The Loan Market Association (“LMA”) recently produced a revised version of the LMA Standard Terms and Conditions for Par and Distressed Trade Transactions (Bank Debt/Claims) (the “Revised Terms and Conditions”) following the conclusion of a “Plainer English” project, and these Revised Terms and Conditions will go live on 3 March 2014.
All LMA trades entered into prior to 3 March 2014 will be on the basis of the current LMA Terms and Conditions (dated 14 May 2012) (the “Current Terms and Conditions”), and all trades entered into on or after 3 March 2014 will be on the basis of the Revised Terms and Conditions.
The publication of these Revised Terms and Conditions (click here) is in response to a request from some market participants to clarify the drafting of the secondary LMA documents to facilitate liquidity.
This memorandum summarises the main amendments to the provisions of the Current Terms and Conditions. We note however, that, while there have been some amendments to the layout and wording of the Current Terms and Conditions, the intention is that the effect of the provisions will not be altered, therefore there are no material changes to current market practice.
All defined terms when used in this memorandum are as defined in the LMA Standard Terms and Conditions for Par and Distressed Trade Transactions (Bank Debt / Claims) dated 14 May 2012.
Summary of Main Clarifications/Amendments:
1) Obligations transfer together with Rights
The Revised Terms and Conditions make it clear that when assets are sold under the terms of an LMA trade confirmation, all obligations under the Credit Documentation will be transferred along with the seller’s rights, title and interest in and to such assets. Reference to the definition of “Purchased Obligations” has now been added to a number of definitions and clauses in addition to referring to “Purchased Assets” to clarify this.
Whilst the transfer of obligations was the intention of the Current LMA Standard Terms, the revised version makes this clearer.
2) Delayed Settlement Compensation payable by Seller after payment default
Under the Current Terms and Conditions, if “Settled Without Accrued Interest” is specified in the Agreed Terms, then Delayed Settlement Compensation is payable by the Seller to the Buyer, irrespective of whether or not the Obligor is in payment default. The Seller has the right to demand repayment by the Buyer if the Obligor defaults and does not pay the scheduled payment within any applicable grace period, and the onus is on the Seller to demand repayment from the Buyer.
Under the Revised Terms and Conditions, the position remains the same but the payment mechanics have been made clearer.
3) Buyer and Seller act as “principal” unless otherwise stated
Unless otherwise stated in the Trade Confirmation, each of the Buyer and the Seller under the Revised Terms and Conditions will be acting as a “principal” in the transaction (and not as an agent). As this will now be the default position, if one of the parties is acting as an “agent”, it will need to specify this in the Trade Confirmation.
4) Originals of documents only required to be delivered upon request
Original versions of the Transaction Documents (being the relevant form of purchase and pricing letter, or where requested, the Confirmation, Confidentiality Agreement or any other document) will only need to be provided to the counterparty under the Revised Terms and Conditions if the counterparty requests delivery of these within 5 Business Days of the Settlement Date.
This now reflects market practice where it is usual for the parties to complete the transaction on receipt of counterparts by electronic mail and rely on such copies, rather than expect delivery of original counterparts.
5) Documents may be executed by electronic signature
Trade Confirmations, confidentiality agreements and other transaction documents may now be executed by electronic signature and such documents shall have the same legal effect under the Revised Terms and Conditions as if signed by handwritten signature.
6) Transfer costs split between multiple entities
Buyer / Seller will, unless otherwise agreed, only pay one half of one transfer fee where there are multiple Buyers / Sellers in cases where each of the multiple Buyers / Sellers are entities managed by the same investment manager or investment adviser as the other Buyers / Sellers involved.
Summary of other non-substantive and drafting amendments
The Revised Terms and Conditions also make the following non-substantive amendments, clarifications and tidy-up changes to language or provisions that were previously unclear:
1) References to “Agreed Terms” and “Confirmation” amended – References to “Agreed Terms” (terms agreed in the trade confirmation) changed to “Confirmation” (being the executed section of the trade confirmation which incorporates the standard terms) where that term is more appropriate (and vice versa).
2) Standard Terms apply – The Revised Terms and Conditions automatically apply to transactions in respect of which they have been expressly incorporated, unless expressly dis-applied or otherwise specified in the Confirmation.
3) Set-off between counterparties – To be at “market rate of exchange” where obligations are in different currencies. The Current Terms and Conditions provide that the party exercising set-off rights can affect such currency exchanges as it considers necessary to implement the set-off.
4) Notification of new address – Parties to notify each other of new address details for notices “by not less than 5 Business Days’ notice”.
5) Electronic communication – Any electronic communication received after 5.00 p.m. is deemed to be become effective on the following day.
6) Jurisdiction of English courts – Parties agree that the courts of England are the most appropriate courts to settle disputes and agree not to argue to the contrary.
Cadwalader was part of the secondary LMA working group advising on the amendments to the Current Terms and Conditions. Various other secondary documents required amendments to take account of cross-referencing changes following the plainer English project (in particular, the Bank Debt Trade Confirmation, Participation Agreements and User Guide). These documents will also go live on 3 March.