On 1 April 2013, the LMA removed its recommended form of Mandatory Costs schedule (the LMA Schedule) from its website. In January 2013, the LMA had published a note reporting that many agents in syndicated transactions were experiencing operational difficulties in using the LMA Schedule. The LMA has clearly now decided that this view is pervasive enough to merit retiring the LMA Schedule altogether. Despite the reported difficulties with the LMA Schedule, most syndicated facility agreements dated before 1 April 2013 included it. Adam Pierce and Charlotte Drake consider some options for dealing with Mandatory Costs in new agreements.
Option 1: Use Updated Version of the LMA Schedule
Finance parties may choose to continue using the LMA Schedule, but will need to ensure it is suitably updated. For lenders acting from the UK (UK Lenders), Mandatory Costs under the LMA Schedule were intended to cover amounts payable by them to the Bank of England and the Financial Services Authority (FSA) based on their deposit-taking activities (if any). Any updated version of the LMA Schedule should therefore reflect that, on 1 April 2013, the FSA’s functions were transferred to the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
Our view is that, at the moment, only limited drafting changes are needed to reflect this change in regulatory structure: broadly, references to the two new regulatory bodies should replace references to the FSA. As the FSA did before, both new regulatory bodies will charge periodic fees to “deposit acceptors” based on their “modified eligible liabilities”. The FCA and the PRA are consulting on the rates they will charge for 2013/14 but currently the basic mechanics for calculating the fees are the same as they were under the old regime.
The main advantage of using an updated version of the LMA Schedule is that it is comprehensive, and provides a clear, objective formula for calculating the Mandatory Cost. Borrowers may therefore prefer it to a shorter, less specific Mandatory Costs drafting, which could give more discretion to lenders. However, as flagged by the LMA, the main disadvantage is operational complexity.
Option 2: Shift Onus of Calculating Mandatory Costs on to the Lenders
Under the LMA Schedule, the Mandatory Cost was the weighted average of each lender’s “Additional Cost Rate”. The agent had to calculate the Additional Cost Rate for each UK Lender individually based on:
- for the Bank of England part (only relevant for sterling loans), information supplied by that lender; and
- for the FSA part, information supplied by the Reference Banks.
The burden this method imposes on agents could be addressed by requiring each UK Lender to calculate its own Additional Cost Rate, and to certify this to the agent. This is essentially the approach taken in the LMA Schedule for lenders lending from a Participating Member State. The drafting could also provide that if a lender does not submit a rate to the agent, then its Additional Cost Rate for the relevant period will be deemed to be zero.
The advantage of this approach is that, due to the administrative work involved in producing a certified calculation to the agent, a lender is unlikely to submit a Mandatory Cost calculation if the sums involved are negligible. However, it would provide a means of recovering costs if Mandatory Costs were to increase significantly in the future. From the agent’s point of view it has to do less: its only task would be to calculate the Mandatory Cost by reference to the weighted average of the lenders’ Additional Cost Rates.
However, there are at least two disadvantages to this approach:
- It merely spreads, rather than eases, the administrative burden in calculating the rate.
- It would probably require a change to the method of calculating the FCA/PRA part of the Mandatory Cost. If it were to remain based on Reference Bank figures (rather than the amounts payable by each lender individually), it would be difficult to avoid continuing to involve the agent in that calculation.
Option 3: Use the Agent’s Rate or a Reference Bank Rate
As suggested in the LMA’s note of January 2013, the administrative burden could be eased by providing that the same Additional Cost Rate applies to all those UK Lenders subject to the relevant regulatory payment obligations. Lenders would need to certify to the agent whether they fall within this group. The rate could either be the agent’s Additional Cost Rate or the average of the Reference Banks’ Additional Cost Rates.
Those lenders would no longer receive payments that reflect the actual charges they have incurred (or will incur), but the amounts involved may be small enough for this to be of limited concern to either lenders or borrowers.
Option 4: Remove Mandatory Costs from Interest Calculations
As the level of Mandatory Costs (if any) charged is so low, lenders may take a view that they no longer need their facility agreements to address them.
A risk in adopting this approach is that payment obligations of a type historically addressed by Mandatory Costs might materially increase in the future. In the absence of specific Mandatory Costs drafting, LMA-style facility agreements are unlikely to provide lenders with a means of recovering these costs. Neither Increased Costs clauses nor general indemnity provisions are likely to cover these types of costs because they are not directly attributable to a lender’s commitments under a particular facility. The amount and nature of lenders’ deposits (if any) determine the amount of Mandatory Costs payments.
LMA-style facility agreements also assume that lenders fund their loans from the inter-bank market, rather than from their deposits. Indeed, one could argue that borrowers have only refrained from voicing this anomaly more forcefully in the past because the level of Mandatory Costs historically charged has been so low.