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					                                                                                                         TREASURY PRACTICE
                                                                                                         Loan Documentation

New approach to
loan documentation
Caroline Bradley of the Association looks at a new form of documentation that
could save time and money in syndicated loan agreements.

         uring 1998, in response to                                                        syndicated facility to a corporate with an

D        demand from lenders in the syn-
         dicated loan market, the Loan
Market Association (LMA) launched a
                                                      Some treasurers
                                                     see a harmonised
                                                                                           investment grade rating. Borrowers and
                                                                                           lenders using this format will still need
                                                                                           to enter into negotiations to produce a
project to produce a form of syndicated                                                    loan document that is tailored to their
loan agreement that would help to
                                                       approach as a                       particular situation and transaction
introduce some harmonisation into the                     welcome                          requirements.
format of loan documents and into the
wording of clauses covering the more
                                                     development that                      The primary documents
mechanical areas. The British Bankers                will save time and                    There will be three forms of the docu-
Association and The Association of                                                         mentation (the ‘primary documents’):
Corporate Treasurers were invited to
                                                        expense and
appoint representatives to participate in                 facilitate                       q a multicurrency term and revolving
the working group commenting on the                                                          facilities agreement;
drafting of the document. The drafting
                                                       syndication of                      q a multicurrency term facility agree-
was undertaken jointly by Allen and                      their loans                         ment; and
Overy and Clifford Chance; the remain-                                                     q a multicurrency revolving facility
ing members of the working group were                                                        agreement.
lawyers from other city law firms and         themselves reluctant to see it co-operate
bankers.                                      in such an initiative but there are poten-      The primary documents are structured
   Until now, the form of a syndicated        tial advantages to treasurers in the         so that, in each, sections 2 to 6 cover
loan document often followed the stan-        availability of a more harmonised for-       operational mechanics of a loan, sec-
dard form of the law firm instructed to       mat which could save time and                tion 7 the guarantee (if any) and so on.
draft the agreement. The creation of a        expense. Of equal importance was the         Accompanying them will be a users
new common form of documentation is           opportunity for the Association to ensure    guide prepared by the LMA which
designed to provide uncontentious boil-       that the concerns of borrowers would be      explains the structure of the primary
er-plate provisions that save on time         aired. The invitation to be represented      documents and goes through each def-
and money and allow the parties to            on the working group was therefore           inition and clause, explaining its pur-
concentrate on the more business-spe-         accepted, with a view to achieving a for-    pose and context. In addition, it sets out
cific provisions of each transaction.         mat that would be more balanced              the assumptions underlying the docu-
   According to Peter Vipond of the BBA:      between the interests of borrowers and       ment. In brief these are:
“Credit markets are undergoing major          lenders. Andrew Balfour, a member of
changes driven by a number of factors         the Association’s technical committee        q the agent is based in London and
including the euro, regulatory reform         and a partner at Slaughter and May,            syndication takes place primarily in
and credit product innovation: all of         was appointed as our representative.           the London market and Euromarkets;
these require a response from the syndi-         Clearly, a balance would be hard to       q each lender is a bank or financial
cated loan market. Our objective in           achieve considering the range of possi-        institution;
contributing to this initiative has been to   ble borrowers, in terms of credit rating,    q the obligors are companies, incorpo-
promote the UK as an efficient market         size and borrowing requirements.               rated in England and Wales;
for the syndication and management of         However, general agreement has been          q all facilities are unsecured and the
loans.”                                       reached on a format which provides a           obligors are of an investment grade
   Although the main objective of the         reasonably balanced starting point.            rating;
LMA in this project has been to encour-       Some clauses may not require further         q each lender participates in each
age a harmonised approach to primary          negotiation, although others will do.          facility proportionally; and
syndicated loan documentation, it is          Indeed, the most contentious areas,          q each transaction is governed by
also likely to have an impact on sec-         such as financial covenants and related        English law.
ondary loan trading if the new common         definitions, have deliberately been left
format is widely adopted. Some mem-           blank. The LMA document aims to               As far as possible the primary docu-
bers of the Association may well find         reflect current market practice for a        ments are written in ‘plain English’, with

The Treasurer – November 1 9 9 9                                                                                                 27
Loan Documentation

     clauses broken down into shorter sub-           much attention as does the
     paragraphs, with exceptions listed as           schedule of the ISDA. It                he primary documents will be of value as a
     sub-paragraphs rather than provisos.

     How to use primary documents
                                                     should, however, assist
                                                     borrowers and lenders in
                                                     their review of documenta-
                                                                                       T     reference source for borrowers seeking a
                                                                                             reasonably balanced starting point for
                                                                                       entering into loan negotiations and to companies
     It is envisaged that lenders would intro-       tion and may reduce legal         looking to update standard in-house loan
     duce the potential use of the primary           costs for borrowers.              documentation for current developments. Also,
     documents as an option in the term                 The Association believes       as David Creed notes: “reducing the cost and
     sheet they present to borrowers at the          that borrowers should:            time required to turn a loan offer into a loan
     start of negotiation of a syndicated                                              drawdown is an important element in funding a
     loan.                                           q always take independ-           company. The LMA’s syndicated loan format
        At each stage of the negotiation and           ent legal advice when           should offer efficiency and savings in the loan
     documentation process it is intended              negotiating the loan            negotiation process for many borrowers, once
     that drafts will show clearly what inser-         documentation;                  the loan term sheet has been agreed. Treasurers
     tions and amendments have been                  q consider the option of          should explore the benefits they can achieve by
     made. It is envisaged that the drafting           continuing to use their         using the format in their negotiations.”
     law firm will provide copies of the nego-         existing documentation             Although some treasurers may be concerned
     tiated document marked to show varia-             or some other format;           at the development of a more harmonised
     tions from the primary document at                and                             approach to loan documentation, others will see
     each reiteration. It is also an LMA rec-        q if they decide to use a         it as a welcome development that will save time
     ommendation that conformed copies of              primary document, they          and expense and facilitate syndication of their
     the final agreement should be marked              should critically consid-       loans.
     to show changes from the relevant pri-            er what changes to it              Borrowers should ensure that they take the
     mary document. This will facilitate               they will require. Some         necessary advice to benefit from the positive
     administration of the loan and any pos-           lenders may be unwill-          aspects of using the primary documents without
     sible secondary loan trading.                     ing to consider signifi-        sacrificing the ability to tailor the documents to
        Christopher Elliott of the LMA believes        cant variations from the        their particular circumstances. To this end, the
     that both lenders and borrowers will              template but borrowers          Association intends to publish a commentary on
     benefit from “a more efficient documen-           should consider the             the primary documents providing a clause-by-
     tation process to a transaction, savings          terms of the primary            clause analysis, concentrating on the more
     in the time-related costs of that process         documents very careful-         important issues, and pointing out some of the
     and confidence in the practical opera-            ly and should certainly         areas where borrowers might wish to focus their
     tion of the facility throughout its term.”        not regard them as a            attention.
        The primary documents will be avail-           standard.
     able to treasurers directly from the LMA
     in hard copy at a cost of £50 and will          Transferability clauses                          Borrowers who are willing to include
     also be available at no cost from rela-         Borrowers need to consider their poli-        loan transferability in their documenta-
     tionship banks and legal firms who are          cies and controls over loan trading           tion might expect to gain increasing ben-
     LMA members.                                    carefully. The primary documents              efit in lower margins relative to non-
                                                     include provisions for transferability that   transferable loans, ease of syndication
     Should treasurers use them?                     are consistent with many loan agree-          and possibly fewer covenants. Borrowers
     Borrowers should not feel under any             ments that have been used in the syndi-       unwilling to contemplate their debt being
     pressure to adopt this format and will, in      cated market for the past decade.             traded must ensure that they take advice
     any event, need to undergo the negoti-          However, the gradual but widespread           on that section of the document that
     ation process necessary to ensure that it       adoption of a clearly recognisable form       deals with transferability and make their
     is tailored to meet their requirements.         of loan document, with clauses in famil-      position clear to their advisers and
     Like the ISDA swaps documentation, the          iar places and marked to show changes         lenders before starting syndication. s
     devil is in the detail. Specific tailoring of   from the primary document, would ulti-
     an individual facility agreement based          mately assist liquidity in the syndicated     Caroline Bradley is the technical officer
     on a primary document will require as           loan market.                                  of the Association.

                              Knowledge Centre                                                     About Us
      s    Technical Guidance                                               s   LMA new syndicated loan documentation –
           Bank of England “Guidance on share-issuing                           ACT press release
           good practice for limited companies” and
           ACT recommendations                                              s   ACT Annual Report 1998 - 1999

     28                                                                                             The Treasurer – November 1 9 9 9

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