Treasury Essentials

• Clearer differentiation between mandatory requirements, recommendations and options. A new interpretation section at the outset of each set of Loan Principles clarifies the wording that denotes a mandatory requirement, a recommendation, an option and a possibility, and the wording of each set of Loan Principles has been reviewed and re-cast accordingly. The resulting changes, in particular in terms of requirements that are now clearly expressed as mandatory, are largely reflective of current market practice, although they will warrant attention from borrowers with new transactions in the pipeline and transactions coming up for refinancing. 
• Removal of grandfathering protection. Grandfathering language was added to the Loan Principles as part of the previous round of updates in February 2023 to clarify that for existing transactions and transactions which were “in flight” as the updated Loan Principles were published, alignment with the version of the relevant Loan Principles in force when the transaction was originated/completed was sufficient for the purposes of the relevant label. This language has now been removed. This may have limited practical significance for transactions currently “in flight” given the nature of the latest changes. The implications for pre-existing loans structured and originated in line with the previous version of the relevant set of Loan Principles will, however, have to be considered on a case-by-case basis.
• Adjustments to the Eligible Project categories in the Green and Social Loan Principles. The list of eligible green/social project categories has been refreshed and refined as part of the latest round of updates to the Green/Social Loan Principles.  While the list is carefully described as indicative and high level, the identified categories are often the bedrock of lenders’ green/social loan frameworks, with decisions on alignment with the Green/Social Loan Principles for any type of project that is not clearly subsumed in one of these categories typically requiring careful thinking and debate. The latest changes, which bring up-to-date and provide additional colour as to what falls into each category, are therefore likely to be viewed as helpful. 
• Refinement of criteria for the selection of KPIs and SPTs in the Sustainability-Linked Loan Principles. A range of detailed changes have been made to the Sustainability-Linked Loan Principles to bring the criteria for KPI and SPT selection into clearer focus and, importantly, underline key contextual factors such as the borrower’s broader sustainability strategy and position, and geographic considerations.

There will, of course, be some parties disappointed with the scope of the latest updates to the Loan Principles, concerned that particular points of detail have not been addressed and/or that the changes do not go far enough. With each iteration of the Loan Principles, however, the scaffolding supporting the integrity of the sustainable loan market becomes stronger and better understood. While the demand for further explanation and clarity from individual parties will no doubt continue, this year’s review further clarifies the requirements of the Loan Principles and explains others, which is a positive step forward. We would also observe that in a year where a number of new reporting requirements are starting to land and/or are being adjusted (the EU Omnibus proposals, for example), it is even more important for the industry to tread carefully so as not to de-stabilise further growth in the sustainable loan market.

For example, earlier this year, the Financial Times reported that certain bond investors have been challenging disposal transactions on the basis that the transaction in question breached the cessation of business event of default in the relevant bonds. The report suggested that hedge funds are drawing up “shopping lists” of companies that could be potential candidates for claims should a disposal be proposed. Low interest rate-era bonds are trading at a discount, which lays the ground for activist investment with a view to forcing repayment or buyback above market value, if an arguable and actionable event of default can be found to have occurred. This article has prompted quite a lot of discussion and focus on the wording and operation of cessation of business events of default.  While terms vary quite considerably, cessation of business events of default are a common feature of bonds of all types and we have been asked to advise on the applicability of these events of default many times, in the context of both solvent and distressed disposals.   

Our most recent Treasury Insights Long Read considers the nature and incidence of event-driven creditor activism in the UK and Europe, and the key risk indicators for claims. We look at some examples of the types of claims that arise, which often turn on competing interpretations of contractual terms. Cessation of business events of default are discussed in detail by way of example. We also outline some strategies for anticipating and responding to activist claims when planning for disposals and other corporate events.

A number of well-known trusted voices were among the suggested resources but there were also some gems we had not heard of before. We thought it might be useful to share some of the recommendations for “keeping up with the credit markets” put forward by our dinner guests, alongside some additional suggestions from our own lawyers. The selection here are some edited highlights - ranging from mainstream to more targeted podcasts and resources. If you have additional recommendations to suggest we would love to hear from you.