Last month, the Association of Corporate Treasurers (ACT) published a fifth edition of its Borrower’s Guide to the Loan Market Association’s Investment Grade Agreements. The Borrower’s Guide has been comprehensively revised and updated to address changes made to the agreements and other market developments since the last edition in 2013.
The association’s collection of recommended forms provide the basis for, or at least have an influence on, virtually all commercial loan documentation, certainly in the English-law market.
Its recommended forms of facility agreement for investment-grade borrowers, the investment-grade agreements (IGAs), were the first primary documents produced by the Loan Market Association (LMA) and are probably the most widely used.
The IGAs are the plain vanilla of the LMA’s various forms of facility agreement.
When embarking on a new financing, it is helpful to anticipate the issues likely to be at the forefront of lenders’ minds
As such, they provide a baseline for the mechanical aspects of loan documentation and a starting point for the commercial aspects that can be applied across most sectors of the loan market.
The ACT has worked with the LMA on the IGAs since the templates were first developed almost two decades ago. The ACT’s involvement is aimed at ensuring that, as far as possible, the agreements reflect an appropriate balance between the interests of lenders and borrowers.
However, the IGAs, like all LMA templates, are presented only as a starting point for negotiation. They are intended to be adapted and supplemented according to the circumstances of the transaction.
It is important for treasurers to understand that they should not feel prevented by the use of LMA terms from negotiating in their own interests where necessary.
The Borrower’s Guide, now in its 18th year, is a reference tool for treasurers working with the LMA templates. It explores the key provisions of IGAs from the borrower’s perspective and outlines some of the typical discussion points and more common negotiating positions.
It is divided into four parts:
The latter are optional clauses for use in conjunction with the IGAs. They address the potential consequences of a default by, or the insolvency of, a lender or administrative party and (given the prompt for their production) are colloquially known as ‘Lehman provisions’.
It is important for treasurers, with support from their advisers, to keep abreast of recent developments affecting lending terms.
Forewarned is forearmed, so it is helpful when embarking on a new financing to anticipate the issues that are likely to be at the forefront of lenders’ minds, consider whether they are likely to be controversial, and, if so, decide what the appropriate response may be.
As such issues often need to be considered and addressed on a case-by-case basis, the number of recent developments to be dealt with can have an impact on the time taken to settle the documentation – something that may need to be factored into the timetable and/or even the borrower’s position on the relevant issue.
To facilitate a smooth documentation process, borrowers may find it worthwhile to discuss the issues that are likely to arise with their legal advisers at an early stage in the transaction, with a view to assessing the lenders’ or lead arrangers’ likely views and current market practice in advance of detailed documentation discussions.
The guide highlights some of the more recent developments that are relevant to many current lending transactions.
Should a contractual floor of zero be imposed on Libor, Euribor or another applicable benchmark for the purposes of the agreement? The commercial point here is whether the lenders or the borrower (by virtue of a reduction in the margin) should have the benefit of a negative benchmark rate.
Reforms to Libor, Euribor and other benchmarks have prompted the LMA to make a number of changes to the provisions of its templates catering for the use of benchmarks and for the consequences of the non-availability of the chosen benchmark.
These changes are, in the main, not controversial, but require focus, as they include a number of options.
For example, the parties may choose whether to include or exclude the impact of any intraday refix of the relevant benchmark for the purposes of the agreement, and are provided with a choice of fallback rates to apply if the screen rate is unavailable.
Lenders’ compliance obligations in this regard have customarily been addressed in pre-contractual due diligence, but increasingly aggressive enforcement action by authorities around the world has prompted lenders over the past few years to seek contractual assurances on these topics from borrowers, to crystallise the results of their due diligence and to ensure no compliance issues arise over the life of the facilities.
Lenders can take a range of views on the need for and scope of such provisions. It is true that, over time, lenders and borrowers have become more familiar with each other’s concerns in relation to these provisions (as have their advisers, aware of the likely compromise positions), but, in the absence of a market-standard starting point, the detail of the drafting must be settled on a case-by-case basis and generally requires some negotiation.
As treasurers will be aware, this represents a major alteration in approach to lease accounting, which companies using IFRS are required to adopt for accounting periods starting on or after 1 January 2019.
The balance sheet recognition of operating lease commitments has the potential to affect a number of financial tests and ratios customarily used in loan documentation, which currently take into account only finance lease commitments. Examples include covenants that place limits on a group’s indebtedness.
The contractual solution is to ‘freeze’ existing provisions so that they are interpreted in accordance with current lease accounting standards; in other words, until renegotiated, any reference to lease commitments, where relevant, will include only lease commitments that are currently treated as finance leases.
The LMA (following discussions with the ACT) has made some optional changes to its templates to address this issue, requiring the parties to discuss what the agreed position should be.
The impact Brexit may have on the financial sector, and therefore the loan market, is the risk factor that has probably received the most attention from loan market participants over the past 12 months, although the general conclusion in most cases is that no changes to documentation terms are required at this stage.
Areas of focus have included whether the terms of the LMA’s syndicated loan documentation are sufficiently flexible to accommodate any post-Brexit restructuring of lenders’ participations (in terms of the jurisdiction in which their participation is booked and managed); the impact of Brexit on dispute resolution clauses; and the popularity of submissions to the jurisdiction of the English courts (current market practice being underpinned by EU legislation).
These issues continue to be discussed. Lenders and borrowers are keen to understand them, but whether any risks highlighted are likely to arise in practice remains to be seen. This is reflected in the LMA’s response. It has produced some helpful guidance, but has not recommended any changes to its templates.
The prospect of Brexit may have had minimal effects so far on loan documentation, but its effect on the FX markets is, in some cases, coming up in documentation discussions.
Currency movements can affect certain financial covenant calculations and also capacity under certain monetary or financial limits that are relatively common in loan agreements.
For example, exceptions to restrictive covenants often take the form of baskets that are capped by reference to a monetary amount specified in a particular currency.
Any arbitrary effects of exchange rate movements can be excluded by express contractual provision, but the appropriate solution tends to vary according to the borrower’s circumstances.
Each of these issues is discussed in detail in the new guide, including the legal and regulatory background, and some of the ways in which these issues are currently being managed in practice.
Kathrine Meloni and Stephen Powell of law firm Slaughter and May are authors of the ACT’s new Borrower’s Guide to the Loan Market Association’s Investment Grade Agreements. The ACT and Slaughter and May created the guide to assist treasurers. Download the publication here. Comments and suggestions for future content are welcome.
This article was taken from the May 2017 issue of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership
