LMA leveraged documents—what has changed?

48004716 - double explosure with businesss charts and financial district of megapolis cityThe Loan Market Association (LMA) published major changes to its suite of documents for use on leveraged acquisitions on 18 November 2016 in response to feedback from the market and changes to practice. It also published a debenture for use on real estate finance transactions. This news analysis focuses on examining the changes to the leveraged documents.
The recommended form of facilities agreement for use on leveraged acquisitions (the leveraged document) has undergone the most substantive changes, while the amendments to the intercreditor agreement, term sheet and hedging letter are for the most part consequential changes resulting from the changes to the leveraged document.The LMA have drafted a helpful note summarizing the key changes and have also updated the user guide to the leveraged document. These, together with mark-ups of the revised documents are available on the LMA website to members of the LMA.This is a major update to the leveraged suite of documents and this news analysis aims to highlight the key changes only. For a detailed understanding of all the changes that have been made, we refer you to the note published by the LMA summarising the changes, the mark-ups published by the LMA and the associated user guides.
Lexis®PSL subscribers can enjoy expert guidance by accessing some of the links below. If you are not a subscriber, you can take a free Lexis®PSL Banking & Finance trial here.

In summary, what key changes have been made?

The key changes to the leveraged document are as follows:

  • addition of optional mechanism to allow for additional term facilities (incremental facilities) to be lent within the framework of the leveraged document
  • amendment to the loan transfer provisions to allow for, as an option, transfer of loans to entities on an agreed list (ie a whitelist) without consent or consultation
  • addition of an undertaking and condition precedent to reduce the risk of secured shares becoming subject to a restrictions notice under the PSC regime
  • expansion of the list of amendments to the finance documents that require all lender consent
  • definition of Reference Bank Rate revised to take into account the new submissions methodology for LIBOR

The hedging letter, intercreditor agreement and term sheet have been amended to reflect changes to the leveraged document (in particular the new option for incremental facilities).

How do the new incremental facilities work and are there any restrictions on terms?

Mechanics

The leveraged document now includes an optional mechanism enabling the parties to establish incremental facilities, ie term loan facilities under the framework of the leveraged document. This reflects the prevalence of incremental facilities in the current market as sponsors seek agreement to significant future borrowing at the time the main facilities are negotiated.

The leveraged document incudes two options as to the identity of the incremental facility lenders. Under the first option, the borrower's parent company (the parent) is obliged to give the existing lenders the right of first refusal on a pro rata basis. Under the second option the parent is free to choose the incremental facility lenders, provided the lender falls within the definition of 'eligible lender'. The definition of eligible lender is very broad and covers existing lenders as well as any other trust, fund or financial institution. It is obviously open to the parties to agree that the definition should only apply to certain types of entity.

Where the existing lenders are to be offered the right of first refusal, the parent must approach them with the proposed terms of the incremental facility and each lender will notify the agent and parent of the commitment it is prepared to make available. The leveraged document sets out the mechanics for dealing with the situation where the incremental facility is over-subscribed (the lenders will scale back their offers pro rata to their existing commitments) or under-subscribed (the lender may scale up their offers pro-rata to existing commitments).

Once the identity of the incremental facility lenders and their respective commitments is settled, an incremental facility notice must be executed by the parent and each incremental facility lender containing all the relevant terms of the new facility. Each incremental facility lender must also submit a certificate to the agent confirming such matters as its tax status.

The leveraged document sets out a number of conditions that need to be met before drawdown of the incremental facility can occur. Once the agent is satisfied that these conditions have been met, it will execute the incremental facility notice and the incremental facility will be made available.

Terms

The incremental facilities are offered under the umbrella of the leveraged document so the majority of terms will apply to the incremental facilities in the same way as the existing facilities. However, there will be some facility specific terms that will need to be agreed at the time the incremental facility is established. These include, for example, size of facility, currency, margin, availability period, repayment schedule, purpose, conditions precedent to utilisation.

The leveraged document sets out some suggested starting points for restrictions on incremental facility terms that should be put in place when the leveraged document is first negotiated in order to protect existing lenders. These include:

  • restrictions on currency
  • restrictions on facility size (eg based on the group's leverage)
  • restrictions on margin and fees (eg by capping the maximum yield by reference to the yield on the existing term facilities)
  • restrictions around maturity (eg an incremental facility with a bullet repayment cannot fall due for repayment prior to the other term facilities)
  • restrictions on which group companies can borrow the incremental facility

Another important protection for existing lenders addressed by the leveraged document relates to the security position. The leveraged document obliges the parent to deliver such documentation as is necessary (eg new security documents or confirmations) to ensure that the existing transaction security is maintained and that the incremental facilities are properly secured. This is to address the risk of the existing lenders suffering loss under turnover and equalisation provisions if the incremental facilities are not properly secured, as well as the risk that the insertion of new facilities could threaten the existing security (depending on the jurisdiction and how the security was initially drafted).

This risk is also addressed by an obligation inserted into the intercreditor agreement on the lenders to do what is necessary to maintain the effectiveness of existing security and facilitate incremental lenders receiving appropriate security. In practice, legal advice will need to be sought in all relevant jurisdictions to find out what the risks are (if any) of the insertion of new facilities and what action should be taken to address the risks. New security documents may need to be put in place which may require execution by all lenders.

How have the transfer provisions been amended?

The transfer provisions have been amended so that the parties now have the option of agreeing that either:

  • the lenders can transfer their commitments following consultation with the parent, or
  • the lenders need to obtain the consent of the parent prior to transfer, except where the transfer is:
    • to one of a pre-approved list of financial institutions (commonly known as a whitelist)
    • to an existing lender (or affiliate/related fund), or
    • is made at a time when an event of default is continuing

Whitelists are very commonly used on deals so this change will be a welcome alignment of the document with market practice in this area. The whitelist will be agreed prior to signing and delivered as a condition precedent.

How is the PSC Register regime addressed?

Following the introduction of the 'People with significant control' (PSC) regime under Part 21A Companies Act 2006, concerns have been raised about the impact of a company issuing a restrictions notice on the enforceability of any security over its shares. The effect of a restrictions notice is to freeze the shareholder's interest in the shares, preventing any dealing with the shares without a court order. A restrictions notice would therefore hinder any attempts to enforce security over the shares.

In order to address this, a new undertaking has been inserted that obliges the obligors to comply with any notice received under the PSC register regime and to provide the agent with a copy of any such notice.

A new condition precedent has also been added. This takes the form of a new directors certificate certifying that the group has complied with any notice it has received and that no restrictions notice has been issued in respect of the shares. This needs to be submitted along with a certified copy of the PSC register.

What additional changes now need all lender consent?

The list of amendments requiring all lender consent has been expanded to include amendments to:

  • utilisation timetable
  • illegality protections
  • obligor accession/resignation mechanics

There are now also several options regarding the extent to which amendments to the mandatory prepayment provisions require all lender consent.

A further amendment has been made to the voting provisions. This clarifies that where a lender has transferred its entire commitment but still remains entitled to receive interest on the following interest payment date, the lender does not have any voting rights.

Why has the definition of Reference Bank Rate changed?

The definition of Reference Bank Rate for LIBOR has been revised to take into account the new submissions methodology for ICE LIBOR. A detailed explanation of the changes is contained in the user guide for the LMA investment grade facility agreement.

In summary, the definition now distinguishes between reference banks that are also ICE LIBOR panel banks and reference banks that are not ICE LIBOR panel banks. Under the definition, ICE LIBOR panel banks are required to base their quotations on the same basis as they base quotes for ICE LIBOR (following the submissions methodology waterfall) until such time as it is decided to move to submission of raw data only (this is envisaged in the roadmap for the evolution of ICE LIBOR). When this occurs, they will use the same basis as non-ICE LIBOR panel banks for their quotations as it is not considered feasible for the agent to create an individual submission from raw data. Non-ICE LIBOR panel banks should base quotations on the 'rate at which the relevant Reference Bank could fund itself in the relevant currency for the relevant period with reference to the unsecured wholesale funding market'.

The reason for distinguishing between panel banks and non-panel banks is that while it is preferable for panel banks to make submissions on the basis they would normally use, it would be too complicated for non-panel banks to have to follow the same process now that the new submissions methodology for ICE LIBOR is in place.

The position as regards EURIBOR is more straightforward at the moment as a revised submissions methodology has not yet been put in place. Therefore, reference banks are obliged to base their quotations on the same basis as the panel banks which provide quotes for European Money Markets Institute (EMMI) Euribor.

 

Relevant Articles
Area of Interest