How Borrowers can Protect their Funding Availability

With the current turmoil in the money markets borrowers are advised to understand the detail of their borrowing agreements to counter the risk of lenders seeking justifications to cease lending or to lend on more adverse terms.

Borrowing agreements are receiving more attention. Flagging the pitfalls for corporate borrowers to avoid, the ACT, in conjunction with Slaughter and May, has today launched the Borrower’s Guide to the LMA (Loan Market Association) Facilities Agreement for Leveraged Transactions (see Notes, below).

The new guide stands alongside the existing guide to the LMA investment grade loan agreements. It provides timely advice to treasurers and finance directors on maintaining flexibility in their dealings with lenders under agreements using terms taken from the LMA Leveraged Facilities Agreement. Many points will also be of interest to investment grade companies.

Issues addressed in the guide also include many of those thrown into focus as a result of adverse market conditions:

• Borrowers need to be confident that they can prevent lenders from trading on loans to new parties that may be less "borrower friendly", and who could prevent waivers and renegotiations.
• Borrowers can benefit from a right to remove uncooperative banks from the syndicate - a "yank the bank" clause. [Note 3]
• In a similar vein inclusion of a “snooze and lose” clause allows the borrower to ignore banks that fail to respond to requests for changes to the agreement [Note 4] or with a “delay and it’s OK” clause to assume agreement for banks not replying [Note 5]

Richard Raeburn, Chief Executive of the ACT, explained:

 In the current markets borrowers have seen pressure on credit margins. However, in extreme circumstances it is not so much the cost of borrowing but the availability and terms and conditions that become absolutely critical. For example, inclusion of the "yank the bank" clause could be essential to avoid hampering recovery and reconstruction plans or, in the worst case, disaster. Richard Raeburn, Chief Executive of the ACT

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. Philip Snell, partner, Slaughter and May

The ACT Borrower’s Guide to the LMA Facilities Agreement for Leveraged Transactions is available for download from the ACT website (www.treasurers.org/loandocumentation) or via the Slaughter and May website (www.slaughterandmay.com).

Enquiries

Published in the October 2008 issue of The Treasurer magazine, the article Drawing from leveraged lending sees Philip Snell and Kathrine Meloni explain the significance of the ACT Borrower’s Guide to the LMA Facilities Agreement for Leveraged Transactions.

Association of Corporate Treasurers

Martin O’Donovan, Assistant Director – Policy and Technical
T: +44 (0)20 7847 2577 (direct line) or +44 (0)20 7847 2540 (switchboard)
E: modonovan@treasurers.org

Kate Hoyle, Director of Communications
T: +44 (0)20 7847 2545 (direct line) or +44 (0)20 7847 2540 (switchboard)
E: khoyle@treasurers.org

For further information on the ACT or to commission an article, please vist the ACT Press Room.

Slaughter and May

Philip Snell, Partner
Kathrine Meloni, Professional Support Lawyer

T: + 44 (0)20 7600 1200

Hogarth Partnership (PR)

Rachel Hirst, Partner
T: +44 (0)20 7357 9477

Notes for editors

Note 1

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.

The LMA also publishes forms for Investment Grade Facilities Agreements. Borrowers will wish to negotiate many points in these forms and should refer to the ACT Borrower’s Guide at www.treasurers.org/loandocumentation to assist them.

Note 2

The new ACT Borrower’s Guide provides a briefing, clause by clause, on the terms of the LMA’s Leveraged Facilities Agreement, explaining the purpose of each clause, where the provisions may cause difficulties and the arguments each side may use in any negotiation. Attention to the detail can significantly benefit a borrower.

Note 3

The ability to get consents from the lenders to amendments or waivers gives the borrower a chance to adapt a loan facility to changed circumstances. Specifying whether consents must be unanimous or can be by the majority (often 66%) is important. To avoid uncooperative banks from blocking a change, borrowers may wish to include a “yank the bank” or “replacement of lender” provision.

Note 4

Less draconian is the “snooze and lose” provision which means lenders who fail to respond to requests for consent are disregarded for the purposes of determining whether any relevant majority voting approval has been obtained. This has been included in the LMA’s Leveraged Facilities Agreement in September 2008, but borrowers need to check that their new lenders have incorporated it.

Note 5

A more aggressive variant of “snooze and lose” is “delay and it’s OK”: any lender who fails to respond to a request for consent within the specified timeframe shall be deemed to have voted in favour of the requested amendment or waiver.

Note 6

Further important areas covered:

• 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.
• Loan agreements include a grace period for remedying any breach. Borrowers should check whether that period runs from the date the breach occurred or (more favourably) from the date the breach was discovered.
• Financial covenant provisions are a particularly challenging aspect of a loan facility to document and implement correctly. Breach of a financial covenant allows the lenders to place a block on new drawdowns and to demand immediate repayment of outstandings. By including equity cure rights the borrower can raise new equity and adjust the financial ratios so that they are no longer in breach.
• 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 26 September 2008.