Monthly Highlights: November 2016

Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from November 2016.

LMA developments

Updated LMA leveraged finance documents and new REF security agreement

On the 18th November 2016, the Loan Market Association (LMA) issued revised forms of term sheet, senior facilities agreement, intercreditor agreement and hedging letter for leveraged acquisition finance transactions.

The LMA also launched a new security agreement intended for use on real estate finance (REF) transactions (the REF Security Agreement) as well as consequential changes to the LMA REF facility agreements and term sheets.

Both initiatives are in response to demand from participants in the syndicated loan market, who felt the projects would be beneficial for the market.

Changes to the leveraged documentation

The key changes to the leveraged documents relate to the inclusion of:

  1. an option for the establishment of additional term loan facilities (referred to as 'incremental facilities')
  2. an option providing for free transferability by lenders to pre-approved entities (with other transfers requiring consent)
  3. protections to address the new UK Persons with Significant Control (PSC) regime (which is relevant where security is taken over shares in UK companies), and
  4. general updates in response to market developments, including the removal of alternative reference bank provisions. To the extent appropriate, changes of a more general nature have also been incorporated across the LMA suite of facility agreements. This includes a change to the definition of 'Reference Bank Rate' to reflect the new ICE LIBOR submission methodology.

For more information on the changes to the leveraged documents, see News Analysis: LMA leveraged documents—what has changed?

The LMA then published a revised version of its Leveraged Facilities Agreement on 23 November to correct a minor typographical error in Clause 33.12(d) (Resignation of the Agent). However, note that the mark-up of the Leveraged Facility Agreement which is available on the LMA website continues to highlight changes as against the 14 June 2016 version.

Changes to the REF documentation

The key change to the LMA REF documentation is the publication of the REF Security Agreement. This is the first security document published by the LMA.

The REF Security Agreement constitutes the debenture to be entered into by each obligor as envisaged under the REF Investment Facility Agreement. The LMA has not drafted security documents for the security over the shares in the Company, or the security over any subordinated debt which are also assumed under the REF Investment Facility Agreement.

More information on all the changes is available to members of the LMA on the LMA website and in particular in the Press release: LMA updates leveraged finance documentation and launches REF security document and its Appendix.

Acquisition finance

ECB draft guidance on leveraged transactions for consultation

The European Central Bank (ECB) has launched a public consultation on a Draft Guidance to develop clear and consistent definitions, measures and monitoring with regard to leveraged transactions. The Guidance aims to develop a clear and consistent definition of what constitutes leveraged transactions, and to establish guidelines on how to measure and monitor such exposures while ensuring safe and sound origination and distribution practices to contribute to a smooth financing of the real economy.

For more information, see Press release: ECB launches public consultation on a draft guidance on leveraged transactions.

Shipping finance

Shipping financing term sheet adopted by BIMCO

The Baltic and International Maritime Council (BIMCO) has cemented its move into shipping financing with the adoption of a standard term sheet for use in shipping financing transactions. The term sheet was approved by BIMCO’s Documentary Committee on 17 November 2016 and will be published in early 2017. For more information, see the BIMCO press release.

Trade finance

New measures to support UK Export Finance

The Export Credits Guarantee Department (ECGD) is the UK's official export credit agency and operates under the name UK Export Finance (UKEF). As part of the Autumn Statement on 23 November, the Chancellor announced some new measures designed to boost UK exports and build upon existing trade policy expertise ahead of Brexit. In particular:

  1. financial support for UK exporters will double through UKEF, and
  2. the Department for International Trade (DIT) will receive £79.4m to develop and deliver an independent international trade policy

As a result of the new measures, UKEF's total risk appetite will double to £5bn and the maximum cover limit for individual markets will increase by up to 100%, potentially resulting in as much as £2.5bn of additional capacity to support exports to some destinations. In addition, the number of pre-approved currencies in which UKEF can offer support has increased from 10 to 40.

The Autumn Statement also included measures to support an enhanced approach to risk management for UKEF, including the use of private insurance markets, which it is hoped will create additional appetite to support UK exports in popular markets.

Derivatives

2016 Variation Margin Protocol and assistance by ISDA in preparing for the Variation Margin requirements

The International Swaps and Derivatives Association, Inc (ISDA) and IHS Markit have announced the launch of the ISDA 2016 Variation Margin Protocol on ISDA Amend, which automates the process for amending existing collateral documents or setting up new agreements in order to comply with new variation margin requirements going into effect on 1 March 2017.

ISDA have also published a useful document which sets out the steps to be taken by market participants in order to prepare for the variation margin requirements coming into force on 1 March 2017.

LCH launches new service for the non-cleared derivatives market

The clearing house, LCH, has announced that it will launch a new service for non-cleared derivatives in early 2017. LCH SwapAgent will act as an independent calculation agent, facilitating the calculation and exchange of bilateral margin and settlement payments, but will not become the central counterparty to the trade. LCH SwapAgent’s customers will be able to benefit from services including CSA standardisation, end-to-end trade life cycle management, independent valuation and risk calculation, dispute elimination, payment netting and compression.

ESMA proposes postponed phase-in period for central clearing

The European Securities and Markets Authority (ESMA) has published its final report regarding the amended application of the clearing obligation that financial counterparties with a limited volume of activity in OTC derivatives need to comply with under the European Market Infrastructure Regulation (EMIR).

Due to a range of reasons covered in the Final Report, ESMA proposes to postpone the phase-in period for central clearing of OTC derivatives applicable to financial counterparties with a limited volume of derivatives activity.

ESMA’s report proposes to amend EMIR’s Delegated Regulations on the central clearing obligation to prolong by two years the phase-in period for financial counterparties with a limited volume of derivatives activity—those ones classified in category three under the EMIR delegated regulations. ESMA is also proposing to align the three compliance dates for category three firms in the Delegated Regulations regarding interest rate swaps and credit default swaps. The newly proposed compliance date is 21 June 2019.

ESMA has submitted the Final Report to the European Commission for endorsement of the draft regulatory technical standards (RTS) set out in the annex to the Final Report. The European Commission has three months to decide whether or not to endorse the RTS.

Structured products and securitisation

Analysis of case relating to construction of the GMRA

In Lehman Brothers International (Europe) v Exxonmobil Financial Services BV [2016] EWHC 2699 (Comm), a recent decision in the Lehmans insolvency, the Commercial Court discussed the construction of the termination provisions in the Global Master Repurchase Agreement (GMRA), how these provisions are effected in practice and how the securities should be valued. The claimant, Lehman Brothers, contended that a default valuation notice served by Exxon was invalid and the valuations ascribed to the securities were incorrect. The Commercial Court held, among other things, that the default valuation notice had been validly exercised and that the valuation had to be rational even if it was not objectively reasonable. In News Analysis: Effective termination of a repo (Lehman Brothers International (Europe) v Exxonmobil Financial Services), we consider the court's verdict and its implications for practitioners using the GMRA.

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