The Loan Market Association (LMA) standard terms are used widely in primary and secondary syndicated loan markets in Europe, the Middle East and Africa. As a result, the importance of certainty and consistency in the application of the standard terms cannot be underestimated. In the case of Tael One Partners Limited v Morgan Stanley & Co International Plc the Supreme Court has handed down judgment in a dispute over the construction of the LMA Standard Terms and Conditions for Par Trade Transactions. This has the potential to have a significant impact on any par trades (trades at stated or face value) carried out on the secondary market where the underlying facility provides for payment of a Payment Premium by the borrower to the lenders.
The inclusion of Payment Premium in a lending arrangement is often designed to reward the lenders for additional risks in the underlying lending, providing an increased sum to be paid by the borrower upon prepayment or repayment of the borrowing over and above the level of interest payable throughout the term of the loan. The further payment at the end of the loan confers an additional reward on the lenders without impacting the cashflow of the borrower during the term of the loan.
The Supreme Court’s judgment rules that unless specific provision is made between the parties at the time of any trade, the seller will have no recourse to the buyer for any Payment Premium paid out by the borrower for the time that the seller was the lender on record. This leaves the seller vulnerable to not receiving the full amount due in recognition of the risks taken by it in advancing the loan and enables a situation to arise where the purchaser obtains a monetary windfall vastly exceeding the level of any risk taken.
The decision by the Supreme Court leaves both buyers and sellers in a quandary when it comes to attributing a price to any loans where Payment Premiums are involved. As agreed by all parties in the Taelcase, it was not possible to calculate the amount of Payment Premium likely to be owing to Tael upon prepayment or repayment of the loan and therefore any value attributed to it upon the sale of the loan would have to involve an element of guesswork by the parties. This clearly opens the door to much more complex negotiation of the purchase price than would normally be required in these circumstances, with both parties concerned about making a bad bargain. This risk becomes even more pronounced when we consider the concern raised by a number of the Judges that the Payment Premium may not be paid out, which may make the buyer loathe to increase the purchase price to cover a sum that it may never be compensated for.
Following the decision by the Supreme Court, however, parties are left with no option, but to embark on a guessing game. If they not do so then in a scenario where a four-year loan is traded once just a few weeks before the end of the loan, the purchaser is rewarded for the risk of providing the financing for the full four years when the reality is that he was exposed to no risk at all for the majority of that time and the seller receives no recognition of the risk that it has taken.