Fronted Distribution Agreements to smooth syndication process

The recent publication of two versions of Fronted Funding and Distribution Agreements by the Loan Market Association will help ease the administrative burdens on lead arrangers and underwriters, primary syndication lenders and borrowers.

Original news

The Loan Market Association (LMA) has introduced new forms of fronted agreements for leveraged acquisition finance transactions. The new agreements came as a response to participants in the syndicated leveraged loan market calling for a form of fronted underwriting to assist in the smooth running of the syndication process.

What are the new documents?

The LMA has published two new documents:

  • Fronted Funding and Distribution Agreement (FFDA); and
  • Fronted Distribution Agreement (FDA).

These documents will be relevant to those advising mandated arrangers and underwriters and primary syndicated lenders. The two new agreements are aimed at syndication in the leverage finance market.

What do the new documents do?

In a syndication, one or more lead arranging banks may fully underwrite the facilities to make them available to the borrower. This typically involves them fully funding the facilities on completion, on the basis that when primary syndication takes place shortly thereafter they will be distribute part (or all) of those facilities amongst the new lenders who form the primary syndicate.

The agreements regulate the rights and obligations of the arranging and underwriting banks who are engaged in organising and underwriting the initial drawdown of term facilities by the borrower and the distribution of allocations in those facilities to the institutions that will form the primary syndicate of lenders. The documents are primarily aimed at making this process smoother and less risky for underwriting lenders and borrowers. They do not document syndication strategy.

Why are there two versions of the agreement?

The two documents do slightly different things.

Under the FFDA a single lender, known as the Funding and Distributing Underwriter, acts on behalf of the other Underwriters to:

  • make the whole amount of the term facilities available to the borrower to draw down at closing (following transfer by the other Underwriters to the Funding and Distributing Underwriter of their commitments under the term facilities), and
  • distribute allocations in the drawn term facilities to the lenders forming the primary syndicate

Once the Funding and Distributing Underwriter has distributed allocations to the primary syndicate, the other Underwriters will purchase at par both their agreed hold amount and also a specified share of undistributed allocations if for whatever reason the facilities are not fully taken up on primary syndication. This ensures the Funding and Distributing Underwriter is not left carrying any unallocated commitment alone.

Under the FDA there is no single Funding and Distributing Underwriter. Each Underwriter makes its share of funds available to the borrower on closing. However, the FDA then provides for a single Distributing Underwriter to purchase a portion of the other Underwriters’ commitments at par in order to allocate them amongst the lenders forming the primary syndicate. As with the FFDA, once this process is completed, the other Underwriters will purchase at par their specified share of undistributed allocations.

Who will be party to these new agreements?

The main parties will be those lenders who are arranging and underwriting the facilities for the borrower.

In some cases because the FFDA and FDA envisage transfer of participations between the parties to the agreement it may be necessary to have the facility agent as a party to the agreement. As the LMA user guide points out this will be necessary if the agent is to waive any fees payable upon transfer of a participation in the loan.

The LMA does not envisage a borrower being party to the new agreements in most cases. In each case if the new documents are to be used to alter any obligation or right of the borrower or other obligor eg in relation to consents the borrower or parent would need to be made a party.

What type of facility can these new documents be used for?

It is envisaged that these documents will be used mainly on leveraged finance transactions.. The reason for this is that leveraged finance facilities are normally drawn down on one occasion at closing. For the same reason it is unlikely the new documents would be used for revolving facilities.

Are these documents standard forms?

The LMA wants these two new documents to be starting points for the relevant lenders. In each case the agreements will need to be negotiated by the parties to make sure they are suitable for any particular transaction.

Both forms of fronted agreement make reference to definitions contained in the relevant facility agreement and care will need to be taken to ensure these definitions are relevant.

Where can I find out more about these new documents?

The documents and a comprehensive user guide detailing the transactions they envisage and the assumptions upon which they are based can be accessed by members of the LMA on their website.

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