In April 2018 the Loan Market Association (LMA) launched a new recommended form of facility agreement for use in export finance buyer credit transactions supported by an export credit agency (ECA): the "Export Finance Buyer Credit Agreement" (the Template). This article explains the assumptions behind the Template and its relevance for parties documenting ECA-backed financings in the future.
Genesis of the Template
The Template is based on the LMA's Unsecured Single Currency Term Facility Agreement For Use in Developing Markets Jurisdictions. It is the product of an 18 month discussion process between a working group of key stakeholders, including major City law firms, banks and ECAs. The LMA has stated that although there was no borrower representation included in the working group, the Template has been drafted to anticipate a number of "borrower asks" which are commonly agreed to by financiers.
The LMA has made clear that, just because any given ECA may have been involved with the working group, or may wish for parties to a financing to use the Template, this does not affect that ECA's general overarching position as regards "documentation risk" in respect of buyer credit facilities, which stays with the lenders.
Assumptions behind the Template
The LMA recognised that producing a single precedent document for use in connection with ECA-backed transactions would not be feasible: there are too many variables, including in particular the type of borrower and the requirements of each individual ECA to be able to produce a true "market standard" document.
So in order to produce a workable document, the LMA made numerous assumptions in drafting the Template. Highlighting just a few, the Template:
contemplates only corporate obligors, and so would need to be amended quite heavily in the case of other types of borrower (for example a significant amount of buyer credit transactions involve sovereign borrowers or state-owned enterprises);
anticipates cover by a single ECA by way of a guarantee or insurance policy, and does not make provision, for example, for an ECA providing direct lending;
assumes (i) there is a single exporter operating a single export contract, (ii) the borrower under the financing and the buyer under the export contract are the same entity and (iii) the export contract and the financing are denominated in the same currency; and
assumes the ECA's cover will extend to a specified proportion of principal and interest due from the borrower.
Helpfully, certain provisions found only in ECA-backed facilities have been included in the Template to try to establish market benchmarks, for example:
an "Isabella clause". This separates the obligations and rights under the underlying export contract from the financing, preserving the borrower's obligation to repay the loan in the event of a dispute in connection with the export contract.
an "ECA override". This is a commonly incorporated clause to help ensure the terms of the financing do not conflict with an ECA's requirements or policy documents.
The Template also adapts standard facility agreement clauses to fit a buyer credit context. For example:
There are a few key, but understandable, omissions in the Template, including the absence of any detailed provisions relating to environmental and social compliance and detailed provisions relating to sanctions. These provisions are almost always heavily negotiated, being determined by the specific requirements of the relevant lenders and ECAs, and very specific to each transaction.
A welcome step, but a market standard?
In our view, the LMA's template is a welcome tool for use in traditional buyer credit facilities. Of course, in relation to any given transaction a number of drafting changes would likely need to be made to take into account the relevant ECA's cover requirements, and the specifics of the particular deal at hand.
Those working in the ECA space should also be aware that, in addition to the LMA's Template, a number of ECAs also have, or are developing, their own template forms of facility agreement that reflect their own commercial positions and the specifics of the products they offer. While many of these may be broadly in LMA form, there is likely to be some mismatch between some of the "boilerplate" provisions set out in them, and the equivalent provisions used in the Template. It will be interesting to observe, as use of the Template beds in, the extent to which it will drive standardisation in this market.