Market disruption clauses in facility agreements
Market disruption clauses in facility agreements

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Market disruption clauses in facility agreements
  • LIBOR—the London Interbank Offered Rate
  • LMA trigger for market disruption
  • Effect of market disruption event—provisions in LMA facility agreements (cost of funds)
  • Minimising the likelihood of interest being calculated on a cost of funds basis
  • Market disruption issues for the agent
  • Market disruption issues for lenders
  • Market disruption issues for borrowers

In summary, a market disruption clause sets out how interest is calculated for a loan if a lender’s cost of funding the loan is in excess of London Interbank Offered Rate (LIBOR) (or other designated benchmark)—this can happen in particular where there are problems with the financial system leading to the freezing of markets or solvency problems with the particular lender. Either of these is likely to result in an increased cost of funding for the lender.

Market disruption clauses are usually included in facility agreements where interest is calculated by reference to a floating rate such as LIBOR or Euro Interbank Offered Rate (EURIBOR). This Practice Note deals with market disruption clauses in the context of LIBOR-related syndicated facilities. Equivalent considerations apply to syndicated facilities which calculate interest rates by reference to EURIBOR and other benchmark rates.

This Practice Note explains the following:

  1. when the market disruption provision will apply

  2. how interest is calculated once the market disruption provision has been triggered (cost of funds)

  3. how to reduce the risk of interest being calculated using cost of funds

  4. market disruption from the perspective of the agent, lenders and borrower including negotiating and drafting considerations

Where relevant, this Practice Note highlights relevant provisions in the Loan Market Association (LMA) investment grade multicurrency term facility agreement (LMA investment grade term facility agreement).This document