12 LMA News H1 2018 Speaking a common language How different is the LSTA’s new form of revolving credit facility from the LMA equivalent?

The recent publication by the Loan The LSTA RCF provides for the use of an Syndications and Trading Association Kathrine Meloni, “Adjusted LIBO Rate”. This is US$ LIBOR (“LSTA”) of a form of investment grade Special Adviser, for the relevant period, adjusted revolving credit facility (the “LSTA Slaughter and May LLP, automatically to take into account US RCF”) signals a change in approach for London statutory reserve requirements for the LMA’s US sibling. The LSTA “Model eurocurrency liabilities (which have been Credit Agreement Provisions”, a library zero since 1990). It also allows the of largely boilerplate clauses, have borrower to opt for an alternative rate, the existed for as long as the LMA’s “ABR”, which does not have a direct primary documents, but the LSTA RCF, equivalent in the European market, and to the final version of which was made Michael S. Goldman, convert between the Adjusted LIBO Rate available to LSTA members on 19 Partner, Cravath, and the ABR without requiring the loans to October, is the LSTA’s first full-form Swaine & Moore LLP, be “refinanced”. credit agreement. New York The ABR is a daily rate, defined as the highest of a) the agent’s published prime or The emergence of a New York law base lending rate, b) the Federal Funds counterpart to the LMA’s recommended Effective Rate plus 0.5% and c) the one forms facilitates a direct comparison of month “Adjusted LIBO Rate” plus 1.00%. New York law and English law terms, incorporating a swingline and a letter of Thus ABR loans are not borrowed for highlighting some of the differences credit option. specific interest periods in the same way between the legal regimes, market The LSTA RCF does not include a as LIBOR loans. The on an practice and market dynamics in the US guarantee. This reflects normal practice in ABR loan can fluctuate daily, if the ABR and in Europe. Although in substance, many investment grade transactions, itself changes, and is payable quarterly in English law and New York law loan where the public reporting company is arrears. documentation has much in common, often the only borrower. As is the case in Although the ABR option is almost certain disparities remain. Europe, however, it is not unusual to see always included in US agreements, it is This article highlights, by way of guarantees of investment grade loans if rarely chosen by borrowers in practice, example, some of the areas where the the borrower’s capital markets debt is largely because interest on ABR loans is terms of LSTA RCF and the LMA’s guaranteed. intended to be, and will generally be, equivalent investment grade templates The LMA IGAs were initially developed higher than interest on LIBOR loans (even (the “IGAs”) diverge. with a single A-rated corporate borrower in mind, so contain minimal Assumed transaction representations, undertakings and events The first point to note is that the LSTA of default. These are often supplemented RCF is more comprehensive than the IGAs where the IGAs are used to document in some respects, but less so in others. loans to borrowers at the lower end of The LMA publishes 11 IGAs: there are investment grade. The LSTA RCF takes a revolving facilities, term facilities and term more expansive view and contains and revolving facilities combined. These provisions more suitable for unsecured are available in single and lending in the BBB- bracket as well as at multi-currency versions and in versions the top end of the market. The with letter of credit or swingline options. representations and undertakings Each includes an integral guarantee but (including provisions relating to sanctions they are all unsecured. Investment grade and anti-corruption laws) are more loans are quite often guaranteed for a extensive and a number are presented in variety of reasons. A common instance is square brackets as optional provisions. where the borrower is the group’s treasury company rather than the parent. Benchmarks The LSTA has chosen to produce (or Under the IGAs, the floating rate component start with) only one template, an unsecured of the interest rate is LIBOR, EURIBOR or an single currency revolving credit facility alternative benchmark, as agreed. LMA News H1 2018 13

determined pursuant to the definition (“incremental capacity” or “accordion” thereof” or if a certain percentage of features) are not unusual, although in the lenders notify the agent that either relevant context of unsecured lending, they are US$ deposits are not available in the more commonly seen in mid-market London interbank market or that deals. These features are negotiated on a LIBOR does not “adequately and fairly” case by case basis as neither is included represent their cost of funds, Lenders are in the IGAs. not obliged to “make or maintain” LIBOR The LSTA RCF enables the borrower to loans until such time as alternative request a 364-day extension to the term of arrangements are made. The template the facility. This is fairly customary in New does not cater for funding to continue York law documents, the mechanic having after taking into account the fact that the automatically using Reference Bank Rates been developed to permit extensions of spread on LIBOR loans is always 100bp or Funding Rates. However, the borrower 364-day facilities in a manner that would higher than the spread on ABR loans). would be able in these circumstances to allow them to continue to qualify for However, ABR can provide the borrower revoke its drawdown request and draw an preferential capital treatment under with additional flexibility. For example, ABR loan instead (or to convert guidelines. The borrower LIBOR loans generally require three outstanding LIBOR loans to ABR loans). must request the extension within a Business Days’ notice of drawing, and The approach in the LSTA RCF reflects specific window and the lenders are free to prepayments made other than on the last New York market practice, which has participate or not. To the extent the lenders day of the interest period may be subject largely dispensed with Reference Bank decline the borrower’s request, the to breakage costs. ABR loans are typically Rates. Unwillingness among lenders to borrower may seek replacement lenders. available on one Business Day’s notice take on the Reference Bank role is also If the borrower is able to garner (or, depending on the agent or the lender prevalent in Europe. However, for the time commitments from a sufficient number of group, on the same Business Day), and being at least, although Reference Banks existing and third-party lenders, the may be prepaid without breakage costs. are not being appointed by name in commitments of those lenders will be If the borrower needs funds on short documentation, the Reference Bank extended. This mechanism is quite similar notice, it might request an ABR loan and concept features in most English law deals. to the extension options that are commonly concurrently provide notice to convert the used in Europe. ABR loan to a LIBOR loan three Business Increased costs The LSTA RCF also includes an Days later. Both templates require the borrower to accordion. The borrower may request that indemnify the lender-side parties in the commitments are increased up to a Rate fallbacks respect of any increased costs that arise financial cap. The mechanism operates The standard rate fallbacks under the during the course of the facility. The along similar lines to the extension option. IGAs provide for the use of interpolated templates define increased costs in The borrower may approach existing benchmark rates, or if not, provide the different ways, but the essence under both lenders or eligible third-party lenders, who option of using Reference Bank Rates. If is that any costs attributable to the lenders choose to participate at their discretion. Reference Bank Rates are not available or having entered into the facility, or funding It is useful that the LSTA has included not used, each lender is entitled to charge or performing their obligations under it, this feature in the RCF, although in the US, its cost of funds from whatever source it are for the account of the borrower, to the as in Europe, in general incremental may reasonably select ( its “Funding extent those costs are the result of a capacity is seen most frequently in Rate”) in place of the chosen benchmark, change in law after the date of the secured deals, where a key motivation is or a weighted average of the syndicate’s agreement. the potential expense of re-opening the Funding Rates if that option is chosen. The LSTA RCF provides that any costs documents as and when further The IGAs also offer an alternative fallback arising out of the Dodd-Frank Act or debt is required. regime which incorporates historic rates relating to Basel III shall fall within the and rates for shortened interest periods if scope of the indemnity regardless of Financial covenants LIBOR is unavailable, before resorting to whether they constitute a change in law. The IGAs do not include financial Reference Bank Rates and Funding Rates. The LMA clause alludes to that possibility covenants. However, they do contain a These fallback provisions apply if the in a footnote, but does not “carve-in” marker, acknowledging that they may be chosen benchmark is unavailable on such costs expressly. This point is often required. Financial covenant tests can be screen, or if an agreed percentage of raised by lenders in practice, although quite sector-specific, and may not be lenders notify the agent that they cannot in investment grade deals, perhaps not required at all from more highly rated fund themselves at the chosen rate. as frequently as was the case 12-18 borrowers. However, interest cover ratios The rate fallback provisions in the LSTA months ago. (“ICRs”), leverage ratios and minimum RCF operate a bit differently. If LIBOR is The LSTA increased costs clause is tangible net worth (“MTNW”) requirements unavailable on screen, the fallback is subject to a temporal limitation; the are all commonly used in investment interpolated rates. If interpolation is not borrower is not obliged to meet claims for grade lending, and it is not unusual for possible, the rate will be the rate at which increased costs that arise more than nine those covenants to be crafted using the agent offers US$ deposits to first-class months prior to the lender notifying the elements of the financial covenant banks in the London interbank market. agent of its claim. A time limit is often provisions published separately by the Some agent banks in the US, however, are negotiated into the LMA clause in practice, LMA. The LMA’s financial covenant unwilling to accept this responsibility, and but is not a feature of the IGAs. provisions (which derive from its do not include this fallback in their forms. leveraged agreement) include net If that fallback regime fails, the general Incremental facilities and leverage and an ICR, in a form which can rate fallback provisions may apply. If the extension options easily be adapted for corporate lending. agent determines that LIBOR, due to Extension options are common in English The LMA’s pre-export finance facility “circumstances affecting the London law investment grade loans. Options to contains a MTNW covenant, which is also interbank eurodollar market…cannot be increase the amount of a facility easily adapted. 14 LMA News H1 2018

The LSTA RCF includes three optional reflecting European norms, suggest similar circumstances, but are more financial covenants in the template itself: defining “Majority Lenders” as lenders detailed and include a more comprehensive an ICR, a leverage ratio and a MTNW holding 66 % of drawn and undrawn set of conditions. Third party sales are requirement, which are also the commonly commitments. subject to the agent’s consent and seen financial covenants in the US. Their The list of matters requiring unanimous minimum amount requirements. Optional formulation is slightly different to the lender consent is shorter in the LSTA RCF provision is made for the use of a blacklist financial covenant provisions put forward than in the IGAs, reflecting the US’s of “Disqualified Institutions”, who cannot by the LMA, reflecting US norms. For the slightly more relaxed approach to participate in the facility. This blacklist purposes of the ICR and the leverage ratio, amendments. For example, alterations to mechanism is more common in the EBITDA is built from consolidated net the illegality and the governing law and leveraged market, although seen income, a US GAAP income statement jurisdiction clauses are not all-lender occasionally in investment grade deals. item. In Europe, the basis of EBITDA is decisions as in the IGAs, which may reflect normally operating profit. The LSTA RCF differing levels of sensitivity among lenders Comment provides for leverage to be calculated on a to these issues. A notable point of detail is US market participants are in the process gross basis, rather than the net basis used that the LSTA RCF provides that of assessing the value of the LSTA RCF in Europe, although in practice, many US unanimous lender consent is not required as a standardised starting point for borrowers negotiate for some ability to net for amendments to financial covenant investment grade lending. The fact that it unrestricted . terms that have the effect of reducing the has been produced suggests a level of The LSTA RCF provides for quarterly interest rate. A clarification along these demand within the investor community, financial reporting and covenant testing. lines is useful from the borrower’s point but whether the major arranging banks will In most of Europe, investment grade of view. adopt the new template to the same extent borrowers are required to report and test as its LMA counterparts, as well as their covenants semi-annually. Assignments and transfers whether any adjustments are required to The IGAs provide, in summary, that a facilitate widespread adoption, remains to Voting change to the lenders of record requires be seen. Loan market practice is quite established the borrower’s consent, unless the new The LSTA RCF has generated in both the US and in Europe with regard lender is an existing lender or an affiliate of significant interest among London lawyers to required voting majorities. The US norm a lender, or is made at a time when an who are accustomed to operating from the (suggested in the LSTA RCF) is that most event of default is continuing. The common reference point provided by the lender voting will proceed on the basis of a borrower’s consent must not be LMA templates. A New York law simple majority in interest, with the unreasonably withheld or delayed, and is comparator is a welcome development consent of lenders representing more than deemed to be given if not forthcoming and a useful resource given the increasing 50% of the facility including both drawn within five Business Days. No minimum need for banking lawyers to be aware of and undrawn commitments (“Required transfer or minimum hold amount is and marry US and UK loan market Lenders” in LSTA terminology) being specified, although these are quite often practices in cross-border deals. required to effect most amendments, to negotiated in practice. declare defaults and accelerate the loans The equivalent terms of the LSTA RCF and to instruct the agent. The IGAs, require the consent of the borrower in

This article was first published in the Loan Market Association's (LMA's) H1 2018 newsletter LMA News.