Learning from Leveraged Lending: New Guidance Launched for Borrowers in the European Loan Markets
Slaughter and May and the Association of Corporate Treasurers ("ACT") have today launched a new Borrower’s Guide to the Loan Market Association ("LMA") recommended form of senior facilities agreement for leveraged financing transactions (the "LMA Leveraged Facilities Agreement").
The LMA Leveraged Facilities Agreement has become a benchmark in the UK and international loan markets for the documentation of syndicated loans to non-investment grade credits. Banks and borrowers use it, or refer to it, in whole or in part on a range of deals, which may or may not be leveraged or linked to acquisitions. The publication of the first borrower-side guide to this form of agreement is, therefore, a major development in assisting borrowers of all types, both in the UK and elsewhere, in dealing with loan documentation.
As a result of the current economic climate and increased risk aversion in banks, it is likely that many corporate borrowers (particularly those slipping down the ratings or credit ladder) will find that in any new financings or refinancings their lenders increasingly wish to import terms taken from the LMA Leveraged Facilities Agreement.
The Guide is intended as a reference tool for borrowers as they navigate the complex lending terms in the LMA Leveraged Facilities Agreement. Borrowers and corporate treasurers who have previously used, or are familiar with, the form of LMA loan agreements for investment grade borrowers will find much that is unfamiliar in the LMA Leveraged Facilities Agreement. Activities which are unrestricted under normal investment grade loan agreements are prohibited or restricted under the leveraged document. These include entering into joint ventures, providing loans outside their group, providing guarantees, incurring borrowings and other financial indebtedness (particularly in subsidiaries) and entering into certain treasury transactions (including hedging). The circumstances in which the loan may be required to be prepaid (including out of the proceeds of disposals or capital markets issues) may also be more extensive.
The Guide considers the potential problems and pitfalls for borrowers in using terms taken from the LMA Leveraged Facilities Agreement, sets the key provisions in context and outlines some of the main issues which are regularly raised by borrowers.
Issues addressed in the Guide also include many of those thrown into focus as a result of adverse market conditions:
Certainty of funding for acquisitions is a key concern for many borrowers in uncertain times. The Guide explains the mechanics of a "certain funds" facility, and the impact of material adverse change provisions in loan documentation.
The types of lender able to join a syndicate can give rise to a number of issues for borrowers, including potential tax risks and difficulties in obtaining amendments and waivers. The Guide outlines some of the techniques that borrowers might employ in managing those issues.
Financial covenant provisions are a particularly challenging aspect of a loan facility to document and implement correctly. The Guide examines the LMA financial covenant provisions in detail and highlights the issues which they do not cover, for example the equity cure and other mitigation rights a borrower might seek in relation to the effect of breaches of financial covenants.
As lenders look for more extensive contractual protection in new facilities, the Guide aims to assist borrowers in negotiating the right levels of flexibility in terms of exceptions and qualifications, by reference to the broad raft of representations, undertakings and events of default in the LMA Leveraged Facilities Agreement.
The purchase by borrowers and related parties of participations in their own debt facilities has been the subject of much debate in the loan markets since the onset of the credit crunch, as such transactions give rise to a number of legal and practical issues under LMA-style loan documentation. The guide describes these issues and the new debt buyback provisions published by the LMA on 26th September.
The new Guide was produced for the ACT by Philip Snell, partner, and Kathrine Meloni, professional support lawyer, both of Slaughter and May. Philip commented: "As we pass the first anniversary of the onset of the credit crunch, many borrowers face lenders seeking more restrictive lending terms. The new ACT Borrower’s Guide will, we hope, provide a useful point of reference not only for borrowers involved in leveraged financing transactions but also for those involved in other types of financing transactions, especially those involving cross-over and sub-investment grade credits."
Richard Raeburn, Chief Executive of the ACT, added: "The new Guide is essential reading for all Corporate Treasurers and private equity investment professionals. It highlights some of the key issues that the LMA Leveraged Facilities Agreement gives rise to from a borrower’s perspective and puts forward some of the modifications to these provisions that borrowers may wish to consider."
The ACT Borrower’s Guide to the LMA Facility Agreement for Leveraged Transactions is available for download from the ACT website or via the Publications and seminars section of the Slaughter and May website.