Transcript LMA Trading Documents

The LSTA and LMA Present
Joint Secondary Documents Teach-In
Thursday, March 25, 2010
SUMMARY OF ECONOMIC
IMPLICATIONS
Clare Dawson - LMA
Summary of economic implications
• Delayed Settlement Compensation will be calculated
using a “two-step method”, namely:
– Seller pays Buyer all interest and recurring fees on
the Traded Portion; and
– Buyer pays Seller interest on the Settlement
Amount
Summary of economic implications
• Break funding default position will be that IT DOES
NOT APPLY
• With respect to permanent reductions and payment of
fees (i.e.to whom they benefit) all references are to “on
or after Trade Date”
• If there is a default under a loan which has traded on
“Settled Without Accrued Interest” basis, it flips to
“Trades Flat”
Summary of economic implications
• Revised Buy-in/Sell-out (BISO) methodology
• Counterparty insolvency now catered for with ability
for non-insolvent counterparty to terminate the
contract
• “Trade is a Trade” concept now applies to Par Trades
• Essential that counterparties agree ALL TERMS OF
TRADE when the verbal contract is struck
Roadmap of an LMA Trade
25 March 2010
Deborah Neale – Clifford Chance
Introduction
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Trading a loan – the structure
Suggested timeline
Which secondary trading documents should I use?
What choices do I need to make?
Roadmap of an LMA Trade 7
LMA Trading Documents – Structure of a Trade
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No change to structure/method
Confidentiality/KYC/due diligence
Oral trade (trade is a trade - no conditionality)
Confirmation (evidences oral trade)
Terms and Conditions (general)
Sale and purchase agreement
Pricing letter
Roadmap of an LMA Trade 8
LMA Trading Documents – Structure of a Trade
Confirmation
Terms and
Conditions
Transfer
Certificate
Assignment
Agreement
Participation
Agreement
Roadmap of an LMA Trade 9
Suggested Timeline
T–x
KYC requirements satisfied
Buyer and Seller exchange Confidentiality Letter (if necessary)
T
Trade Date (telephone or otherwise)
T+1
Seller sends request to Agent for Borrower consent (but see Condition 6)
Seller sends Credit Documentation to Buyer (unless sent before Trade Date) (But see Condition 7.2(b))
T+2
Responsible Party sends Confirmation to Other Party (Condition 4(a))
Agent sends consent request to Borrower
T+4
Other Party returns Confirmation to Responsible Party (Condition 4(b)).
T+5
Responsible Party sends Transaction Documentation to Other Party (Condition 8) .
T+7
Borrower’s approval of trade
T + 7 (Par)
T + 15 (Distressed)
Both parties sign Transaction Documentation - deliver to the Agent (But see Condition 8).
T + as soon as
reasonably
practicable
Settlement Date (Condition 10.1)
T + 10 (Par)
T + 20 (Distressed)
If applicable, delayed settlement compensation starts to accrue (Condition 10)
T + 60
(par only)
Buy-in/Sell-out applies if one party fails to perform its Settlement Delivery Obligations (Condition 22.3)
Roadmap of an LMA Trade10
LMA Trading Documents
Confi Letters
(Seller) (Purchaser) (Agent/Broker)
Master
No Change
Trade Confirm (Par)
Trade Confirm (Distressed & Bank
Debt)
Trade Confirm
(Bank Debt)
Trade Confirm (Par)
Trade Confirm
(Risk Participation)
Trade Confirm (Distressed Claims)
Trade Confirm
(Claims)
Roadmap of an LMA Trade 11
LMA Trading Documents
Terms and Conditions (par)
Terms and Conditions (distressed & bank
debt claims)
Reps & Warranties (distressed bank debt/
secondary lender)
Reps & Warranties (distressed bank debt/
original lender)
Reps & Warranties (distressed claims/
secondary lender)
Reps & Warranties (distressed claims/
original lender)
Funded Participation (Distressed)
Funded Participation (Par)
Risk Participation (Par)
Terms and Conditions for Par
and Distressed Trade
Transactions (bank debt and
Claims)
Notices and Pricing Panel
Methodology
Funded Participation
(Par/Distressed)
Risk Participation (Par)
Roadmap of an LMA Trade 12
LMA Trading Documents
Funded/Risk Participation (Par)
Fund/Risk Participation
(Par)
Risk to Funded (Par)
Risk to Funded (Par)
Master Risk and Master Funded (Par)
Master Risk (Par) and
Master Funded
(Par/Distressed)
Put option/Call option (Par)
Removed (elevation in
Participation Agreements)
Assignment (Par)
Assignment (Distressed Bank Debt)
Assignment (Bank Debt)
Roadmap of an LMA Trade 13
LMA Trading Documents
Assignment (Distressed Claims)
Assignment (Distressed
Claims)
Transfer Agreement (Par)
Transfer Agreement (Distressed)
Transfer Agreement (Bank
Debt)
Termination and Transfer Agreement
(Distressed)
Termination and Transfer Agreement
(Par)
Termination and Transfer
Agreement (Par and
Distressed)
Settlement Letter (Par)
Pricing Letter (Distressed)
No Equivalent
Users Guide (Distressed)
Users Guide (Par)
Users Guide
Roadmap of an LMA Trade 14
Know Your Documents
• Which Trade Confirmation?:
– Bank Debt (Not Risk Participation)
– Risk Participation (Bank Debt Par)
– Distressed Claims
• Form of Purchase
– Novation
– Assignment
– Participation (Risk or Funded)
Roadmap of an LMA Trade15
Know Your Options - New
• Is it a par or a distressed trade?
• Settlement Date (as soon as reasonably practicable)
• Delayed Settlement Compensation (still optional but
separate from BISO (par))
• Legal Transfer only
• Termination on Insolvency between Trade Date and
Settlement Date
• Buy-in/Sell-out (par only/new default position)
• Breakfunding (par only/new default position)
• Participation – No Traded Margin
• Additional representations and warranties
• Original lender
Roadmap of an LMA Trade16
Conclusions
• Same structure but one set of documents
• Know your documents
• Know your options (Checklist)
Roadmap of an LMA Trade17
Overview of Combined Terms
and Conditions
25 March 2010
Justin Conway – Goldman Sachs
Deborah Neale – Clifford Chance
Terms and Conditions - Process
• LMA Secondary Documentation Committee
• Merger began with Terms and Conditions. Other
documents followed
• Terms and Conditions now based on existing
distressed
• Therefore main differences are to par
Overview of Combined Terms and Conditions
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Terms and Conditions – New for Par
• Trade is a trade – mandatory settlement
• Settlement Date – as soon as reasonably practicable
• Delayed Settlement Compensation – follows
distressed to put Buyer and Seller in position of
T+10/20 settlement. Must be selected but now
separate from BISO
• Settled without accrued – clawback for Borrower
default
• No breakfunding unless specified
Overview of Combined Terms and Conditions 20
Terms and Conditions – New for Par (contd)
• Purchased Assets include ancillary rights and claims
and non cash distributions
• Obligor insolvency provisions (i.e. info requirements)
• Two-way indemnities for breach of agreed terms or
warranty, failure to perform obligations and resulting
from obligation to reimburse or disgorge
• Seller pays Agent’s expenses (i.e. – steering
committee) up to Settlement Date, or, if Trades Flat,
Trade Date
Overview of Combined Terms and Conditions 21
Terms and Conditions – New for Par (contd)
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BISO
Only applies to Par Trades
Based on LSTA model
Differences to current BISO
– BISO applies to all par trades unless expressly
excluded.
– BISO only applies if the exclusion of the liability clause
for the LMA Pricing Panel and the associated third party
rights provisions are incorporated into the transaction.
– BISO kicks-in 60 Business Days after original Trade
Date (Trigger Date).
Overview of Combined Terms and Conditions 22
Terms and Conditions – New for Par (contd)
– BISO Notice can be served any time after Trigger Date.
– Defaulting party has 15 Business Days to remedy
default.
– Non defaulting party has 15 Business Days from end of
Cure Period to enter into Substitute Confirmation.
– Disputes over price for substitute trade referred to
Pricing Panel which acts according to Pricing Panel
Methodology.
Overview of Combined Terms and Conditions 23
Terms and Conditions – New for Par (contd)
– Permanent shield.
• BISO scenarios
Overview of Combined Terms and Conditions 24
Terms and Conditions – New to Par & Distressed
• Termination on Insolvency
– Applies between Trade Date and Settlement Date
– Insolvency Event follows ISDA
– Default = termination by notice (in LMA form)
– Either party can select automatic termination for certain
insolvency events in confirmation or by notice
– Consider master notice for particular counterparty.
– Legal implications – jurisdictional.
– On termination, NIP calculates the Early Termination
Amount.
Overview of Combined Terms and Conditions 25
Terms and Conditions – New to Par & Distressed (contd)
– Early Termination Amount Statement (in LMA form).
– Payment by Insolvent Party of difference between Early
Termination Amount and the Settlement Amount
(calculated as at the Early Termination Payment Date).
– Default interest.
Overview of Combined Terms and Conditions 26
Terms and Conditions – New to Par & Distressed (contd)
• Business Day Definition
• Average LIBOR/EURIBOR
• Confidentiality (not to confuse with Borrower
confidential information). Note: Settlement service
provider
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Terms and Conditions – New for Par & Distressed (contd)
• Tax gross up except in respect of interest and fees
under Credit Documentation
• Notices by email
• Seller to send Buyer copies of all notices/documents
received under Credit Documentation between Trade
Date and Settlement Date
Overview of Combined Terms and Conditions
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Terms and Conditions – Representations
• All representations and warranties now included as
standard in the Terms and Conditions
– regardless of whether trade is par or distressed
– regardless of whether the traded portion is bank debt or
an insolvent claim
– regardless of whether the seller is an original or
secondary lender
• Common mutual representations for par and
distressed trades
– typical corporate representations
Overview of Combined Terms and Conditions
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Terms and Conditions – Representations (contd)
• Common seller representations
– legal and beneficial ownership
– no documents other than the credit documentation
– no default of seller/PiT in relation to the purchased
assets
– traded assets capable of being assigned/participated
– amounts used in calculating the settlement amount true
and accurate
– ERISA compliance
– quality of Ancillary Rights and Claims
Overview of Combined Terms and Conditions
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Terms and Conditions – Representations (contd)
• Additional specific par trade seller representation
– no decision to accelerate or enforce rights under the
credit documentation
• Additional specific distressed trade seller
representations
– provision of the credit documentation to the buyer
– no "connection" with any obligor
– no "bad acts" or set-off or counterclaim
– no notice or knowledge of any claim impairment
– no obligation to make further advance or extend further
credit
– no proceedings against seller/PiT which would
adversely affect the purchased assets
Overview of Combined Terms and Conditions
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Terms and Conditions – Representations (contd)
• Buyer representations
– compliance with confidentiality requirements
– ERISA compliance
• Additional representations
– to be annexed to the confirmation
– variations to standard representations and warranties to
be agreed at time of trade
Overview of Combined Terms and Conditions
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Terms and Conditions – Representations (contd)
• New for Par
– some additional seller representations
– predecessor-in-title representations
– Ancillary Rights & Claims
– ERISA
• New for Distressed
– ability to assign/participate the purchased assets
Overview of Combined Terms and Conditions
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Participations
25 March 2010
Justin Conway – Goldman Sachs
Introduction
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Outline of process
Legal structure and role of Funded Partipation
Differences from current par Funded Participation
Differences from current distressed Funded
Participation
• Voting Rights
Outline
• Focus on forms of Funded Participation
• Combined document
• Based on currently published distressed Funded
Participation
• Same terms apply whether a trade is par or distressed
(other than voting rights)
• Other forms of participation conformed
Legal structure of Funded Participation
• Upfront payment by Participant to Grantor
• In return, Grantor pays Participant amounts equivalent
to those received by Grantor from Borrower under the
relevant Loan
• Legal basis is a limited recourse loan from Participant
to Grantor – no change in “ownership” of the relevant
Loan
• Participant takes credit risk on relevant Borrower and
on Grantor
Role of Funded Participation
• One of the Forms of Purchase
• But also the “fallback” Form of Purchase under the
“trade is a trade” provisions of the Standard Terms
and Conditions unless
– not possible
– changes can’t be agreed
– parties elect otherwise
• N.B. not designed as a freestanding document
Key changes from currently published par Funded
Participation
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Deletion of Traded Margin concept
Grantor’s duty of care
Non-attributable sums allocated pro rata
Participant bears risk of debt restructuring
Treatment of Non-Cash Distributions
Information Rights
Elevation Rights
ERISA
Framework for collateral for undrawn commitment
Termination provisions
Changes from currently published distressed Funded
Participation
• Some changes to terminology
• Allowance made for interest treatment selected in Agreed
Terms
• Specific provision made for Grantor withholding only
• Ability for Participant to opt out of receiving information
under Credit Documentation
• Participant bears risk of amendments to Credit
Documentation
• Obligation on Grantor to bring about an Elevation if the
trade “defaulted” to a funded participation
• Participant given two Business Days’ notice of
requirement to make funds available
• Participant given a two Business Day grace period to
remedy breaches
Voting Rights
• No change to the current position
• Par trade
– Where Participation is of all Grantor’s commitment Participant has
voting rights on key reserved matters only:
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date of payments
changes to amounts or currencies
reduction in interest/recurring fees
release of security
all Lender matters
– Otherwise no voting rights
• Distressed Trade
– Parties’ choice
– If voting rights are given, Grantor gives effect to Participant’s
instructions
– Majority voting
Questions?
UK/2279285/02
Comparison Between LSTA & LMA
Terms & Conditions
Thursday, March 25, 2010
Comparing LSTA and LMA Docs
 Structural differences
 Transfer methods
 Timing
 Settlement
 LSTA Upstreams vs. LMA Step-ups
 Participations in the US and UK
 BISO Mechanisms
 Novations and Assignments
 Termination rights
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Comparing LSTA and LMA Docs
 Loan agreements governed by NY law which trade on both
LMA and LSTA documents
 Delayed compensation and purchase price calculations
 Other differences:
 Bar Date/Proof of Claim/Insolvency
 Voting
 LMA Substantive Terms
 Representations
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