Note on the implications of Brexit for LMA facility documentation

Note on the implications of Brexit for LMA facility documentation

The Loan Market Association (LMA) has produced a supplementary note (the Supplementary Note) to inform members of market discussions/concerns related to the documentary implications of Brexit for LMA facility documentation. Members should note that the Supplementary Note does not replace the previous note, first produced by the LMA in September 2016 (the 2016 Brexit Note), but rather is intended to be read in conjunction with it.

The Supplementary Note focuses on the evolving concerns associated with the loss of the financial services passports in situations where facility documentation envisages continuing activities that may require a passport and looks in more detail at potential documentary mitigants. It is intended to increase market awareness of these issues.

Documentary mitigants to the loss of passporting rights include:

  • the ability to transfer rights and obligations to a licensed affiliate
  • the ability for an institution to change the branch through which it acts
  • contractual rights to exit the transaction under illegality protections
  • the ability to control the accession of additional members of the borrower group to existing lending arrangements

The schedule to the Supplementary Note discusses the extent to which these contractual mitigants are currently catered for in LMA facility documentation, in terms of, not only lending activity, but also the provision of letters of credit and bank guarantees, bank accounts and facility and security agent services. In particular, it highlights the current illegality provisions and wording allowing free transferability to affiliates, as well as the LMA Designated Entity Clause and flexibility in the definition of Facility Office.

The Supplementary Note then goes on to discuss other potential adjustments to the facility documentation that market participants may want to consider to address risks associated with loss of passporting. The aim is to increase market awareness of the issues and options.

The additional options discussed are as follows:

  • tranching structures—this involves making certain tranches available to certain borrowers and lenders only, enabling lending institutions to confine their lending obligations under a facility to certain members of the borrower group or allocate lending obligations to suitable entities in their own corporate group
  • fronting structures—this involves the lending that might be impacted by the loss of the passport being carried out by an appropriately authorised ‘fronting’ lender subject to back-to-back funding arrangements between that fronting lending and the remainder of the syndicate
  • illegality clause—it is not clear that the existing illegality clause could necessarily be relied on in all circumstances by a lender if it lost passporting rights—an expansion of the clause to instances where an institution reasonably considers that illegality might result from maintenance of the loan could be considered
  • facility agent resignation—a facility agent’s ability to unilaterally appoint a successor under LMA facility documentation is limited by a requirement that any such successor be operating through an office in a specified jurisdiction. The documentation could be amended to provide for more flexibility on this
  • account banks—the documentation currently provides that certain bank accounts must be maintained with specified finance parties (eg the facility agent). Again, the documentation could be amended to provide more flexibility
  • controls on borrower accession—so that UK lenders can control the accession of new borrowers (to ensure no borrower accedes that it cannot lend to), the documentation could be amended so that accession requires all lender consent rather than majority lender consent
  • mandate letters and commitment letters—if a mandate or commitment extends beyond the date on which the financial services passports may be lost, they could be amended to permit transfer to an affiliate or a different branch

Each of these options has their own complexities and disadvantages, and these are discussed in the Supplementary Note. The Supplementary Note can be read in its entirety by accessing the LMA website, available to members of the LMA.

Members can log into the LMA website with their username and password to view the Supplementary Note.

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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.