Loan Market Association issues ‘2014 Summary Note on FATCA’ and suggested drafting

The Loan Market Association (LMA) published a note: ‘2014 Summary Note on FATCA’ on 9 June 2014. This replaces the May 2013 note. The note explains the rationalising of the drafting as the 1 July 2014 deadline for implementation approaches. The note includes an explanation of the following issues.

The note explains that the investment grade facility agreements now contains language for FATCA on the basis of an agent in a jurisdiction with a Model I intergovernmental Agreement (IGA) in place but that is not a qualified intermediary. The language is set out in annex 1 to the note.

Other approaches are set out in riders 1 and 2.

The investment grade facility agreements include provisions which were in rider 3 of the previous LMA Note on FATCA and cover the right to withhold but not to gross up. This is on the assumption that the party is FATCA compliant within the required timeframe. If it is not, there is a risk that it would receive payments subject to withholding.

Information sharing – this mainly covers the provision of  US tax forms to the US tax authorities.

Suggested representations are given for when it is not clear if any income has a US source.

Optional drafting is given in rider 1A, if it is unclear if there is not a Model IGA in place.

Drafting is given in Rider 1A for representations and other assurances from the obligors that their status is such that FATCA withholding should not arise on payments made by obligors or the agent on their behalf. If it does, then parties have to look at normal contractual remedies to seek compensation.

Drafting  provisions are included in Rider 1B, requiring obligors to gross-up if FATCA withholding arises. It also permits finance parties to make FATCA deductions themselves, and requires the company to compensate any finance party suffering a shortfall as a result. The company has the option to repay or replace any lender.

Drafting in Rider 2 can be used to protect against ‘pass thru’ withholding from 2017.  Rider 2 drafting was used originally to cover grandfathering. Parties should consider whether the risk of pass thru exists as if a Foreign Financial Institution (FFI) is in a jurisdiction where there is a IGA in place then there would not be a requirement to make pass thru withholding on a payment to another FFI.

The note also covers the lender’s veto of any change to an obligor and the borrower’s right to replace a lender if it is or becomes non-FATCA compliant.

For more  detailed information and the suggested drafting  see the LMA website under the heading Documents and Guidelines (Investment Grade) > Issues and Guidance which is available to LMA members.