THE LOAN SYNDICATIONS and Trading Association (“LSTA”) is preparing to implement a trade termination mechanism for distressed trades, called “buy-in/sell-out” or “Distressed BISO,” designed to give a performing party leverage over a nonperforming party to move a stalled trade toward settlement. BISO is already in place for par trades, but required substantial adaptation for use in distressed trades.1
The proposed Distressed BISO mechanism, which is expected to become effective in early September, sets forth a procedure by which a performing party can terminate a trade, proceed on a similar trade with a third party (the “cover trade”), and then potentially require the non-performing party or performing party to compensate the other party for any difference in purchase rate, as no party is intended to profit from Distressed BISO. Distressed BISO is drafted to put the parties in the same economic position as they would have been had the trade settled. As proposed, buyer and seller, by agreeing to use LSTA distressed trade documents, agree to be bound by the LSTA Standard Terms and Conditions, which will include the Distressed BISO once implemented.
Although there are several iterations of the Distressed BISO timeline, depending on, for example, whether the buyer or seller is drafting the settlement documents, the general rule is that Distressed BISO becomes available fifty days after the trade date (the “trigger date”). The trigger date can be extended by up to ten or twenty days for a number of reasons, for example, if the seller delivers the upstreams to the drafting buyer within ten days of the trigger date.
To exercise its right to use Distressed BISO, the performing party sends the non-performing party a notice after the trigger date (the “BISO Notice”). To prevent the performing party from commencing a cover trade, the non-performing party then has twenty days to perform (the “cure period”). If the non-performing party does not comply with its obligations by the end of the cure period, the performing party has ten days from the end of the cure period to find an alternative party with which to enter the trade (the “cover period”), i.e., to “buyin” or “sell-out.” When the buyer enters a cover trade, the non-performing seller shall pay to the buyer the amount by which the cover price exceeds the price of the original trade or, if the cover price is less, the buyer shall pay the net amount to the seller. Conversely, when the seller enters a cover trade, the non-performing buyer shall pay to the seller the amount by which the cover price is less than the price of the original trade or, if the cover price is more, the seller shall pass on the difference to the buyer.
Below are a few other key features of the proposed Distressed BISO:
- Distressed BISO is only available for trades that are to settle by legal transfer, i.e., assignment, but not for trades that were to settle as participations on the trade date.
- Failing to execute and deliver a trade confirmation prior to the trigger date could give rise to a BISO Notice. The LSTA explains in footnote six to the exposure draft that a performing party should consider the appropriateness of using Distressed BISO if it has received written objection from the non-performing party as to a material term of the trade confirmation, the applicability of the LSTA Standard Terms and Conditions or the applicability of Distressed BISO to that trade.
Key features of the proposed Distressed BISO continued:
- If a seller’s non-performance is due to an upstream issue beyond the non-performing party’s control, the seller, as non-performing party, might be eligible to “shield” itself from Distressed BISO by delivering to the buyer copies of the upstream confirmation, with rate and purchase price redacted, and certifying in writing that the upstream confirmation will not be used as inventory for another trade, that the seller will attempt to settle on the upstream confirmation, and that the seller will use Distressed BISO if the upstream counterparty is non-performing (the “upstream shield”). Upstreams confirmations used in the upstream shield must have trade dates not later than five business days after the trade date of the current trade at issue.
- If the performing party fails to effect a cover trade during the cover period, the performing party may not use Distressed BISO again for that trade.
- Although Distressed BISO is not intended to have any economic impact for either party, the non-performing party will be liable for up to $5,000 in legal fees associated with the trade.
- For drafts of documents to qualify a party as “performing,” the drafts must be in “reasonably acceptable form.” Documents can be in reasonably acceptable form even if they include blanks with respect to information to be provided by the nondrafting party. No further clarification on what is reasonably acceptable is provided in the Distressed BISO draft.
- If there is a dispute as to the reasonableness of the price of the cover trade, the dispute is referred to a three-member arbitration panel comprised of LSTA Board of Directors members for a binding determination.
- Currently under consideration, and the cause for the delayed effective date of Distressed BISO, is a proposal by LSTA board members that, once the parties have agreed on the settlement documents, the drafting party must deliver executed settlement documents within 10 days after the trigger date in order to maintain its performing party status and avoid a BISO Notice.
Given the added complexity of distressed trades, Distressed BISO will be more complicated than the BISO mechanism currently in place for par trades, and it may take time for the distressed debt market to fully understand and embrace Distressed BISO.