Post on 06-May-2018
LMA – origins, development and introduction
Jarosław Miller
Alina Stancu Birsan
January 2017
English Law: a practical update │ January 2017 │ 1
> Evolution of LMA Documentation
> LMA Facility Documentation
Agenda
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Evolution of LMA Documentation
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It was set up in London to represent the interests of (primarily) lenders:
> Established in 1996 to develop market practice for the syndicated loan market and make the
secondary market work more efficiently
> First English law facility agreements published in 1999; French, German & Spanish law facility
agreements followed in 2002, 2007 & 2013
> Works primarily through committees in a constant process of:
─ Updating its documents to reflect changes (e.g. the credit crisis)
─ Developing new precedents and documents (real estate & PXF)
─ Hosting conferences and training sessions
> LMA documents are now widely used for cross-border deals
The Loan Market Association has become a key player
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Development of LMA Documentation
November 1996
LMA formed with seven
original members
November 1999
LMA launches investment
grade primary syndicated
loan documents
January 2004
LMA launches
leveraged loan
primary
document
September 2008
LMA launches debt
buy-back language
March 2009
New recommended form
of intercreditor
agreement launched
June 2009
LMA launches documentation to
address finance party default
and market disruption
November 2009
LMA produces revised form
of intercreditor agreement
following discussions with
mezzanine lenders
October 2010
LMA launches revised
primary documents
December 2011
LMA issues revised
investment grade primary
documents and user guide
July 2012
LMA produces FATCA
riders for use with LMA
documentation
September 2012
LMA launches new
facility agreement
for developing
markets
May 2013
LMA launches new
developing markets
documentation
November 2014
Leveraged and
investment grade
documentation update
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Overall anatomy of a facility agreement
Conditions precedent
Parties
Definitions and
interpretation
Facility and purpose
Agreement to lend
Transfers
Boilerplate
Schedules
Execution pages
Repayment, prepayment
and cancellation
Yield and
yield protection
Guarantee
Credit protection
Funds flow
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What will we focus on?
We will cover each of these areas in turn:
For each we will discuss:
> What are the key clauses? Why are they there?
> What are the typical debates you would have about them?
Representations
& warranties
Undertakings
/covenants
Events
of default
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What are the key representations and warranties?
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Representations and warranties
What are they?
Factual or legal statements that the
borrower (and the other obligors) make
Why have them?
Set out the position that the banks believe
the borrower to be in and which form the
basis of the decision to lend
Event of default if incorrect
Drawstop
When are they given?
Signing
Before first drawdown
First day of each interest period
Difference between new money advances
and rollover advances
Materiality
What is material?
Material adverse
effect
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Representations and warranties
Which are repeated?
Normally, all legal representations
Generally, all others not covered by e.g.
covenants/events of default (n.b. may
allow for tougher day 1 representation),
but…
Some not logical (e.g. information
memorandum) or would undermine
commercial deal (e.g. no potential default)
Risk allocation
Borrower may argue that events are out of
its control, but…
Normally at borrower’s risk
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What are the most common representations?
Legal representations:
Status
Binding obligations
Non-conflict with other obligations
Power and authority
Validity and admissibility in evidence
Governing law and enforcement
Information representations:
Deduction of tax
No filing or stamp taxes
No default
No misleading information (info memo)
Financial statements
Pari passu ranking
No proceedings pending or threatened
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Are there any others?
No insolvency
No breach of laws
Environmental
Taxation
Security and indebtedness
Ranking of security
Title to assets
Intellectual property
Structure chart
Accounting reference date
Acquisition documents
Pensions
Insurance
Centre of main interest (COMI)
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What about the covenants (or undertakings?)
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These move the focus from the present to the future...
Due
diligence
First drawdown
Disclosure
Warranties/
indemnities
Legal
opinions
Financial
covenants
Other
covenants
Events of
default
Regular
information
Change of
control
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What different types of covenants do you see?
LMA documents include three types of undertakings:
Information
undertakings
Financial
covenants
General
undertakings
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> A lender providing capital has an interest in preserving that capital
> Debt, unlike equity, gives no right to vote on management or shareholder transactions
> Lenders rely on the borrower’s covenants
─ Sanction for breach = event of default
Main lender concerns:
> Mitigate insolvency risk
> Protect assets and lender’s priority
> Early warning of problems (financial covenants)
What do covenants do?
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How do they work to prevent leakage of value?
40
40
20
Value of
business
Assets of borrower
Transfer of
key assets
Pledge to secure
another loan X Financial
covenants
No disposal
covenant X
Negative
pledge
X
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Main functions:
> Preserve identity of obligors (change of control/constitutional documents/merger)
> Maintain status of advances (negative pledge/pari passu undertaking)
> Protect asset quantity/equity in company (negative pledge/financial ratios)
> Protect asset quality (restriction on dealings with connected parties/insurance
obligations/purpose clause)
> Maintain type of business
What are the key general commercial covenants?
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> Negative pledge
─ To whom does the prohibition apply (all members of group; material companies)?
─ Legal exclusion (liens etc.)
─ Carve-out far below threshold
─ Acquisition security
─ Check relationship with general package (e.g. disposals including securitisation)
> Restriction on financial indebtedness (not always)
─ To whom?
─ Exceptions
Negative pledge and no financial indebtedness
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> Disposal restriction
─ To whom does the prohibition apply (all members of group; obligors; material companies)?
> Exceptions to disposals restriction
─ Meaning of “ordinary course of business/trade”
─ Intra-group (is a transfer to non-obligors or partly-owned subsidiaries caught?)
─ “Threshold”:
− “Arms length” full value transactions
− Linked/unlinked transactions
− How valued?
− Time periods
No disposals
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> Measurement of the borrower’s financial position and early warning system
> IFRS issues
> Covenants can include:
─ Interest cover (EBITDA: interest expense)
─ Cash cover (cash flow: debt service)
─ Leverage ratio (debt: EBITDA)
─ Capital expenditure
─ On projects deals common to see financial covenants based on projections as actual
figures may not be available
─ Financial covenants can be bespoke on a case-by-case basis
> Covenant lite deals?
What do the financial covenants do?
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> Financial information
─ Important to ensure compliance with other undertakings
> Others include:
─ Change of business, merger, pari passu
─ Deal, borrower and lender specific
─ Guarantor cover and security on secured deals (customary on leverage finance
transactions)
Other common covenants
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A breach of these can lead to... an event of default
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> Trigger which entitles lenders to
─ Accelerate loans
─ Cancel commitments
─ Demand repayment
─ Enforce guarantees and security
> Drawstop to funding
─ Lenders usually have right to refuse to participate in a loan
Events of default – the theory…
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> Contractual remedy which brings parties back to the table
─ Bargaining power and control for lenders
─ Renegotiate terms
─ Force reorganisation of debt and business
... and the practice
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> Non-payment – consider appropriateness of grace periods
─ Principal and interest/other payments
─ Administrative error; including the borrower’s own?
─ Grace to run from due date/notification?
> Breach of representations
─ Grace periods?
─ Materiality? – better left to individual representations
Negotiating events of default
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Breach of covenants:
> Grace periods? Often given, but consider start point (breach or notification) and appropriateness
of grace at all to (e.g.):
─ Purpose clause
─ Financial covenants
─ Positive actions (negative pledge / disposals clause)
─ Irremediable breaches
> Materiality – better left to individual covenants?
Negotiating events of default
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What are the key issues about events of default?
What are the issues here?
Non-payment Breach of representation
Cross-default v
cross acceleration
Material Adverse Change Insolvency
Breach of undertaking
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LMA documents have become market standard for syndicated facility agreements in Europe. Why?
> Precedents consider the interests of all parties.
Consequence:
> Simplifies drafting of facility agreements
> Accelerates the negotiation process
> Facilitates and encourages the transfer of participations in the primary and secondary market
(primary goal of the LMA)
LMA – the market standard?
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Questions?
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Contacts
Jarosław Miller
Banking Partner, Warsaw
Tel: +48 225 265 048
jaroslaw.miller@linklaters.com
Alina Stancu Birsan
PeliFilip
Tel: +4021 527 20 07
Alina.Stancu_Birsan@pelifilip.com