Proposed Revisions to the LSTA Par Trade Confirmation: The Risks of Trading English Law Loans on LSTA Par/Near Par Terms

Background

Recently, the Loan Syndications and Trading Association (LSTA) circulated revised language¹ relating to the trading of English law-governed loans on the LSTA Par/Near Par Trade Confirmation (the LSTA Par Confirm). The purpose of the revised language is to mitigate the risks market participants may encounter when trading English law loans on the LSTA Par Confirm (as opposed to using the LMA form trade documentation) by providing these loans with similar protections afforded to loans governed by New York law (or the law of another state within the U.S.) under the LSTA model form of assignment agreement (the LSTA Form AA). The LSTA sought final comments on the revised language. Once finalized and approved, the additional language would be added as Section 27 to the LSTA Par Confirm.

The LSTA first previewed the issue of trading European law loans on the LSTA Par Confirm in a Market Advisory published on May 22, 2019. In its Market Advisory, the LSTA acknowledged that while there are no “formal” requirements for choosing LSTA or LMA documentation when trading syndicated bank debt on the secondary market, there are a number of factors for determining which documentation regime to use, including, most notably, the governing law of the applicable credit agreement. In situations where the credit agreement is governed by English law (or the law of another European jurisdiction), it is customary for parties to use the LMA form documents. Where the credit agreement is governed by New York law (or the law of another state within the U.S.), the LSTA form documents are typically used. However, situations may arise where market participants trading English law loans choose to trade on an LSTA Par Confirm. In these instances, due to the disparity in the “architecture” of the LMA and LSTA secondary loan trading documentation, market participants should be aware of the potential risks they may face.

The Construction of the LSTA versus LMA Par Trade Documentation   

When entering into a trade pursuant to an LSTA Par Confirm, the parties agree that (unless specified otherwise) the form of purchase shall be by assignment. In the case of an assignment, the standard terms of the LSTA Par Confirm provide that the parties execute an assignment agreement in the form set forth in the applicable credit agreement (or, in the absence of such form, a reasonably acceptable assignment agreement containing customary provisions for the sale of par/near par loans). It is customary for large corporate credit agreements governed by New York law to use a form of assignment agreement that is “substantially similar” to the LSTA Form AA. The LSTA Form AA contains several key representations, including those listed below.

Seller’s Representations

Assigned Interest. Under the LSTA Form AA, the seller assigns and sells to the buyer all of seller’s rights and obligations relating to (a) the loans and commitments being assigned, and (b) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and other rights of the seller arising under or in connection with the credit agreement and any other document or instrument delivered in connection therewith.

Good Title. Seller represents it is the legal and beneficial owner of the Assigned Interest.

No Encumbrances. Seller represents the Assigned Interest is free and clear of any lien, encumbrance or other adverse claims.

Power and Authority. Seller represents it has the power and authority to execute the assignment agreement and consummate the transaction.

Defaulting Lender. Seller represents it is not a defaulting lender.

Buyer’s Representations

Due Authorization and Eligible Lender. Additionally, under the LSTA Form AA, the buyer represents it is duly authorized to execute and perform its obligations under the transaction and that the buyer meets the eligibility requirements to become a lender of record under the applicable credit agreement.

It is important to note that the standard terms and conditions to the LSTA Par Confirm do not include any of the above representations set forth in the LSTA Form AA. In fact, the representations made by the parties in the LSTA Par Confirm are limited to (i) the nature and use of syndicate information, (ii) “big boy language” and (iii) ERISA. Unlike the LSTA Par Confirm, the standard terms for par trades relating to bank debt governed by the LMA (the LMA Par Confirm) contain far more extensive representations (the current version of the LMA Par Confirm spans 55 pages). However, unlike the LSTA Form AA, the standard form of English law assignment agreement (the LMA Transfer Certificate) does not typically include the key representations set forth in the LSTA Form AA. The incongruity in the construction of the LSTA and LMA par form documents may subject parties to unforeseen risks when choosing to trade English law loans on the LSTA Par Confirm, as the LSTA Par Confirm and the LMA Transfer Certificate are the two documents containing the fewest protections typically afforded to par market participants. It is this disparity that the additional language in the LSTA Par Confirm seeks to address.

In addition to the addition of Section 27 to the LSTA Par Confirm, the LSTA advises parties electing to trade English law loans on the LSTA Par Confirm to consider the following:

Delayed Compensation. It is important to note that the LSTA delayed compensation regime will apply to these trades, as will all the other provisions of the LSTA Par Confirm.

Settlement by Participation. In the event the parties are unable to settle by assignment, the parties will be required to settle by participation using the LSTA form Participation Agreement. In the case of settlement by participation, the parties should consider the differences in the voting regimes under English/U.S. law and the interpretation of the participation by English/U.S. courts.

Survival. The LSTA advises including a survival provision that both the seller and buyer agree that the representations and warranties set forth in the LSTA Par Confirm survive the consummation of the transaction.

Conclusion

It is critical that market participants understand the material differences in the LSTA and LMA trade documentation regimes. When choosing to trade English law loans on the LSTA Par Confirm, parties should consider including the additional language discussed in this alert so that they may receive the benefit of the basic customary representations and warranties afforded to par market participants.

The additional language in Section 27 to the LSTA Par Confirm may read as follows:

Section 27

If the Debt has been extended pursuant to a credit agreement that is governed by English law and provides for the assignment or novation of the Debt pursuant to an assignment agreement or a transfer certificate attached as an exhibit to the Credit Agreement (a “Transfer Certificate”) that does not contain provisions that are substantially similar to the provisions set forth below, then, notwithstanding any other provision set forth in this Confirmation, Seller and Buyer hereby agree to the following:

• Effective as of the Settlement Date, Seller irrevocably sells and assigns to Buyer, and Buyer irrevocably purchases and assumes from Seller, subject to and in accordance with the Credit Agreement, to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of the Seller (in its capacity as a lender) against any person or entity, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations related to the Purchase Amount of Debt (such rights and obligations sold and assigned by Seller to Buyer pursuant to this clause, together with all of Seller’s rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the Purchase Amount of Debt, referred to herein as the “Assigned Interest”). 
  
  
•  Seller represents and warrants to Buyer on the Settlement Date that (i) Seller is the legal and beneficial owner of the Assigned Interest; (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim; (iii) Seller has full power and authority, and has taken all actions necessary, to execute and deliver the Transfer Certificate and to consummate the Transaction; and (iv) Seller is not in default of any of its obligations in its capacity as a lender with respect to the Purchase Amount of the Debt. 

• Buyer represents and warrants to Seller on the Settlement Date that (i) Buyer has full power and authority, and has taken all actions necessary, to execute and deliver the Form of Purchase and to consummate the Transaction, and (ii) Buyer meets all the requirements to be a lender of record under the Credit Agreement (subject to such consents, if any, as may be required thereunder).

¹ _{The revised language can be found at the end of this alert.}