“It’s LMA” is every banking lawyer’s favourite justification for a negotiating position, and UK banks increasingly ask their lawyers to prepare facility agreements in LMA format. But what is “LMA”? The Loan Market Association (LMA) publishes two types of recommended form of facility agreement: investment grade and leveraged finance (LF). As Adam Pierce explains, there are some points of detail which appear only in the LF agreement and which it may be appropriate to include in facility agreements regardless of the type of transaction.
LMA’s approach to updating its facility agreements
The LMA has updated its LF agreement more often than its investment grade agreements in recent years. Some of those changes are simply leveraged finance specific. But the LMA also seems keen to keep the investment grade agreements simple where possible and more willing to make changes to the LF agreement.
As a result, there are a number of recent amendments to the LF agreement that are in no way leveraged finance specific, but which do not appear in the investment grade agreements. So if you are drafting or reviewing a facility agreement based on the LMA investment grade agreements, consider adopting the following terms from the LF agreement.
Some terms to consider adopting from the LF agreement
Revolving facilities – rollover loans
If you have a revolving facility, include netting provisions in the repayment section. Revolving loans have a term of only one interest period. So at the end of each interest period the borrower will usually want to partially or wholly refinance its existing revolving loans by drawing down new ones. In practice, the lenders or the borrower simply make a net payment to the extent the outstanding amount of the revolving loans is increasing or decreasing. Since June 2009, the LF agreement has acknowledged that both lenders and borrowers need only make these net payments.
Change the “Reference Bank” limb of the LIBOR definition so that in it LIBOR is the average of the rates at which the Reference Banks say they can borrow funds in the interbank market at the relevant time. In the equivalent definition the investment grade agreements still refer to the rates which the Reference Banks “quote…for the offering of deposits” rather than their actual cost of funds. The [Base] Reference Bank Rate in the LF agreement (which appears in the LIBOR definition) is an average actual cost of borrowing rate. This is consistent with how Screen Rate LIBOR is calculated.
LIBOR floor in Market Disruption clause
Under the Market Disruption clause, if a Market Disruption Event occurs, each lender’s actual cost of funds is used to calculate the interest rate on its loans in place of LIBOR. Include a “LIBOR floor” in this clause so that no lender suffers under this clause if its cost of funds is less than LIBOR. The LF agreement now contains this floor.
In a syndicated transaction which includes a letter of credit facility, consider including the “Non-Acceptable L/C Lender” provisions if you are the Issuing Bank or are acting for it. The Issuing Bank relies on an indemnity from the lenders for its obligations under any L/C it issues. These provisions allow the Issuing Bank to require additional protection (including cash collateral) if a lender becomes a Non-Acceptable L/C Lender (for example, because its credit rating falls below a required level).
Update the tax gross-up clause and the relevant schedules to reflect the coming into force of HMRC’s Double Taxation Treaty Passport scheme in September 2010. The LMA has made a series of changes to its LF agreement on this, but not yet updated its investment grade agreements.
Guarantor intent wording
Add “Guarantor intent” wording to the Guarantee clause. It can be difficult for lenders to enforce a guarantee if the terms of the underlying loan are subsequently changed without the guarantor’s consent. But a lender may be in a better position if it can show that the guarantor and the lender were contemplating the relevant type of change at the time of the guarantee. The “Guarantor intent” wording in the LF agreement attempts to address this.
MAC and change of control definitions
Add definitions for “Material Adverse Effect” and, in the Change of Control clause, for “control” and “acting in concert”. The definitions are blank in the investment grade agreements. The definitions of these terms in the LF agreement (which are not new) may not always be suitable, and will often need simplifying when used outside leveraged finance. However, they are a sensible starting point.
Some of these terms appear in optional riders that can be added to the investment grade agreements, but none is in the basic investment grade agreements.