Springing lockbox arrangement
/What is a Springing Lockbox Arrangement?
A springing lockbox arrangement requires the use of a lender-controlled deposit account only when there is a triggering event, such as a loan default by a borrower or the failure of a debt-service ratio. At that point, the account is set up and payers are notified to send their payments to the lockbox. Examples of other actions that can trigger a springing lockbox are as follows:
A delay by the borrower in making a loan payment, typically beyond a certain threshold date
A decline in the borrower’s credit rating below a certain threshold value
The inability of the borrower to meet a minimum financial ratio as outlined in the debt agreement
The borrower’s breaching of a financial covenant as outlined in the debt agreement
Advantages of a Springing Lockbox Arrangement
There are several advantages to setting up a lockbox, which are as follows:
Lender security. A springing lockbox arrangement provides the lender with some security, since it then has direct access to the borrower's cash flows. These funds can then be used to pay down the remaining balance on the lender’s loan.
Efficient transfer of control. This approach minimizes the need for legal hassles when setting up the lockbox, because the borrower has already agreed to it as part of the original lending contract.
Minimal costs. There are no periodic costs associated with having a lockbox until the account is created.
Disadvantages of a Springing Lockbox Arrangement
When a lender obtains loan payments directly from a borrower’s cash flows, this presents a significant risk that the borrower will not have enough cash flows remaining to pay its other obligations. A possible outcome is that the borrower will go bankrupt in short order.