Speaking a Common Language How Different Is the LSTA’S New Form of Revolving Credit Facility from the LMA Equivalent?

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 interest rate 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 currency 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 eurodollar 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 Federal Reserve 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 finance 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.

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