LMA origins, development and introductioncontent.linklaters.com/sitecollectionimages/EmailImages... · · 2017-07-26LMA – origins, development and introduction Jarosław Miller

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


Evolution of LMA Documentation


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


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


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


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


What are the key representations and warranties?


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


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


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


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)


What about the covenants (or undertakings?)


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


What different types of covenants do you see?

LMA documents include three types of undertakings:

Information

undertakings

Financial

covenants

General

undertakings


> 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?


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


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?


> 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


> 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


> 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?


> 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


A breach of these can lead to... an event of default


> 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…


> 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


> 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


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


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


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?


Questions?

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Contacts

Jarosław Miller

Banking Partner, Warsaw

Tel: +48 225 265 048

[email protected]

Alina Stancu Birsan

PeliFilip

Tel: +4021 527 20 07

[email protected]

Documents

LMA origins, development and introductioncontent.linklaters.com/sitecollectionimages/EmailImages... · · 2017-07-26LMA – origins, development and introduction Jarosław Miller