted with significant legal issues. Federal and state government funding cuts resulting from economic bailout packages and decreasing revenues may add additional strains to tribal budgets. Adjustments in variable rates or changes in leverage ratios may lead to violations of existing loan covenants, resulting in unexpected and surprising defaults for tribes and tribal businesses. Meanwhile as business slows down, demands on governmental entities increase and leadership and planning become paramount. Identifying appropriate opportunities, monitoring, and addressing concerns relating to existing loans and financing issues will require sophisticated and ongoing legal analysis.

Reexamine Existing Loans

While many tribes are still current on existing loan payments, they may already be in violation of existing loan covenants. Loan covenants are conditions in a commercial loan or bond issue that require the borrower to meet specific conditions or that restrict the borrower from certain actions when various conditions are met. Many loans have
built-in leverage ratios (debt to revenue), which cannot be exceeded. Likewise, many commercial loans have variable rates that adjust. As the rates adjust upward and tribal revenues decline, the leverage ratios within the loan may be affected negatively. This could trigger a default under the terms of the loan, regardless of payment history. In the event of default, the bank could call the loan, making it due. It could move to seize collateral. It could also require the borrower to renegotiate with less favorable terms. I regularly hear horror stories about tribes that did not fully understand the risks associated with current loans and are now are scrambling for loan work-outs to save infrastructure projects and enterprises. Regardless of what your loan was for, if you find yourself in default or nearing default, you may also soon discover that you are on the hook for various fees, including attorneys' fees for the lender. Loan work-outs can be expensive, particularly with inexperienced attorneys, unfamiliar with the process or the related substantive areas of law.

Preparations to Consider

Time and mistakes cost big money. Therefore, it is important to prepare as thoroughly as possible for what may be ahead.

  • If you have not already done so, it would be wise to review or seek a review of all your loans to determine whether you are in violation. If you are in violation, potentially headed that way, or you just do not know, identify someone with the appropriate expertise to advise you. A generalist may not suffice in this situation and you may want a second opinion from someone other than the attorney who helped you craft the initial deal.
  • If you want to seek new financing, investigate all government and non-profit grants, loans, and bond financing options to determine what makes the most sense for you financially and legally (the two interests may differ).
  • Identify new and emerging markets such as cap-and-trade markets relating to greenhouse gas emissions. In some cases carbon credits may create capital opportunities for tribes while carbon sequestration initiatives can assist with culturally-relevant projects that can lead to job creation and industry development like reforestation/timber projects or wind and solar farms. Develop related business plans and negotiation strategies to protect your related legal interests.
  • Re-evaluate any tribal version of the Uniform Commercial Code (U.C.C.). If you do not have one, review the U.C.C. itself or state counterparts and adopt a tribal U.C.C. or determine which provisions will be acceptable to cross reference for purposes of enforcement and recordation of security interests.
  • Develop a strategic plan for lobbying and legal efforts. Continue to develop and/or improve legal ordinances, resolutions, and internal regulatory systems that allow financings to occur in ways that protect your unique interests. Review grant requirements and internal procedures to ensure timely and appropriate spend downs. Tribal attorneys often are well equipped to address legal planning and management issues but too often are sidetracked by specialized issues that outside counsel may be better suited for. Do not blindly assume that any one lawyer, consultant or firm can or will address all legal needs. Determine where you want to spend your money and what expertise you really need for each task.

Addressing these issues now will save time and money in later negotiations while anchoring your goals and vision. In such uncertain economic times, taking charge of the matters you can control, working to prevent costly mistakes, and planning for the future is more important than ever.

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