The following Banking & Finance practice note provides comprehensive and up to date legal information covering:
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.
The transition away from LIBOR to risk-free rates such as SONIA will affect the drafting of market disruption provisions. For more information, see Practice Notes: LIBOR transition and Interest provisions in Loan Market Association (LMA) documentation.
This Practice Note explains the following:
when the market disruption provision will apply
how interest is calculated once the market disruption provision has been triggered (cost of funds)
how to reduce the risk of interest being calculated using cost of funds
market disruption from the perspective of the agent, lenders and borrower including
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