NOVEMBER 2012
JONES DAY WHITE PAPER
THE UK LOAN MARKET ASSOCIATION’S PRE-EXPORT FINANCE FACILITY AGREEMENT
INTRODUCTIONOn 20 September 2012, the Loan Market Association (the
“LMA”) issued its recommended form of facility agreement
for pre-export finance transactions (the “PXF Document”).
The PXF Document was stated to have been prepared in
response to an increased demand, particularly amongst
lenders, for a form of standardised loan document for use
in English law pre-export finance transactions.
The approach adopted by the LMA when producing
the PXF Document was to base it to the greatest extent
possible on the Leveraged LMA loan document (the
“Leveraged LMA Facility”). As a result, many of the ‘boiler-
plate’ clauses in the Leveraged LMA Facility, for example
the indemnities and increased costs, have been incorpo-
rated into the PXF Document.
The purpose of this guide is to identify and explain some
of the key features of the PXF Document that will be rele-
vant to lenders and borrowers alike when approaching this
document (though this is not, and should not be regarded
as, a definitive guide as to whether those provisions are
appropriate to any particular transaction).
The guide has been broken down into the following
sections:
1. Assumed Structure and Basis of Preparation
2. Clause 1.1: Material Adverse Effect
3. Section 2: The Facility
4. Section 4: Repayment, Prepayment and Cancellation
5. Section 5: Costs of Utilisation
6. Section 6: Additional Payment Obligations
7. Section 8: Representations, Undertakings and Events
of Default
8. Section 9: Changes to the Parties
9. Section 10: The Finance Parties
10. Section 12: Governing Laws and Enforcement
11. Schedule 2: Conditions Precedent
12. Summary
Where relevant , cross-references to the applicable
clauses of the PXF Document have been included to
assist the reader.
In preparing this guide, we have assumed familiarity with the
Leveraged LMA Facility and therefore have not included any
commentary on those provisions that are common to both
the Leveraged LMA Facility and the PXF Document.
Terms defined in the PXF Document, unless they are
defined in this guide or the context otherwise requires,
shall have the same meaning in this guide.
COMMENTIt remains to be seen whether the PXF Document will
be accepted and taken up by lenders and borrowers to
the same extent that the other standard form LMA docu-
ments have been. Established borrowers in particular are
likely to resist some of the more restrictive covenants and
extensive representations that are included in the docu-
ment and may well insist that future deals continue to
be documented using the form that they have become
accustomed to.
The extent to which the PXF Document will be used where
new borrowers enter the market will likely depend upon
how closely the PXF Document reflects the structure of
the deal that is to be documented. In particular, there are
a number of assumptions upon which the PXF Document
is based which, if not true, may well lead to the PXF
Document requiring heavy amendment before consider-
ation of the commercial terms begins:
1. As described more fully below, the PXF Document is
based on one of many structures that are found in
PXF transactions, whereas the PXF market is far from
homogeneous—the borrower can be based anywhere
in the world and the Product itself can differ greatly;
2. The exclusion of hedging counterparties from any
security and from the PXF Document (including vot-
ing rights) itself suggests that the PXF Document is
drafted on the assumption that hedging is unlikely to
be required as part of the deal;
3. The assumption that no security will be taken over the
Product itself (and therefore no concepts of collateral
managers, trust receipts etc); and
4. Although it is not explicitly stated, the PXF Document
appears to have been drafted upon the assumption
that there will be very few Sales Contracts as there is
little materiality embedded within, and very little flex-
ibility with regards to, the representations and under-
takings that pertain to the Sales Contracts.
If new capital providers (other than banks) are to be
attracted to the PXF market, then it could be argued
that the PXF Document may ease that process if it is in
a form (with the same structure and general boilerplate
provisions) that such capital providers have seen in
other sectors. It is interesting to note, however, that the
transfer provision in the PXF Document, although slightly
more permissive than those contained in the Leveraged
LMA Facility, are not as widely drawn as the transfer pro-
vision in the recently launched LMA Real Estate Facility
Agreement (this sector has a similar desire to attract
alternative capital providers) which allows transfers to be
made to “any person”.
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ASSUMED STRUCTURE AND BASIS OF PREPARATIONThe PXF Document assumes a structure whereby a limited
liability company (the “Parent”) is the 100 per cent share-
holder of a limited liability company which is the producer
of the commodity (referred to in the PXF Document as the
“Product”) and is also the borrower (the “Borrower”). The
Borrower is also assumed to be the seller of the Products
under the various Sales Contracts. It is assumed that the
Parent and various subsidiaries of the Borrower will pro-
vide guarantees (the Parent, the Borrower and each such
subsidiary are each referred to as an “Obligor”).
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© Loan Market Association
This structure will be appropriate for some pre-export trans-
actions, but by no means all. A wide range of alternative
structures are commonly found in the sector, for example
it is sometimes the case that the borrower group will have
a specific trading entity based in a tax friendly jurisdic-
tion and/or to mitigate any perceived country-risks which
produces a double-decked structure, with a sale from the
producer to the trading entity and then an additional layer
of sales contracts to third party off takers. In such cases, it
may be that the trading entity will be the borrower.
The other general characteristics of the PXF Document
(and assumptions upon which it is based) include the
following:
(a) it provides for a single-currency term loan facility;
(b) it assumes that:
• no equity investment or other layers of debt will
form part of the capital structure;
• each Obligor will provide unlimited guarantees
but not security; and
• where the loans are fully or partially hedged,
the hedge providers will not be party to the PXF
Document, nor will they benefit from the security
package; and
(c) the security package will be provided by the Borrower
only and will comprise security over:
• the Sales Contracts and Sales Contracts L/Cs;
• the Collection Account into which the payments
under the Sales Contracts are to be made; and
• the Debt Service Reserve Account into which the
monies standing to the credit of the Collection
Account are to be swept.
Lenders should note that the PXF Document does
not envisage the taking of other forms of security
which are sometimes encountered if the credit
worthiness of either the Group (or indeed the
Buyers) is deemed not to be sufficiently strong.
Such other security may consist of:
(i) a pledge or other security interest in the
Product itself (including the use of collateral
managers and trust receipts); and/or
(ii) security taken in respect of the insurance
arrangements relating to the Product1.
Further features of the PXF Document:
(a) approach taken with respect to Sales Contracts:
• it is assumed that certain Sales Contracts will
be approved upfront , but there is also flex-
ibility to introduce additional Sales Contracts in
the future (see Clause 25.9 (Additional Buyers
and Additional Sales Contracts) – referred to in
Section 8 below);
• there are two options relating to Additional Sales
Contracts:
• the Majority Lenders will decide at the time
whether any proposed sales contract should
qualify as a Sales Contract; or
• there is a pre-agreed Eligibility Criteria (and if a
proposed sales contract does satisfy such cri-
teria, the Finance Parties have no further right to
approve its terms).
• the Eligibility Criteria is:
“…in relation to any contract for the sale and
delivery of Products entered into by the Borrower
as seller, that:
(a) the counterparty to that contract is a Buyer;
(b) it has or will have, as at the date it becomes
subject to the security constituted by the Sales
Contracts [Pledge/Assignment] Agreement, a
minimum remaining tenor of not less than [•]
months beyond the Termination Date;
(c) it provides for all amounts payable to the
Borrower under it to be:
(i) paid in [insert currency];
(ii) paid directly to the Collection Account;
(iii) paid within no more than [thirty (30)] days
from the date of delivery; and
(iv) made without any withholding, counter-
claim, deduction or set-off whatsoever
(save to the extent expressly permitted
under the terms of that contract as specifi-
cally approved by the Agent on the instruc-
tions of the Majority Lenders);
(d) it complies with any payment or other condi-
tions that were imposed by the Agent when
confirming the designation of the counterparty
to that contract as a Buyer;2
(e) it is capable of being freely assigned by the
Borrower without any further consent of the rel-
evant counterparty or, where such consent is
required, this has been or will be obtained and
presented to the Agent prior to such contract
becoming subject to the Transaction Security
constituted by the Sales Contracts [Pledge/
Assignment] Agreement;
(f) it is expressed to be governed by English law
or the law of another jurisdiction acceptable
to the Agent on the instructions of the Majority
Lenders;
(g) it provides for disputes to be submitted to
arbitration in or to the courts of a jurisdiction
acceptable to the Agent on the instructions of
the Majority Lenders; and
(h) [•];”3
(b) approach taken with respect to Buyers:
• it is assumed that certain Buyers will be pre-
approved and that there is also flexibility to
introduce additional Buyers in the future (see
Clause 25.9 (Additional Buyers and Additional
Sales Contracts)). Note that the Lenders retain
discretion whether to accept any new Buyer and
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can impose whatever conditions they consider
appropriate;
• Buyers are either approved as:
• ‘Invoice Buyers’– who are considered sufficiently
credit worthy that they are permitted to buy
Products on open account terms; or
• ‘LC Buyers’ – who are only acceptable if a bank
considered sufficiently credit worthy provides
a documentary letter of credit in respect of that
Buyer’s payment obligations; and
• the Major i t y Lenders reta in d iscret ion as
to whether any company can become an
Additional Buyer.
Where the structure for a particular transaction does not
reflect the PXF Document’s assumed structure, lenders
will need to decide whether to use the PXF Document as a
starting point for documentation.
THE PXF DOCUMENT
Clause 1.1: Material Adverse Effect
This is an important term, as it is used as a qualifier for a
number of the representations, undertakings and Events
of Default (as well as to trigger an Event of Default in its
own right) and therefore the parties must carefully con-
sider this definition.
The PXF Document defines a ‘Material Adverse Effect’ as:
“[ in the reasonable opinion of the Majority Lenders] a
material adverse effect on:
(i) the business [including the production and export
capacity], operations, property, condition (financial or
otherwise) or prospects of [any Obligor] [or] [the Group
taken as a whole]; or
(ii) [the ability of an Obligor to perform[ its obligations
under the Transaction Documents]/the ability of the
Obligors (taken as a whole) to perform [their obliga-
tions under the Transaction Documents]; or
(iii) the validity or enforceability of, or the effectiveness or
ranking of any Security granted or purporting to be
granted pursuant to any of, the Finance Documents or
the rights or remedies of any Finance Party under any
of the Finance Documents.
The likely negotiating points include whether:
• the reference in paragraph (i) to “operations, property” is
appropriate, given the focus on the production capabili-
ties of the Borrower;
• the reference in paragraph (i) to “prospects” is appropri-
ate (this may be seen as a metric too subjective to quan-
tify, particularly if paragraph (ii) is included);
• the Borrower is likely to argue that the correct option in
paragraph (ii) should be “the Obligors taken as a whole”,
given that the cross-guarantee means that each Obligor
is liable for the indebtedness of every other Obligor
under the PXF Document but this will depend upon the
composition of the Obligor group;
• paragraph (ii) should be limited to payment or financial
obligations only; and/or
• the second part of paragraph (iii) is appropriate, as this
includes all rights and remedies of a Finance Party, no
matter how immaterial or theoretical.
Section 2: The Facility
(a) Clause 3.1: Purpose
The facility made available under the PXF Document
is a single currency term loan facility, the purpose of
which is not specified (though the accompanying note
recognises that such facilities are often used to fund
production or operating costs associated with the
production of the Products).
(b) Clause 4: Conditions Precedent
The specific documents required to be delivered as
conditions precedent under the PXF Document are
considered below in the section relating to Schedule 2.
Section 4: Repayment, Prepayment and cancellation
(a) Clause 6.1: Repayment of Loans
The PXF Document provides for either bullet repay-
ment or amortising repayment.
(b) Clause 7.3: Right of cancellation and repayment in
relation to a single Lender
The PXF Document retains the general right for the
Borrower to prepay a single Lender that is seeking
to claim amounts under the tax gross-up, tax indem-
nity and/or increased costs provisions. The alterna-
tive right available to borrowers under the Leveraged
LMA Facility to replace a ‘Defaulting Lender’ has been
removed. As a result, a ‘Defaulting Lender’ would still
have voting rights in respect of the PXF Document.
The Lenders and the Borrower may consider if they
wish to reinstate the ‘Defaulting Lender’ concept.
(c) Clause 8: Mandatory Prepayment and Cancellation
As per the Leveraged LMA Facility, the PXF Document
requires mandatory prepayment upon illegality or
change of control. In respect of the latter, however,
mandatory prepayment is not automatic, but rather
at the option of each individual Lender or the Majority
4
Lenders (the Leveraged LMA Facility simply has auto-
matic mandatory prepayment of all Loans in full).
Section 5: Costs of utilisation
(a) Clause 11: Interest Periods
The PXF Document provides optional wording to
ensure that the Interest Period for each Loan would
end at the same date. This is driven by concerns relat-
ing to the ability to perform the calculations for the
Cover Ratios (see Section 8 below for more detail)
and also aids the administration of the Loans.
Section 6: Additional payment obligations
(a) Clause 14: Tax gross-up and indemnities
The PXF Document simply has a requirement that
each Obligor will need to gross-up any payment
where a deduction or withholding applies (though the
footnotes recognise that the clause will need to be
considered on a case-by-case basis).
Borrowers will therefore need to check whether they
would have to deduct tax from interest payments to any
member of the initial syndicate. Assuming that this is
not the case, some Borrowers may try to seek to intro-
duce a concept of ‘Qualifying Lenders’ i.e. Lenders to
whom a Borrower is able to pay without deduction at
the outset (which is reflected in the Leveraged LMA
Facility). If this starting position is agreed, the market
position is generally that Borrowers take change of
law risk (such that if an entity which was a Qualifying
Lender at the outset ceases to be as a result of a
change in law, the Borrower will be required to withhold
and gross up), but that a Borrower should not have to
gross up if a Lender ceases to be a Qualifying Lender
other than as a result of a change in law (e.g. because
of action taken by that Lender) or if a transfer is made
to an entity which is not a Qualifying Lender.
This provision therefore is likely to see significant
amendment and negotiation.
SwissBorrowers
In the situation where there is a double-decked struc-
ture of producer and separate trading company and
the latter is the Borrower, it is the tax situation of the
trading company which is likely to be most relevant.
Often such companies are incorporated in Switzerland
which has:
“20 non-bank rule”: A Swiss Borrower who owes
interest bearing debt to more than 20 “non-banks”
under any agreement (including under certain cir-
cumstances intra-group loans, i .e. not only the
Lenders under the PXF Document will count) will
re-qualify the Swiss Borrower as a bank for Swiss
withholding tax purposes meaning that all interest
payments of such Swiss Borrower will become the
subject of Swiss withholding tax (currently at a rate
of 35%) which must be deducted (i.e. a mere notifica-
tion procedure is not available).
“10 non-bank rule”: If there are more than 10 lend-
ers (and, under certain conditions, sub-participants,
swap counterparties etc.) under the PXF Document
who are not banks, the facility will be re-qualified as
a “bond” for Swiss withholding tax purposes which
again triggers Swiss withholding tax (and possibly
Swiss transfer stamp duty on assignments and trans-
fer with respect to loan tranches). Therefore, the PXF
Document should contain restrictions that prevent that
more than 10 non-banks becoming involved in relation
to a facility agreement with a Swiss Borrower.
The above rules are even more problematic, as pur-
suant to art. 14 of the Swiss Withholding Tax Statute,
grossing-up for Swiss withholding tax is not permit-
ted. Therefore, a PXF Document with a Swiss Borrower
must include appropriate language to reduce the risk
of a breach of these rules.
Many other jurisdictions impose some form of with-
holding tax so the parties should take appropriate
advice for each deal.
Section 8: Representations, Undertakings and Events of
Default
Because the PXF Document uses the Leveraged LMA
Facility (as opposed to the Investment Grade LMA Facility)
as the starting point, the representations, undertakings
and Events of Default are likely to be more extensive than
large trading houses and corporates are used to seeing
in their documentation and therefore may be subject to
extensive negotiation as to both scope and substance.
(a) Clause 20: Representations
The PXF Document contains a typical set of general
representations relating to, amongst other things,
the status of the Obligors, the binding nature of
the various obligations incurred, non-conflict with
other obligations, power and authority, validity and
5
enforceability in evidence, and governing law and
enforcement. These will need to be considered on a
case-by-case basis and amended to suit the actual
transaction and Obligor group structure.
Many representations in the PXF Document refer to
the ‘Transaction Documents’ rather than the Finance
Documents. The term ‘Transaction Documents’ encom-
passes a wider range of documents than just the
Finance Documents and includes all Sales Contracts,
all Sales Contract LCs and [all Material Contracts]4.
Given that any misrepresentation will trigger a draw-
stop and/or result in the occurrence of an Event of
Default , the parties should consider whether it is
appropriate, or even possible, to give such repre-
sentations in respect of all Transaction Documents.
Whether or not this is appropriate is likely to depend
upon the relative importance of such documents
so that, for example, in a structure with only one or
a very small number of Sales Contracts, each one is
likely to be material and therefore the Lenders are
likely to insist that they be covered by the representa-
tions. Conversely, if there were many Sales Contracts,
the Borrower may argue that no one contract is suf-
ficiently material to warrant triggering an Event of
Default. Similar arguments will apply in respect of
Sales Contract LCs.
Below are some further representations to which specific
consideration should be given.
(a) Clause 20.10: Deduction of Tax
The representations relating to payments and deduc-
tion of tax should be carefully reviewed. Specific tax
advice is recommended in this respect.
(b) Clause 20.11: No Default
The PXF Document contains a standard ‘no Event of
Default’ representation but also seeks confirmation
from the Obligors that no Event of Default might rea-
sonably be expected to result from “the entry into,
the performance of, or any transaction contemplated
by, any Transaction Document”. It may not be possi-
ble for the Obligors to provide this confirmation if, for
example, a Sales Contract ‘contemplates’, but does
not necessarily require, a number of possible trans-
actions (for example, the sale of a Product) in circum-
stances where such actions would not necessarily be
permitted by the Finance Documents. Due diligence
should obviously highlight any such issues.
(c) Clause 20.18: Anti-corruption law
A new representation has been added as compared to
the LMA Leveraged Facility that “Each member of the
Group has conducted its businesses in compliance
with applicable anti-corruption laws and has instituted
and maintained policies and procedures designed to
promote and achieve compliance with such laws.”
Borrowers will note the absolute nature of this rep-
resentation (and the fact that it extends to the entire
Group rather than being limited to the Obligors) and
the lack of materiality or thresholds. However, anti-cor-
ruption is an area that lenders are particularly focussed
on and upon which there is sometimes little room for
negotiation given internal compliance policies.
(e) Clause 20.25: Sales Contracts
“(a) Capability: Each Obligor is fully capable of
performing and complying with its obliga-
tions under each Sales Contract to which it is
a party, and possesses all technical and finan-
cial means required for this purpose.
(b) Sales Contracts in effect: each Sales Contract
is in full force and effect and any condition
precedent to its coming into force was satis-
fied (or waived, with the prior written consent
of the Agent on the instructions of the Majority
Lenders) by the date on which such condi-
tion precedent was due to be satisfied under
the terms of that Sales Contract and the pay-
ment obligations of the Buyer under the Sales
Contract are legal, valid, binding and enforce-
able obligations and do not and will not conflict
with any applicable law or regulation.
(c) Sales Contracts meet Eligibility Criteria: each
Sales Contract satisfies the Eligibility Criteria.
(d) Sales Contracts in form provided: Except as
the same may be amended after the date of
this Agreement in accordance with Clause 25.3
(Dealings with counterparties):
(i) each Sa les Contract i s in the fo rm
supplied:
(A) (in the case of the Original Sales
Contracts) to the Agent prior to the
execution of this Agreement; or
(B) (in the case of any Additional Sales
Contract) to the Agent prior to the date
6
on which that contract became an
Additional Sales Contract,
other than, in each case, in respect of
amendments permitted to be made under
this Agreement and notified in writing to
the Agent in accordance with Clause 25.3
(Dealings with counterparties);
(ii) there are no contracts, agreements or
other arrangements in existence (other
than any Finance Document) that amend,
modify, vary or otherwise relate to that
Sales Contract, other than those notified by
the Borrower to the Agent in writing:
(A) (in the case of the Original Sales
Contracts) prior to the execution of this
Agreement; or
(B) (in the case of any Additional Sales
Contract) prior to the date on which
that contract became an Additional
Sales Contract,
or, in each case, any amendments permit-
ted to be made under this Agreement and
notified in writing to the Agent in accor-
dance with Clause 25.3 (Dealings with
counterparties).
(e) No breach or repudiation: No party to a Sales
Contract is in breach of any payment, delivery,
or other material obligation thereunder or has
repudiated or done or caused to be done any
act or thing evidencing an intention to repudi-
ate that Sales Contract.
(f) No notice of inability to perform: No Obligor has
received or given any notification (written or
otherwise) of a failure or inability by any party
to a Sales Contract to comply with its obliga-
tions thereunder.
(g) No force majeure or early termination event: No
event or circumstance has occurred that gives
rise or might reasonably be expected to give
rise to a right to terminate early, suspend per-
formance under, repudiate or cancel any Sales
Contract.
(h) No claims or liabilities: There are no claims, lia-
bilities or obligations in existence between any
Obligor and a Sales Contract counterparty or
any other person that are or might reasonably
be expected to be materially detrimental to the
rights of any Finance Party under that Sales
Contract or the Finance Documents.
(i) Arm’s length terms: It has entered into each
Sales Contract on arm’s length terms.”
The PXF Document envisages that this repre-
sentation will be periodically repeated on an on-
going basis. If that is the position reached after
negotiation, the parties should ensure that there
is consistency between the representation and
the on-going covenants. For example, Clause
20.25(a) is wider in its application (requiring each
Obligor to be “fully capable of performing and
complying with its obligations under each Sales
Contract”) whereas Clause 25.1(a) only requires
the Borrower to “comply in all material respects
with its obligations under each Sales Contract”.
The likely negotiating points include whether:
• is it appropriate to represent that each Obligor
represents to being “fully capable of perform-
ing and complying with its obligations under
each Sales Contract” , or whether this should
be limited to material, payment or delivery
obligations;
• all of the representations should be repeated;
and
• Clause 20.25(f) should also have a reference to
material, payment or delivery obligations rather
than “its obligations”.
Negotiations will be influenced by whether the
representation is required to be repeated and
upon the profile and materiality of the Sales
Contracts as previously noted. Borrowers and
Lenders alike will want to ensure that an Event of
Default is not triggered as a result of a technical
(but in the context of the deal as a whole, immate-
rial) breach under any particular Sales Contract.
Lenders will, however, be keen to ensure that the
mechanism through which their loans will ulti-
mately be repaid is intact. The parties should
note that , if any representation listed in this
clause is not true, in respect of a particular Sales
Contract, that Sales Contract may be excluded
from the calculation of the Cover Ratios.
(g) Clause 20.28: No immunity and Clause 20.29: Private
and commercial acts
[“In any proceedings taken in its jurisdiction of incor-
poration in relation to the Finance Documents to which
it is a party, it will not be entitled to claim for itself or
any of its assets immunity from suit, execution, attach-
ment or other legal process”.]
7
[“Its execution of the Finance Documents to which it is
a party constitutes, and its exercise of its rights and
performance of its obligations thereunder will con-
stitute, private and commercial acts done and per-
formed for private and commercial purposes”.]
Both the above clauses will be required where there
is some doubt as to whether the Obligors are privately
owned and/or benefit from form of sovereign or statu-
tory immunity.
Clause 21: Information Undertakings
The PXF Document contains a set of fairly standard infor-
mation undertakings relating to, amongst other things, pro-
vision of and requirements as to financial statements and
Compliance Certificates, notification of Default, and details
of litigation.
The only PXF-specific addition in this context is the
requirement to provide the Agent with fairly extensive infor-
mation relating to the Sales Contracts as follows:
(a) Clause 21.6: Information: Sales Contracts
“The Borrower shall:
(a) permit each of the Agent and the Security
Agent and any of its officers and agents to
have access to and examine at reasonable
times and on reasonable notice its minute
books and other corporate records, and books
of account and financial records, in relation to
each Sales Contract to which it is a party, [but
no more than once every calendar year unless
a [Default]/[Event of Default is continuing or the
Agent reasonably suspects a [Default]/[Event of
Default] is continuing or may occur;]
(b) promptly supply to the Agent copies of all doc-
uments relevant to its material obligations and
rights under the Sales Contracts (including all
its delivery obligations and the payment obliga-
tions of any Buyer), and notify the Agent of the
price of any delivery under the Sales Contracts
promptly after such price has been determined;
(c) keep the Finance Parties (via the Agent) regu-
larly informed of all material developments and
material progress under the Sales Contracts to
which it is a party;
(d) notify the Agent of any default, breach, termi-
nation or suspension of any Sales Contract or
of any dispute or claim in relation to a Sales
Contract and deliver to the Agent a copy of all
notices received or given by it in connection
with any Sales Contract promptly upon receipt
or dispatch thereof (including without limita-
tion any notice of default, termination, dispute
or claim made against it under any such Sales
Contract together with details of any action it
proposes to take in relation to the same);
(e) (without prejudice to its obligations under
Clause 25.3 (Dealings with counterparties)),
promptly provide the Agent with a copy of any
documents that amend, waive or otherwise
vary the terms of any Sales Contract to which
it is a party;
(f) from time to time on request, promptly provide
the Agent with such other information relat-
ing to the Sales Contracts to which it is a party
(and its ability to perform its obligations there-
under) as the Agent may reasonably require;
(g) promptly on becoming aware of them, provide
the Agent with details of:
(i) any event or circumstance which is or may
be a force majeure event under any Sales
Contract to which it is a party; and
(ii) (without prejudice to its obligations under
Clause 25.3 (Dealings with counterparties)),
the invocation of indemnity provisions by it
or any Buyer;
(h) [promptly on becoming aware of them, provide
the Agent with details of any claim made under:
(i) any cargo insurance policy relating to a
Sales Contract where the claim is for a
sum in excess of [ ] [(before deductibles)];
(ii) any business interruption insurance policy
relating to any Obligor, where:
(A) the claim affects a Sales Contract;
(B) [events giving rise to the claim con-
tinue for more than [ ] days;] and
(C) the amount of the claim is in excess of
[ ] (before deductibles);]
(i) deliver to the Agent, promptly upon receipt or
dispatch thereof, a copy of any notice relating to:
(i) the exercise by a Buyer of any rights it may
have to reduce the quantities of Products
to be delivered to it; and
(ii) the exercise by a Buyer of any rights it may
have to suspend or reject deliveries;
(j) deliver to the Agent, in relation to each delivery
of Products made under a Sales Contract to
which it is a party:
8
(i) no later than [5] Business Days after each
such delivery is made, a copy of the final
commercial invoice issued in respect of
such delivery;
(ii) no later than [5] Business Days after any
such delivery is made, copies of all appli-
cable Delivery Documents (including, but
not limited to, all bills of lading and prelimi-
nary invoices as required under the terms
of that Sales Contract); and
(iii) promptly on request, such other certifi-
cates or documents required in connection
with the sale or delivery of Products under
that Sales Contract as Agent may reason-
ably request; [and]
(k) deliver to the Agent, no later than the first
Business Day of each calendar month a sched-
ule of planned deliveries under the Sales
Contracts for that calendar month[.] / [; and
(l) deliver to the Agent on the first day of each
calendar [quarter]/ [month] (or, if such day is
not a Business Day, on the immediately follow-
ing Business Day), a duly completed Contracts
Report5 for the preceding calendar [quarter]/
[month].]”
The Borrower should ensure that all such information can
actually be provided to the Agent (and that all necessary
internal procedures are implemented to ensure that these
requirements are complied with). Furthermore, depending
on the number of Sales Contracts, the parties may well feel
that it is administratively easier for some of this information
to be swept up with the Contracts Report which is periodi-
cally delivered and for only very material issues to require
on-going notification.
(b) Clause 21.9: Cover Ratios Certificate
“On [the first Business Day of each month]/[each Test
Date]/[other], [the Borrower]/[the Parent] shall supply
to the Agent a Cover Ratios Certificate setting out (in
reasonable detail) computations as to compliance
with 23.2 (Cover Ratios) and Clause 23.4 (Look Back
Test) as at [the Test Date falling in that month]/[that
Test Date]”.
The parties will need to agree what is the appropriate
testing period for the Cover Ratios.
Clause 22: Financial Covenants
The PXF Document includes three general financial cov-
enants, namely:
• a Leverage test – Clause 22.2(a);
• an Interest Cover test – Clause 22.2(b); and
• a Net Worth test – Clause 22.2(c).
The parties should note that the Net Worth covenant is a
‘maintenance covenant’ and therefore must be complied
with at all times rather than only on those dates when it
is tested. These financial covenants aim to measure the
financial health of the whole group rather than just the
Borrower. The appropriateness of these covenants and the
levels at which they are set will need to be considered on
a case-by-case basis.
The PXF Document does not include any cure or remedy
rights in respect of these financial covenants.
Clause 23: Cover Ratios
The PXF Document states that the Cover Ratios are only a
suggested form and that the detail of the Cover Ratios will
be a matter of negotiation between the parties. It is envis-
aged that the Cover Ratios will be tested monthly and on
each Utilisation Date.
(a) Clause 23.2(a): Debt Service Cover Ratio
This is a forward looking ratio which measures, for
each relevant period, the Sales Value under Assigned
Sales Contracts against the amount of Debt Service
Obligations falling due during that period. It effectively
measures whether the Borrower is producing suf-
ficient cash to service its payment obligations under
the PXF Document. Particular points to note are:
CalculationofSalesValue
Sales Value is determined by multiplying the quan-
tity of Products to be delivered under Assigned Sales
Contracts during the relevant period by the applicable
Reference Price.
In order to qualify as an Assigned Sales Contract:
(A) the relevant Sales Contract must continue to be
subject to the Transaction Security; and
(B) the Security Agent must have received:
(I) a copy of the notice of assignment delivered
to the relevant Buyer;
(II) an acknowledgement of notice of assign-
ment signed by the relevant Buyer (sub-
stantially in the form of acknowledgement
required under the relevant security docu-
ment); and
(III) a c o py o f t h e I r r e vo c a b l e P ay m e n t
Instructions, issued to and acknowledged by
the relevant Buyer.
9
The PXF Document does not attempt to define the
Reference Price for the Product as this will vary
depending upon the nature of the commodity,
whether it is traded and the methodology for ascer-
taining the price payable under the Assigned Sales
Contracts themselves. Lenders may also consider
whether it is appropriate to discount the rate used in
the Sales Contracts.
DebtServiceObligations
Debt Service Obligations include any amortisa-
tion of principal, together with interest, fees, costs or
expenses payable to the Finance Parties under the
PXF Document during the relevant period.
(b) Clause 23.2(b): Loan Life Cover Ratio
This is a forward looking ratio which measures the
Sales Value under Assigned Sales Contracts against
the amount of Debt Service Obligations falling due
until the Final Maturity Date. It effectively measures
whether the Borrower is likely to produce sufficient
cash to service its ultimate payment obligations under
the facility. The methodology used is the same as for
the Debt Service Cover Ratio.
(c) Clause 23.3: Top-Up
This clause permits the Borrower to cure any defi-
ciency in the Debt Service Cover Ratio or the Loan
Life Cover Ratio by any of:
(i) prepayment of Loans;
(ii) increasing sales under existing Assigned Sales
Contracts;
(iii) entering into new Assigned Sales Contracts; and/
or
(iv) depositing cash into the Debt Service Reserve
Account (see reference to Clause 26: Bank
Accounts below for details).
The parties will want to carefully consider the ability to
cure the Cover Ratios, in particular the frequency that
any such cure may be used.
(d) Clause 23.4: Look Back Test
In addition to the forward looking tests contained
in Clauses 23.3(a) (Debt Service Cover Ratio) and
23.3(b) (Loan Life Cover Ratio), the PXF Document
also contains a test which measures the amount actu-
ally received under the Assigned Sales Contracts as
against the Debt Service Obligations paid over two
separate periods:
(i) the Look Back Test Period (effectively [three]
months); and
(ii) the previous month.
In order to add any protection to the Lenders beyond
that already contained in the PXF Document, this
ratio would need to be set at a higher level than that
required to merely meet the Debt Service Obligations
for that period. This provision effectively gives the
Lenders additional comfort that , not only did the
Borrower meet its payment obligations, but that there
was additional headroom having done so (i.e. a finan-
cial ‘buffer’ is incorporated). How much headroom (if
any) is appropriate is likely to be heavily negotiated.
Borrowers are likely to argue, that if they have made
all payments as required and are in compliance with
the forward looking cover ratios, they should not be
put into default.
There are no cure rights relating to this test.
Clause 24: General Undertakings
As with the representations, the general corporate
undertakings have, to a large extent, been based on the
Leveraged LMA Facility (though, as with the representa-
tions, certain references in the Leveraged LMA Facility to
‘Finance Documents’ appear in the PXF Document as ref-
erences to ‘Transaction Documents’).
There are a number of additional undertakings that
will need to be particularly considered on a case-by-
case basis.
(a) Clause 24.5: Anti-corruption law
“(a) No Obligor shall (and [the Borrower]/[the Parent]
shall ensure that no other member of the Group
will) directly or indirectly use the proceeds of
the Facility for any purpose which would breach
the Bribery Act 2010, the United States Foreign
Corrupt Practices Act of 1977 or other similar leg-
islation in other jurisdictions.
(b) Each Obligor shall (and [the Borrower]/[the
Parent] shall ensure that each other member of
the Group will):
(i) conduct its businesses in compliance with
applicable anti-corruption laws; and
(ii) maintain policies and procedures designed
to promote and achieve compliance with
such laws.”
10
As with the representation relating to anti-corruption,
this is a widely drafted provision which extends to the
whole Group and Borrowers will need to ensure they
are able to comply.
(b) The PXF Document follows the form of the LMA
Leveraged Facility in carving out activities which will
not be prohibited by the negative covenants such as
Clause 24.9: (Acquisitions), Clause 24.12: (Negative
Pledge) and Clause 24.13: (Disposals). The detail of
these provisions is beyond the scope of this guide
and the parties will therefore need to carefully con-
sider the definitions of:
(i) Permitted Acquisition;
(ii) Permitted Disposal;
(iii) Permitted Financial Indebtedness;
(iv) Permitted Guarantee;
(v) Permitted Loan;
(vi) Permitted Security; and
(vii) Permitted Transaction,
in each case to ensure that the carve-outs accurately
reflect the needs of the Group. Note that many of
these undertakings apply to the whole Group which
a Borrower may argue is not acceptable unless a
breach by a non-Obligor negatively affects an Obligor.
Clause 25: Sales Contract Undertakings
The PXF Document contains a number of undertakings
that are specific to the Sales Contracts. Given the impor-
tance of these agreements in providing the revenue
necessary to repay the facility, it is no surprise that the
Lenders will wish to exert tight control over such contracts.
However, the majority of the undertakings will require
some consideration to ensure that they are applicable and
appropriate for each particular transaction. In particular,
the Lenders will not want to impose such tight constraints
on the Sales Contracts that the Borrower is not able to run
its business efficiently without constantly requiring waivers.
As before, the number of such Sales Contracts will have
an effect on both how operationally difficult this is likely
to be for a Borrower and whether some level of materiality
beyond that envisaged in the current drafting is required.
(a) Clause 25.1: Compliance with Sales Contracts
“The Borrower shall:
(a) comply in all material respects with its obligations
under each Sales Contract in the manner and at
the times provided for therein; and
(b) use its best efforts to procure that each Buyer
duly complies in all material respects with its pay-
ment and other material obligations under that
Sales Contract in the manner and at the times
provided for therein (and in accordance with the
directions of the Agent or the Security Agent from
time to time given pursuant to the terms of the
Finance Documents); and
(c) not take or omit to take any action that might
result in:
(i) any default on any of its payment, delivery
and other material obligations under a Sales
Contract;
(ii) any right to terminate a Sales Contract
becoming exercisable by the Buyer; or
(iii) any counterclaim or right of set off arising
under a Sales Contract other than any set-
off under a Sales Contract that occurs prior
to an Event of Default that is continuing, and
in the ordinary course of trading as part of
the settlement of final invoices for deliveries
made thereunder”.
The likely negotiating points include whether:
• compliance must be to all obligations or just to
material or payment or delivery obligations;
• it is appropriate to require the Borrower to use its
“best efforts to procure that each Buyer duly com-
plies…”. Given the ability of the Borrower embed-
ded in the PXF Document to substitute Buyers and
Sales Contracts, it could be argued that expending
resources chasing a Buyer who has defaulted may,
depending on the importance of the relationship
and the circumstances, be counter-productive; and
• the correct threshold for paragraph (c) is something
that ‘might’ result in any of the listed items.
(b) Clause 25.2: Pursuit of remedies
“Subject to any provision of the Finance Documents to
the contrary, the Borrower shall diligently pursue any
remedies available to it in respect of any breach or
claim arising in relation to each Sales Contract.”
The parties will note the overlap with Clause 25.1(b)
above. The Borrower may also wish to exclude from
this obligation any requirement to take uneconomic
or disproportionate actions in respect of immaterial
breaches.
11
(c) Clause 25.3: Dealings with counterparties
“The Borrower shall not without the prior written con-
sent of the Agent:
(a) in respect of any matter under a Sales Contract
that , pursuant to the terms of that Sales
Contract, falls to be decided by mutual agree-
ment of the parties thereto, negotiate or agree
such matter except in accordance with the
instructions of the Agent or the Security Agent,
other than in respect of any minor administra-
tive or technical matters or matters required
by the parties thereto to improve the practical
performance of their obligations under a Sales
Contract, provided further that:
(i) such matters do not relate to the financial
obligations of the parties under that Sales
Contract or vary or have the effect of varying
any of the Eligibility Criteria; and
(ii) the Agent or the Security Agent is noti-
fied of such matters as soon as reasonably
practicable;
(b) rescind, amend, vary or waive (or agree to or
permit any amendment to, or variation or waiver
of) any term of a Sales Contract except as
required or as expressly allowed by the Finance
Documents, provided that the parties thereto may
agree to immaterial amendments to and waivers
of a Sales Contract where such amendments or
waivers relate to minor administrative or tech-
nical matters or matters required by the parties
to such Sales Contract to improve the practical
performance of their obligations under that Sales
Contract, provided further that:
(i) such matters are not prejudicial to the
interests of the Lenders under the Finance
Documents and do not relate to the payment
obligations of the parties under such Sales
Contracts (other than amendments in relation
to [ ]) or vary or have the effect of varying any
of the Eligibility Criteria; and
(ii) such amendments or waivers are notified to
the Agent or the Security Agent as soon as
reasonably practicable;
(c) consent to the transfer by a counterparty of any
of its rights, title or interest in, or its obligations
under, a Sales Contract;
(d) consent to any act or decision by a counterparty
that might constitute a breach of a Sales Contract
or otherwise adversely affect any rights of the
Finance Parties thereunder or in relation thereto;
(e) make or agree to any claim that a Sales Contract
is frustrated or permit or agree to the cancella-
tion, suspension, rescission, repudiation or other
termination of a Sales Contract or accept any
material breach thereof or default thereunder as
repudiatory; or
(f) seek relief from performance of its payment,
delivery or other material obligations under a
Sales Contract whether under any force majeure,
time limit for claims or any other provision.”
Where there are a large number of Sales Contracts,
the restrictions above (particularly the limit to only
making amendments which relate to ‘minor or tech-
nical’ matters) may ensure a steady stream of waiver
requests being made to the Lenders and lead to an
unnecessary burden (and time delays) on the day-to-
day operation of the Borrower’s business.
(d) Clause 25.4: Payments under Sales Contracts
“The Borrower shall ensure that each payment made
to it under a Sales Contract is made in [insert cur-
rency of Facility] and (unless specifically approved by
the Agent on the instructions of the Majority Lenders)
free and clear of any set off, deduction, counterclaim
or condition.”
The parties will note that, if a payment under any Sales
Contract is subject to any set-off or other deduction, it
would not meet the Eligibility Criteria and may trigger
a recalculation of the Cover Ratios under Clause 25.7
(Sales Contract Failure). In this regard, the whole of
the payments made under that Sales Contract would
be disregarded, not just any amount withheld.
(e) Clause 25.5: Deliveries under Sales Contracts
“The Borrower shall:
(a) make all deliveries under each Sales Contract
directly to the place specified for such deliveries
in that Sales Contract (or in directions given pur-
suant to that Sales Contract), and in accordance
with the delivery schedule set out therein; and
(b) ensure that the aggregate quantities of Products
delivered and scheduled to be delivered under
the Sales Contracts are at all times sufficient to
ensure that the obligations under Clause 23.2
(Cover Ratios) are complied with”.
12
(f) Clause 25.6: Fair market price
“The Borrower shall ensure that the price (includ-
ing any applicable discount) charged and payable
for each delivery of Products under a Sales Contract
pursuant to the terms thereof is on arm’s length terms
and reflects and will reflect the fair market price for
Products”.
Clause 20.25(i) (Sales Contracts) already contains a
repeating representation that all Sales Contracts are
on arm’s length terms. The addition in this clause of
requiring the Products to be sold at a ‘ fair market
price’ is likely to be very difficult to test other than
in respect of flagrant (possibly fraudulent) breach.
Given the alignment of interest of the Borrower and
the Lender in ensuring the best price is paid for the
Products, and, provided that the Cover Ratios are
being complied with, it is likely to be only in such
instances that this clause becomes relevant.
(g) Clause 25.7: Sales Contract failure
“(a) If:
(i) on any date any Sales Contract ceases to
satisfy the Eligibility Criteria;
(ii) the representations set out in Clause 20
(Representations) in relation to a Sales
Contract are not true; or
(iii) the Borrower is in breach of its obliga-
tions in relation to any Sales Contract
under Clause 25.1 (Compliance with Sales
Contracts) to (and including) Clause 25.6
(Fair market price) or otherwise under the
Finance Documents,
[the Borrower]/[the Parent] shall, immedi-
ately upon becoming aware of the same,
notify the Agent.
(b) If the Agent receives notice from the [the Borrower]/
[the Parent] under paragraph (a) above or oth-
erwise becomes aware that any of the matters
referred to in paragraph (a) has occurred in rela-
tion to a Sales Contract, the Agent may and shall,
if so instructed by the Majority Lenders, notify [the
Borrower]/[the Parent] in writing that such contract
has ceased to be a Sales Contract, whereupon:
(i) that contract shall immediately cease to be a
Sales Contract; and
(ii) the Cover Ratios shall be retested on the
date of such notice from the Agent, treating
the date of retesting as a Test Date for the
purposes of testing the Cover Ratios. For the
purpose of such retesting, the Debt Service
Obligations as at the most recent Test Date
shall be used, but the applicable Sales Value
shall be reduced by the Sales Value under
each such contract that has ceased to be a
Sales Contract”.
This clause gives the Majority Lenders the abil-
ity to disregard the value attributed to any Sales
Contract where, amongst other things, a breach
has occurred in relation to such Sales Contract.
Depending upon the nature of the breach, the
Borrower may feel that this is too draconian.
Borrowers should note that if a breach of the
Cover Ratio follows any such recalculation, the
Borrower may still cure any such breach using the
mechanism, set out in Clause 23.3 (Top-Up).
(h) Clause 25.8: Buyer failure
“(a) If in relation to any Buyer:
(i) it defaults on its obligations under a Sales
Contract, its acknowledgement of the Sales
Contracts [Pledge/Assignment] Agreement
or its acceptance of the Irrevocable Payment
Instructions in respect of that Sales Contract[,
unless, in the case only of a Sales Contract,
such default does not relate to a payment
obligation, is otherwise technical in nature
and is remedied within [ ] Business Days];
(ii) an Insolvency Event has occurred and is
continuing;
(iii) it rescinds or repudiates any Sales Contract
to which it is a party or does or causes to be
done any act or thing evidencing its intention
to rescind or to repudiate any Sales Contract
to which it is a party; or
(iv) it otherwise ceases to be sufficiently cred-
i twor thy or capable of per forming i ts
obligations under a Sales Contract , as
determined by the Agent on the instructions
of the Majority Lenders and notified to [the
Borrower]/[the Parent],
[the Borrower]/[the Parent] shall, immediately
upon becoming aware of the same, notify the
Agent.
(b) If the Agent receives notice from [the Buyer]/[the
Parent] under paragraph (a) above or otherwise
becomes aware of the existence or occurrence of
any of the events and circumstances described
in paragraph (a) above in relation to a Buyer,
the Agent may notify [the Borrower]/[the Parent]
13
in writing that such person has ceased to be a
Buyer, whereupon:
(i) such person shall immediately cease to be a
Buyer;
(ii) each Sales Contract to which such person
is a party shall immediately cease to be a
Sales Contract; and
(iii) the Cover Ratios shall be retested on the
date of such notice from the Agent, treating
the date of retesting as a Test Date for the
purposes of testing the Cover Ratios. For the
purpose of such retesting, the Debt Service
Obligations as at the most recent Test Date
shall be used, but the applicable Sales Value
shall be reduced by the Sales Value under
each such contract that has ceased to be a
Sales Contract”.
The effect of any Buyer losing such status is that any
Sales Contract to which it is a party is disregarded for
the purpose of the calculation of the Cover Ratio if
the Agent so decides (not the Majority Lenders as per
Clause 25.7 (Sales Contract Failure)). Given the seri-
ousness of the events listed in sub-paragraphs (i) to
(iii), it would be hard for a Borrower to argue that is
inappropriate, though there may be some discussion
of the ability of the Majority Lenders to subjectively
determine that a Buyer has ceased to be ‘sufficiently
creditworthy’.
(i) Clause 25.9: Additional Buyers and Additional Sales
Contracts
“(a) [The Borrower]/[The Parent] may request in writ-
ing that additional persons [that are not members
of the Group or an Affiliate of the member of the
Group] (a “Proposed Buyer”) be designated as
Buyers in accordance with paragraph (b) below.
(b) A Proposed Buyer may be designated as a Buyer
in accordance with the following procedure:
(i) [the Borrower]/[the Parent] shall deliver to the
Agent a written request providing all relevant
details of the Proposed Buyer and specify-
ing whether such person is to be an Invoice
Buyer or an LC Buyer;
(ii) within [ ] Business Days of receiving such
request (or, if later, within [ ] Business Days of
receiving such additional information as the
Agent may have required), the Agent on the
instructions of the Majority Lenders (and each
Lender may, without limitation, have regard
to whether the Proposed Buyer is incorpo-
rated in or trading from any country subject to
legal sanctions which affect that Lender) will
confirm to [the Borrower]/[the Parent] whether
or not such person is acceptable as a Buyer,
including any conditions applicable to the
designation of that person as an Invoice
Buyer or an LC Buyer; and
(iii) if the Agent has confirmed under sub-para-
graph (ii) above that the Proposed Buyer is
acceptable as a Buyer, with effect from the
date of that confirmation, that Proposed
Buyer shall become a Buyer for the purposes
of this Agreement.
(c) [The Borrower]/[The Parent] may request in writ-
ing that any contract for the sale and delivery
of Products between the Borrower as seller and
a Buyer as buyer (a “Proposed Additional Sales
Contract”) be designated as an Additional Sales
Contract in accordance with paragraph (d) below.
(d) A Proposed Additional Sales Contract may be
designated as an Additional Sales Contract in
accordance with the following procedure:
EITHER
(i) [the Borrower]/[the Parent] shall deliver to the
Agent:
(A) a written request providing a copy of the
Proposed Additional Sales Contract and
confirming that the Proposed Additional
Sales Contract satisfies the Eligibility
Criteria; and
(B) all of the documents and other evidence
listed in Part II of Schedule 2 (Conditions
precedent);
(ii) the Agent shall notify [the Borrower]/[the
Parent] and the Lenders promptly upon
being satisfied that it has received all of
the documents and other evidence listed in
Part II of Schedule 2 (Conditions precedent)
in form and substance satisfactory to it; and
(iii) if the Proposed Additional Sales Contract
satisfies the Eligibility Criteria and the Agent
has received all of the documents and
other evidence listed in Part II of Schedule 2
(Conditions precedent) in form and substance
satisfactory to it, then with effect from the
date of notice by the Agent under paragraph
(ii) above, the Proposed Additional Sales
14
Contract shall become a Sales Contract for
the purposes of this Agreement.
OR
(i) [the Borrower]/[the Parent] shall deliver to the
Agent a written request providing a copy of
the Proposed Additional Sales Contract;
(ii) within [ ] Business Days of receiving such
request (or, if later, within [ ] Business Days of
receiving such additional information as the
Agent may have required) the Agent on the
instructions of the Majority Lenders will con-
firm to [the Borrower]/[the Parent] whether or
not the Proposed Additional Sales Contract is
satisfactory as a Sales Contract;
(iii) if the Agent on the instructions of the Majority
Lenders has confirmed that the Proposed
Additional Sales Contract is satisfactory
to it , the [the Borrower]/[the Parent] shall
deliver to the Agent all of the documents and
other evidence listed in Part II of Schedule 2
(Conditions precedent);
(iv) the Agent shall notify [the Borrower]/[the
Parent] and the Lenders promptly upon
being satisfied that it has received all of
the documents and other evidence listed in
Part II of Schedule 2 (Conditions precedent)
in form and substance satisfactory to it; and
(v) if the Proposed Additional Sales Contract
is satisfactory to the Agent on the instruc-
tions of the Majority Lenders and the Agent
has received all of the documents and
other evidence listed in Part II of Schedule
2 (Conditions precedent) in form and sub-
stance satisfactory to it, then with effect from
the date of notice by the Agent under para-
graph (iv) above, the Proposed Additional
Sales Contract shal l become a Sales
Contract for the purposes of this Agreement”.
As mentioned above, this clause sets out the mech-
anism for the approval of Additional Buyers and
Additional Sales Contracts. Borrowers will obviously
prefer that there is clarity at the outset of the deal as
to the requirements for a new sales contract to qual-
ify as an Additional Sales Contract and so will push
for the first option. If this is agreed, the Lenders will
need to be sure that the “Eligibility Criteria” definition
includes everything that they are concerned about, for
example, it may be that there are certain country limits
or other criteria which the Lenders will want to include.
Clause 26: Bank Accounts
The PXF Document envisages that the Borrower will set
up at least two accounts with the Agent or the Security
Agent, namely a Collection Account and a Debt Service
Reserve Account:
(a) Clause 26.2: Collection Account
The PXF Document leaves open whether the Agent/
Security Agent or the Borrower has signing rights
on the Collection Account but requires that all pro-
ceeds under each Sales Contract are paid into
the Collection Account. The mechanism for this is
that the Borrower must deliver to each Buyer an
Irrevocable Payment Instruction.
The use of Irrevocable Payment Instructions is far from
ubiquitous in PXF transactions. Often, the requirement
to pay into the Collection Account will be contained in
the notification of assignment by way of security of the
Borrower’s rights under the relevant Sales Contract.
Indeed, if there are many Buyers or there is sensitiv-
ity about sending out a separate formal notice, it is
sometimes accepted that the requirement to pay into
the Collection Account is simply added to the invoice
that is sent in relation to that Sales Contract.
It is envisaged that funds will be automatically swept
from the Collection Account to the Debt Service
Reserve Account to meet the minimum level required
in such account ahead of the first Utilisation Date.
Following a Default, monies standing in the Collection
Account may not be withdrawn by the Borrower.
Assuming that the requirements relating to mainte-
nance of the minimum reserve in the Debt Service
Reserve Account have been met, the Borrower may
argue that the trigger should be an Event of Default
(or, indeed, only certain Events of Default).
(b) Clause 26.4: Debt Service Reserve Account
It is envisaged that a minimum amount will be depos-
ited by the Borrower into this account from and includ-
ing the first Utilisation Date. This is intended to act as
a buffer in case there are problems with payments
under the Sales Contracts or indeed problems relat-
ing to the production of the Product itself. If the latter,
experience has shown that such buffers provide only
short protection.
No withdrawals are permitted from the Debt Service
Reserve Account.
15
Clause 27: Events of Default
The PXF Document incorporates the standard Events of
Default from the Leveraged LMA Facility with the following
principal additions:
(a) Clause 27.12: Accounts
“Without the prior written consent of the Agent on the
instructions of the Majority Lenders any Collection
Account or DSRA is closed or requested to be closed
(other than in accordance with the terms of this
Agreement)”.
This Clause should be uncontroversial.
(b) Clause 27.15: Sales Contracts
“(a) Any Sales Contract is amended, varied or waived
in a way that , in the opinion of the Majority
Lenders, is likely to have a material adverse
effect on the ability of any Obligor to perform its
obligations under any Finance Document.
(b) An event or circumstance occurs that gives rise
to, or might reasonably be expected to give rise
to, the termination, frustration, repudiation, rescis-
sion or cancellation of any Sales Contract, or to
a right to effect or make such termination, repu-
diation, rescission or cancellation [in a way that,
in the opinion of the Majority Lenders, is likely to
have a material adverse effect on the ability of
any Obligor to perform its obligations under any
Finance Agreement]”.
Given the wide ambit of the undertakings relating to
the Sales Contracts, it is difficult to see when para-
graph (a) will be required. Paragraph (b) is likely to
cover the same ground as Clause 27.22 (Material
Adverse Change).
(c) Clause 27.16: [Material Licences]
“(a) [Any Material Licence is terminated, cancelled,
suspended or revoked (whether wholly or in part).
(b) Any restrictions or conditions are imposed on any
Material Licence.
(c) Any Material Licence is modified or varied in a
way that is adverse in any material respect to the
interests of the relevant member or members of
the Group.
(d) Any Material Licence expires and is not renewed
on substantially the same terms.]”
Whether this Clause is appropriate will depend upon
if any licences are crucial to the ability of the Borrower
to produce the Product.
(d) Clause 27.18: Expropriation
“The authority or ability of any member of the Group
to conduct its business is limited or wholly or substan-
tially curtailed by any seizure, expropriation, nationali-
sation, compulsory acquisition, intervention, restriction
or other action by or on behalf of any governmental,
regulatory or other authority or other person in relation
to any member of the Group or any of its assets or the
shares in that member of the Group (including without
limitation the displacement of all or part of the man-
agement of any member of the Group)”.
This clause (along with Clauses 27.20 (Moratorium)
and 27.21 (Political and economic risk)) will only be rel-
evant for jurisdictions where such risks are considered
to be material.
(e) Clause 27.19: Convertibility/Transferability
“Any foreign exchange law is amended, enacted or
introduced or is reasonably likely to be amended,
enacted or introduced in [insert relevant jurisdiction(s)]
that (in the opinion of the Majority Lenders):
(a) has or may reasonably be expected to have the
effect of prohibiting, or restricting or delaying in
any material respect any payment or delivery that
any Obligor is required to make pursuant to the
terms of any of the Transaction Documents; or
(b) is materially prejudicial to the interests of the
Finance Parties under or in connection with any of
the Transaction Documents”.
Some jurisdictions often encountered with PXF facili-
ties (e.g. Brazil and Angola) have some form of cur-
rency control so this clause will obviously need to be
considered on a case-by-case basis.
(f) Clause 27.20: Moratorium
“A moratorium is called on payments by borrowers in
relation to, or by third parties under guarantees of,
or pursuant to enforcement of Security for, External
Indebtedness by [insert relevant jurisdiction(s)]
entities generally or a class thereof to which any
Obligor belongs”.
16
(g) Clause 27.21: Political and economic risk
“A deterioration occurs in the political or economic sit-
uation generally in [insert relevant jurisdiction(s)], or an
act of war or hostilities, invasion, armed conflict or act
of foreign enemy, revolution, insurrection, insurgency
or threat thereof occurs in or involving [insert relevant
jurisdiction(s)] [, unless (in any such case) this does not
and will not have a Material Adverse Effect]”.
Section 9: Changes to the Parties
(a) Clause 28: Changes to the Lenders
The Leveraged LMA Facility states that:
• the Lenders can assign or transfer their rights only
to a person that is “another bank or financial institu-
tion or to a trust, fund or other entity which is regu-
larly engaged in or established for the purposes of
making, purchasing or investing in loans, securities
or other financial assets”; and
• the Lender must consult with the Parent before any
assignment or transfer can be effected unless the
assignee/transferee is another Lender or an affiliate
of a Lender or it is made at a time when an Event of
Default is continuing.
However, the PXF Document provides for a more per-
missive approach to Lender transferability (which the
LMA views as reflecting the current state of the PXF
lending market) by allowing a Lender to freely assign
or transfer its rights to any such entity without any
requirement to consult with any Obligor. The Borrower
will therefore need to carefully consider whether this
is acceptable.
The PXF Document retains the provisions in the
Leveraged LMA Facility preventing an assignee/trans-
feree of a Lender from claiming amounts under the
increased costs provisions in circumstances where
the transferor was not claiming amounts under those
provisions but not in respect of claiming amounts
under the tax gross-up (which reflects the current
drafting of that clause as not having a concept of
Qualifying Lender). If a change is made to the Tax
Gross-up clause to include such a concept, it may
also be referred to in the transfer provisions.
(b) Clause 30: Changes to the Obligors
Unlike the Leveraged LMA Facility which permits addi-
tional borrowers and guarantors to accede to the
facility, the PXF Document prohibits any changes to
the Obligors.
Section 10: The Finance Parties
The PXF Document sets out the appointment of the Agent
and the Arranger on terms very similar to those of the
Leveraged LMA Facility and includes the appointment of the
Security Agent (the equivalent wording for the Leveraged
LMA Facility is included in the intercreditor agreement).
Section 12: Governing law and enforcement
Given the potential for an Obligor to have its jurisdiction
of incorporation in a country which does not recognise
English court judgments, there is an option for arbitration
under the Arbitration Rules of the LCIA which will be famil-
iar for lenders in the PXF market.
Schedule 2: Conditions Precedent
The conditions precedent set out in the PXF Document
contain the usual corporate documentation to be pro-
vided by each Obligor, together with the documentation
that relates to the Sales Contracts, Irrevocable Payment
Instructions etc.
SUMMARY
Whether the PXF Document will be used by many Lenders
in the UK market as the basis for their loan documenta-
tion relating to PXF transactions remains to be seen, par-
ticularly for transactions which do not precisely fit the
PXF Document’s assumed structure.
We would expect, in any event, that many borrowers,
depending on their negotiating strength, will seek to
negotiate many of the provisions contained in this docu-
ment. There are clearly a number of areas where the PXF
Document is likely to be regarded by such companies as
unduly restrictive or onerous.
17
18
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our web site at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.
FURTHER INFORMATIONFor further information, please contact your principal Firm
representative or one of the lawyers listed below. General
email messages may be sent using our “Contact Us” form,
which can be found at www.jonesday.com.
LONDON
Edwin BorriniPartner
+44 (0)20 7039 5152
David FrickerAssociate
+44 (0)20 7039 5230
ENDNOTES1 Indeed the PXF Document contains very little of sub-
stance relating to insurance requirements—merely
copying the generic undertaking that is found
in the LMA Leveraged Facility—see Clause 24.18
(Insurances).
2 There is clearly some flexibility in this discretion that
would allow Lenders to impose additional condition-
ality into the Eligibility Criteria and therefore restrict
the ability of the Borrower to introduce new Sales
Contracts.
3 Other relevant criteria may be (a) country limits or (b)
commodity limits.
4 The concept of a Material Contract is not defined,
though the LMA’s User’s Guide simply states “there
may be specific contracts which are of particular
importance in the context of any particular transac-
tion”. These could include, for example, contracts with
applicable third parties relating to the production of
the Products.
5 Note there is no suggested form included in the PXF
Document.
© 2012 Jones Day. All rights reserved. Printed in the U.S.A.
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