Loan Market Association updates its recommended secondary trading documentation

Loan Market Association updates its recommended secondary trading documentation

Banking & Finance analysis: What do lawyers need to know about the recent updates to the Loan Market Association’s (LMA) secondary trading suite?

Original news

Revised versions of the LMA’s Trade Confirmations, Standard Terms and Conditions, Participation Agreements and Secondary Debt Trading Users Guide have been issued and are available on the pending page of the LMA website. The revised documents will go live on 16 December 2015. Similar changes had previously been proposed on 14 October 2015, but the updated documents never became ‘live’, owing to comments received by LMA members.

Why have these changes been made?

The changes to the documentation which have now been announced have been made to take account of the decision of the Supreme Court in Tael One Partners v Morgan Stanley & Co International plc [2015] UKSC 12,[2015] All ER (D) 112 (Mar) and to clarify and provide guidance on the scope and application of a number of other provisions in the documentation.

Which documents have been updated?

The LMA has updated the following documents:

  • Users Guide
  • Trade Confirmation (Bank Debt)
  • Trade Confirmation (Claims)
  • Trade Confirmation (Risk Participation)
  • Standard Terms & Conditions for Par and Distressed Trade Transactions (Bank Debt/Claims) (Standard Terms and Conditions)
  • Master Funded Participation Agreement (Par/Distressed)
  • Master Risk Participation Agreement (Par)
  • Funded Participation (Distressed/Claims)
  • Funded Participation (Distressed/Par)
  • Risk Participation (Par)
  • Risk to Funded Participation (Par)
  • Funded/Risk Participation (Par)

These documents are available to LMA members on the pending section of the LMA website here and will become 'live' documents on 16 December 2015.

Capitalised terms have the meanings given to them in the LMA’s Standard Terms and Conditions, unless otherwise specified.

What are the main changes to the documentation?

Clarifications resulting from the court’s decision in Tael One

In Tael One, the Supreme Court considered whether a Seller was entitled to recover from the Buyer a portion of a payment premium that was paid by the borrower on the prepayment of the loan, which occurred after the Trade Date. The case considered the interpretation of what is now Condition 15.9 of the LMA’s Standard Terms and Conditions and which party was entitled to the payment premium by reference to the date on which it could properly be said to have accrued.

For more on this case, see the Lexis®PSL Banking & Finance News Analysis: Supreme Court clarifies rights from trading of debt under LMA terms. The court considered the interpretation of Condition 15.9 as a matter of contract law, but also took a commercial view that it would have been inconsistent with usual market practice in secondary trades (and the parties’ intentions) for the seller to recover the payment premium in this case.

The seller based its case for the recovery of the payment premium on Condition 15.9. As a result of Tael One, the LMA has amended the Terms and Conditions to clarify that Condition 15.9 is not to be read in addition to any specific provisions found in the trade confirmation but that this condition only applies to allocate Interest and Fees (whether recurring or non-recurring) if the Trade Confirmation is silent on the treatment of these items. This is confirmed in the User Guide commentary on this provision.

The User Guide emphasises that where the relevant credit documentation contains unusual interest, fee or other yield arrangements which do not readily sit within the definitions used in the Standard Terms and Conditions, or where the parties want to provide for different treatment of Interest, Recurring Fees and/or Non-Recurring Fees from that provided for in the Standard Terms and Conditions, it is critical that the parties agree the allocation of these at the time of trade. Failure to do so can result in disputes such as the one that arose in Tael One. Any such provision should be included as a specific term of trade in the ‘Other Terms of Trade’ section of the Trade Confirmation.

The updated User Guide provides some helpful guidance on the definitions of ‘Recurring Fees’ and ‘Non-Recurring Fees’—only fees which are expressly referred to in the Credit Agreement will come within the definition of Recurring Fees; Non-Recurring Fees will include ‘ticking’ fees (that is, fees which increase by reference to time elapsed) documented in a commitment letter, arrangement and underwriting fees and amendment/waiver fees arising under the credit agreement to the extent these are paid or capitalised after the Trade Date. It would also include the type of payment premium which was the subject of Tael One.

Provision for payment of notarial fees

In some jurisdictions, a secondary trade can involve the payment of fees to a notary—for example, in order to formalise transfers of/changes to security arrangements to ensure that the purchaser will be properly secured. These notarial fees can be significant, particularly in some European jurisdictions such as France and Spain and, if not considered at the time of trade, can have an unforeseen impact on the parties’ profit or recovery from the purchase.

The LMA’s Standard Terms and Conditions now include a new Condition 18.3 (Notarial fees) which allocates responsibility for payment of notarial fees. There are two types of notarial fee attributable to a debt trade under the Terms and Conditions, which are treated differently as follows:

Contractual Notarial Fees

These are notarial fees which are attributable to the sale and/or purchase of the Traded Portion, but not to any other part of the Purchased Assets and Purchased Obligations or related Collateral, where the notarisation is undertaken pursuant to an express provision in the relevant Credit Agreement. This includes where this express requirement is exercised at the discretion of the Agent or any other party to the Credit Agreement.

These Contractual Notarial Fees are to be divided equally between Buyer and Seller. However, it is important to note that where one of the counterparties is selling or purchasing the Traded Portion using a number of different legal entities, this will not increase the proportion of the Contractual Notarial Fees payable by that counterparty overall, as all the trades using different legal entities will be treated for these purposes as one trade.

This means that if, for example, a Seller is dealing with a counterpart Buyer which wishes to nominate four different legal entities to each hold part of the Traded Portion, for the purpose of these fees the four different legal entities will be treated as only one ‘Buyer’ (notwithstanding that there will be four separate trades with the Seller trading with four separate Buyers). This takes into account the reality of how some parties operate in the secondary trading market.

All other notarial fees attributable to the sale/and or purchase of the Traded Portion, the related Collateral and any other part of the Purchased Assets and Purchased Obligations

These fees will be payable by the Buyer.

If the parties wish to vary this Condition, any variation would need to be documented in the applicable trade confirmation under ‘Other Terms of Trade’.

Delayed Settlement Compensation

The Delayed Settlement Compensation provisions are designed to put the parties in the position they would have been in if the delayed transaction had settled ten Business Days after the Trade Date (in the case of a Par trade) or 20 Business Days after the Trade Date (in the case of a Distressed trade). This is accomplished by having the Buyer compensate the Seller for its ‘costs of carry’ during the period of delay, on the assumption that the Seller is funding the Traded Portion in the interbank market.

The User Guide has now been amended to clarify the circumstances in which a seller could be obliged to compensate a buyer for its cost of carry, rather than the Buyer compensating the Seller. These include:

  • where a loan is trading below par and the unfunded portion being sold is greater than the funded portion—the adjustment resulting from the unfunded portion could result in a negative Settlement Amount being due (thus a payment due from Seller to Buyer upon settlement), and
  • where a negative Relevant Benchmark Rate (such as negative IBOR) could result in a Seller receiving a financial benefit from its cost of carry during the period of delay, rather than suffering any loss from the continued funding. If the parties do not want the Seller to have to make a payment to the Buyer in these circumstances, they should agree this at the time of the trade and insert this under ‘Other Terms of Trade’. The User Guide suggests some ‘zero IBOR floor’ drafting that can be used in this situation: ’If on any day, the Relevant Benchmark Rate is less than zero, it shall be deemed to be zero on that day’
Non-Cash Distributions

A Non-Cash Distribution made by a borrower or obligor in respect of a Traded Portion of a debt could for example include a distribution of equity in a debt for equity swap, or any other kind of financial instrument distributed on account of a transferred loan.

The LMA has amplified the provisions relating to the treatment of Non-Cash Distributions after the Trade Date and these are now addressed in Condition 9 (Insolvency Proceedings), Condition 11 (Delayed Settlement) and Condition 15 (Interest payment and fees). These conditions provide that Non-Cash Distributions made after the Trade Date are for the account of the Buyer and set out in detail the Seller’s obligations to the Buyer in respect of these, including a timeline for the transfer of such Non-Cash Distributions to the Buyer.

No fiduciary duties/exclusion of liability

The Standard Terms and Conditions contain clarification (at Conditions 21.1(c) (non-reliance and independent investigation; Acknowledgement) and 21.6 (No fiduciary duty/Exclusion of liability)) that neither party to a trade is acting as a fiduciary, trustee, agent or custodian of the other, which could otherwise import a number of unexpected and unintended duties as well as compliance and custody rules into the trade. If this is not the case, it should be specified in the trade confirmation or participation agreement, as applicable.

Designation of Relevant Benchmark Rate

The Standard Terms and Conditions provide various benchmark rates for the purpose of calculating the Relevant Rate in respect of the cost of carry element of Delayed Settlement Compensation and the sell-out element of the buy-in/sell-out provisions. If any sum is denominated in a currency which does not have a Relevant Benchmark Rate, the parties are required to agree the applicable rate at the time of trade and to include it in the trade confirmation under ‘Other Terms of Trade’. The box specified ‘Relevant Benchmark Rate’ should be ticked and the relevant rate included.

If such a rate is required but none is specified at the time of trade, the fallback position is that that the rate for that currency will be as specified by the Seller (acting reasonably) (Standard Terms and Conditions, paragraph (h) of ‘Relevant Benchmark Rate’ definition).

What are the implications of these amendments for practitioners?

The LMA’s revised documentation will become ‘live’ on 16 December 2015. All trades made on or after 16 December 2015 (and until such date as further revised Standard Terms and Conditions are published by the LMA) which incorporate the Standard Terms and Conditions applicable at the time of the trade, will be governed by the 16 December 2015 Standard Terms and Conditions for their duration.

Practitioners therefore have some time to familiarise themselves with the changes to the documentation in advance of it going live. When the revised documents take effect on 16 December 2015, practitioners should take note the following in particular:

  • any unusual pricing features (for example prepayment premiums of the type at issue in Tael One) should be discussed between the parties upfront and their allocation agreed. If practitioners are not comfortable that this allocation is clearly in accordance with the treatment of such items in the Standard Terms and Conditions, it should be explicitly included in the trade confirmation
  • notarial fees can also have a significant value impact for both Buyer and Seller. Where relevant, practitioners should advise their clients of the allocation included in the Standard Terms and Conditions for these, and include any desired variation as a term of trade under the ‘Other Terms of Trade’ section of the trade confirmation, and
  • if there is no benchmark rate included in the Standard Terms and Conditions for the currency/ies of the Traded Portion, this should also be included as a term of trade under the ‘Other Terms of Trade’ section of the trade confirmation. This is particularly important when acting for a Buyer, as the fallback will be the Seller’s choice of rate (acting reasonably)

Kate Edwards, solicitor in the Lexis®PSL Banking & Finance team.

First published on LexisPSL Banking & Finance. Click here for a free trial.

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About the author:

Miranda is a solicitor specialising in leveraged and acquisition finance. She trained at Hogan Lovells International LLP and qualified into the international banking and finance team. During her time at Hogan Lovells she worked on a variety of domestic and cross-border transactions, acting for both borrowers and lenders. She also experienced secondments to Barclays Bank PLC and Kaupthing Bank hf.