Essential Elements of the LSTA s Model Credit Agreement Provisions

Transcription

1 Essential Elements of the LSTA s Model Credit Agreement Provisions May 10, 2017 Bridget Marsh EVP and Deputy General Counsel Loan Syndications & Trading Association Tess Virmani SVP and Associate General Counsel Loan Syndications & Trading Association Arleen Nand Finance Partner, DLA Piper LLP

2 INTRODUCTION 2

3 Speakers A. Bridget Marsh. Executive Vice President and Deputy General Counsel, Loan Syndications & Trading Association ( LSTA ) B. Tess Virmani. Senior Vice President and Associate General Counsel, LSTA C. Arleen Nand. Finance Partner, DLA Piper LLP 3

4 Session Overview A. Overview of the LSTA B. Model Credit Agreement Provisions ( MCAPs ) 1. Boilerplate Provisions 2. Interlending Issues 3. Buybacks 4. Amends and Extends 5. Bail-in Language 6. Defaulting Lenders C. Future MCAPs and Related Projects 4

5 OVERVIEW OF THE LSTA 5

6 LSTA Promotes Transparency, Standardisation, and Operational Uniformity A. Primary responsibilities of LSTA Legal Team: 1. Develop legal product for our members 2. Expand and update suite of LSTA documents a) Lead Primary Market Committee b) Lead Trade Practices and Forms Committee 3. Respond to member legal and market practice questions 4. Resolve secondary market trading disputes 5. Education B. Some of the LSTA advocacy efforts include engagement with regulators on key issues for the loan market, including submitting comment letters and white papers, and filing amicus briefs. 6

7 LSTA Standardises both Primary and Secondary Documentation and Practices A. Primary Market. LSTA has published Model Credit Agreement Provisions (MCAPs), guidelines, and standard agreements for use in the origination and distribution of new deals. B. Secondary Market. LSTA offers a comprehensive suite of documents for use in the trading and settlement of all performing and distressed corporate loans. C. Trade Claims Market. LSTA has published a form master confidentiality agreement and a sample trade confirm for use in the claims trading market. 7

8 LSTA Membership Includes the Sell-Side, Buy- Side, Law Firms, and Vendors Vendors, 36 Banks, 74 Law Firms, 154 Institutional Investors, 142 8

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11 LSTA Memorialises Market Standard Terms Used by Loan Market Participants A. LSTA Working Groups and LSTA Committees help to produce new LSTA product. B. Most projects percolate up from our members; occasionally, the LSTA Board may make a decision to tackle an important issue. C. The production of a new document generally takes about one year with numerous turns until the document is released as an Exposure Draft and then published in final form. 11

12 LSTA MODEL CREDIT AGREEMENT PROVISIONS 12

13 LSTA First Published Credit Agreement Provisions Nearly 20 Years Ago A. The LSTA initially published provisions which could impact a loan s liquidity and then tackled boilerplate language: 1. Assignment Agreement (2000) 2. Model Transfer Provisions (2002) 3. Model Credit Agreement Provisions (2004 and 2005) addressed typical boilerplate provisions, including: a) Yield Protection b) Rights of Setoff c) Tax d) Sharing of Payments by Lenders e) Indemnity 13

14 MCAPS: BOILERPLATE PROVISIONS 14

15 MCAPs: List of Boilerplate Provisions A. Yield Protection B. Right of Setoff C. Cash Collateral D. Tax E. Sharing of Payment by Lenders F. Administrative Agent s Claw-Back G. Indemnity 15

16 Yield Protection A. Economic Rationale 1. Lenders expect to receive a certain return usually calculated by reference to an agreed margin over its cost of funds. 2. This pricing model rests upon certain assumptions regarding the regulatory treatment of loan and the lender. 3. If regulatory treatment makes the loan more expensive for lenders or otherwise reduces their rate of return, lenders expect to have the right under the loan agreement to pass on these costs to the borrower to protect this expected return. 16

17 Yield Protection (Continued) B. Yield Protection Components in MCAPs: If a Change in Law occurs that increases a lender s costs to originate or maintain a loan, then those costs shall be assessed to the borrower. Change in Law means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any Governmental Authority or (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any Governmental Authority; provided that notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a Change in Law, regardless of the date enacted, adopted or issued. 17

18 Yield Protection (Continued) C. Delay in Requests: Borrowers are not required to compensate a lender for increased costs incurred or reductions suffered more than nine months prior to the date that the lender has notified the borrower of the Change in Law giving rise to the increased costs or reduction giving rise to the lender s claim. 18

19 Yield Protection (Continued) D. Momentive Decision 1. In 2014, the U.S. District Court for the Southern District of New York refused to enforce a make-whole provision against a borrower whose debt had been automatically accelerated upon bankruptcy. 2. Momentive held that after the underlying debt has been accelerated, a make-whole premium would only be due if the agreement clearly and unambiguously provides for it. In re MPM Silicones LLC, No RDD, 2014 WL (Bankr. S.D.N.Y. Sept. 9, 2014), aff d, 531 B.R. 321, 338 (S.D.N.Y. 2015) ( Momentive ). Currently, pending appeal in the Second Circuit. 19

20 Yield Protection (Continued) D. Momentive Decision (Continued) 3. The Court found that the acceleration provision in the indenture providing that the premium, if any would become immediately payable upon acceleration ambiguous. 4. Following this decision, lenders have expansively defined triggers for yield protection in credit agreements, indenture and other debt instruments expansively to include repayments, prepayments, accelerations or mandatory assignments (i.e. yank-a-banks) for failing to consent to amendments. 5. BEST PRACTICES: Draft acceleration language in debt instruments to clearly state that yield protection becomes payable immediately prior to any automatic acceleration caused by a bankruptcy event. 20

21 Yield Protection (Continued) D. Momentive Decision (Continued) 3. The Court found that the acceleration provision in the indenture providing that the premium, if any would become immediately payable upon acceleration ambiguous. 4. Following this decision, lenders have expansively defined triggers for yield protection in credit agreements, indenture and other debt instruments expansively to include repayments, prepayments, accelerations or mandatory assignments (i.e. yank-a-banks) for failing to consent to amendments. 5. BEST PRACTICES: Draft acceleration language in debt instruments to clearly state that yield protection becomes payable immediately prior to any automatic acceleration caused by a bankruptcy event. 21

22 Yield Protection (Continued) E. Energy Futures Delaware Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 842 F.3d 247 (3d Cir. 2016) 1. The Third Circuit, applying New York law, rejected rationale of Momentive in reversing the lower courts, and upheld the make-whole premiums. 2. The court ruled that the refinancings were optional redemptions even though they occurred post-acceleration, that the optionalredemption provisions of the indentures required payment of the make-whole premiums, and that the acceleration provisions did not provide otherwise. 22

23 Right of Setoff A. Setoff versus Recoupment 1. Setoff: Application of a mutual debt owed by a creditor to the debtor against claim held by such creditor against the debtor, to satisfy the claim in the amount of the applied debt effectively the netting of the two obligations. Section 553 of the U.S. Bankruptcy Code addresses setoffs, and, although it does not create any rights, Section 553 generally preserves any setoff rights that were available prepetition. 2. Recoupment: Similar to setoff, but not subject to the same restrictions in a bankruptcy (11 U.S. Code 553). Recoupment exists under common law and continues without restriction in bankruptcy. Recoupment permits the netting of mutual obligations between a debtor and creditor but only if they arise under a single, integrated transaction. In that sense it is different from setoff, which when permissible in bankruptcy would permit the netting of mutual obligations from different transactions. 23

24 Right of Setoff (Continued) B. MCAP Setoff Provision 1. Event of Default: Setoff right can be exercised upon the occurrence and continuance of an Event of Default. 2. Defaulting Lenders: If a Defaulting Lender exercises any right of setoff, all amounts so set off shall be paid over immediately to the Administrative Agent for further application in accordance with the provisions of Section [Defaulting Lenders] and, pending such payment, shall be segregated by such Defaulting Lender from its other funds and deemed held in trust for the benefit of the Administrative Agent, the Issuing Banks, and the Lenders. 3. Participants: To the extent permitted by law, each Participant also shall be entitled to the benefits of Section [Right of Setoff] as though it were a Lender; provided that such Participant agrees to be subject to Section [Sharing of Payments by Lenders] as though it were a Lender. See Successors and Assigns and Sharing of Payments MCAPs. 24

25 Cash Collateral 1. Cash Collateralize means, to [deposit in a Controlled Account or to] pledge and deposit with or deliver to the Administrative Agent, for the benefit of one or more of the Issuing Banks or Lenders, as collateral for L/C Obligations or obligations of Lenders to fund participations in respect of L/C Obligations, cash or deposit account balances or, if the Administrative Agent and each applicable Issuing Bank shall agree in their sole discretion, other credit support, in each case pursuant to documentation in form and substance satisfactory to the Administrative Agent and each applicable Issuing Bank. 2. Borrower is generally required to Cash Collateralize Fronting Exposure of Non-Defaulting Lenders 3. MCAPs do not indicate the required amount of Cash Collateral, but Borrowers may typically request to specify 100%. 4. Issuing Bank s right to consent to documentation governing Cash Collateralization may be subject to minimum L/C Obligation threshold. 25

26 Tax Provisions 1. FATCA. In general, the Foreign Account Tax Compliance Act ( FATCA ), enacted in 2010, imposes a 30% withholding tax on foreign financial institutions and other specified foreign entities that fail to comply with certain information reporting and withholding obligations. Since compliance with FATCA is generally within the control of a lender, the MCAPs state that withholding taxes imposed under FATCA are ineligible for the gross-up and tax indemnification provisions of credit agreements, and require lenders to provide information necessary for borrowers and administrative agents to fulfill their obligations under FATCA.. 2. MCAPs bifurcate taxes into those imposed on payments, which are covered by the tax gross-up and tax indemnity, and those that are not, which are addressed instead by the increased costs provision. 26

27 Tax Provisions (Continued) 3. Subject to various exclusions, typical withholding taxes are covered by the tax gross-up and tax indemnity, while bank taxes on a lender s capital or liabilities are covered by the increased costs provision. 4. Exclusions to Tax gross-up and Tax indemnity: net income taxes, franchise taxes and branch profits taxes, to the extent such result from any connection between the lender and the taxing jurisdiction. 5. Increased costs provisions: a newly imposed bank tax is similar to an increased cost resulting from a regulatory change and, therefore, is similarly covered by the increased costs provision. 27

28 Tax Provisions (Continued) 6. Greater Payments to Participants. MCAPs allow a participant to receive a greater payment under the tax gross-up and tax indemnity than the participating lender would have received, provided that the additional tax is due to a change in law that occurred after the participant acquired its participation interest. MCAPs also acknowledge that the administrative agent, rather than the borrower, will often be the withholding agent, and include more extensive tax forms provisions. 7. Participation Register. Certain non-u.s. lenders rely on the so-called portfolio interest exemption to receive interest from loans free of U.S. withholding tax. This exemption requires that the loans be in registered form (which the administrative agent s loan register typically ensures). In light of concern that silent participations might require the same exemption, lenders selling such participations are now required to maintain a register, which they must disclose only if necessary to establish that the loan participation is in registered form. 8. Lender Tax Indemnity. MCAPs also requires each lender to indemnify the administrative agent for taxes attributable to the lender or taxes attributable to the lender s failure to maintain a participation register. 28

29 Sharing of Payment by Lenders Greater Payments to Participants. If a lender exercises its right of setoff or counterclaim or otherwise, receives payment for principal and interest of any of its Loans in excess of its proportionate amount, such lender shall (a) notify the Administrative Agent, and (b) purchase (for cash at face value) participations in the Loans and such other obligations of the other Lenders, or make such other adjustments as shall be equitable, so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and other amounts owing them, subject to certain exclusions. 29

30 Administrative Agent s Clawback 1. In the MCAPs, Administrative Agents consent to provide funding before they have access to lenders advances. As a protective measure, they have the ability to claw back advanced amounts. 2. The debt instrument should be reviewed to determine whether the Administrative Agents has the obligation or right to make such advances. If so, if the agent has such right then a clawback clause would usually be included. 3. Practice Note: If a debt instrument provides that the Administrative Agent will only advance when it has same day available funds from the parties, then the clawback clause may not be required. The clawback will generally expend both to funding by lenders and payments by the borrower. The determination as to whether an Administrative Agent will make advances on behalf of either prior to receipt of same day funds is a business matter to be negotiated, and generally will be dependent upon the credit quality of the parties involved. 30

31 Indemnity Indemnification by the Borrower. The Borrower shall indemnify the Administrative Agent (and any sub-agent thereof), each Lender and each Issuing Bank, and each Related Party of any of the foregoing Persons (each such Person being called an Indemnitee ) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses (including the fees, charges and disbursements of any counsel for any Indemnitee)[, and shall indemnify and hold harmless each Indemnitee from all fees and time charges and disbursements for attorneys who may be employees of any Indemnitee], incurred by any Indemnitee or asserted against any Indemnitee by any Person (including the Borrower [or any other Loan Party]) other than such Indemnitee and its Related Parties arising out of, in connection with, or as a result of: (i) (ii) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby, any Loan or Letter of Credit or the use or proposed use o the proceeds therefrom (including any refusal by any Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), 31

32 Indemnity (Continued) iii. iv. any actual or alleged presence or Release of Hazardous Materials on or from any property owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries, or any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by the Borrower [or any other Loan Party], and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (x) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee or (y) result from a claim brought by the Borrower or any other Loan Party against an Indemnitee for breach in bad faith of such Indemnitee's obligations hereunder or under any other Loan Document, if the Borrower or such Loan Party has obtained a final and nonappealable judgment in its favor on such claim as determined by a court of competent jurisdiction. This Section [ ](b) shall not apply with respect to Taxes other than any Taxes that represent losses, claims, damages, etc. arising from any non-tax claim. 32

33 AGENCY 33

34 LSTA Agency Language Makes Clear that the Agent s Duties are Merely Administrative in Nature A. The agent does not act in a fiduciary capacity and: 1. Shall not have any duty to take any discretionary action. 2. Shall not have any duty to disclose any borrower related information. 3. Shall not be liable for any action taken or not taken by it with the consent or at request of lenders in the absence of its own gross negligence or willful misconduct. 4. Shall not have any duty to ascertain any statement made in connection with the agreement, the contents of any certification, performance of any terms, covenants, conditions, etc. 34

35 Agent Has No Duty To Monitor Or Enforce Compliance With A DQ List The Administrative Agent shall not be responsible or have any liability for, or have any duty to ascertain, inquire into, monitor or enforce, compliance with the provisions hereof relating to Disqualified Institutions. Without limiting the generality of the foregoing, the Administrative Agent shall not (x) be obligated to ascertain, monitor or inquire as to whether any Lender or Participant or prospective Lender or Participant is a Disqualified Institution or (y) have any liability with respect to or arising out of any assignment or participation of Loans, or disclosure of confidential information, to any Disqualified Institution. 35

36 ASSIGNMENTS 36

37 The LSTA Published Model Transfer Provisions Nearly 20 Years Ago and Periodically Updates Them A. Minimum Amounts: MCAPs provide that the minimum amount of a revolver assignment is $5 million and a term loan assignment is $1 million, or no minimum amount if it s the entire remaining amount of the assigning lender s commitment/loans. B. Borrower s Deemed Consent: MCAPs state that no consent is required for any assignment except borrower s consent is required (unless default has occurred and is continuing); provided that the borrower shall be deemed to have consented to an assignment unless it shall object by written notice to agent within 5 business days after receiving notice. 37

38 Loans Cannot be Assigned to Natural Persons A. In 2014, the LSTA clarified the prohibition on assignments to people. Now MCAPs expressly state that loans can t be assigned to a natural Person or to a holding company, investment vehicle or trust for, or owned and operated for the primary benefit of, a natural person. Thus, someone interested in acquiring a loan cannot circumvent this provision by setting up a LLC or other entity to then acquire that loan. B. Register of Lenders: The entries in the register shall be conclusive absent manifest error. The register shall be available for inspection by the borrower and any lender at any reasonable time and from time to time upon reasonable prior notice. C. LSTA Best Practices: LSTA has promulgated best practices regarding the sharing of lender lists. If a request for an amendment is pending, a lender seeking to consult with other syndicate members in connection therewith may request from the agent a lender list with the names of the other lenders in the syndicate and their exposures. 38

39 Lenders May Sell Participations Without Borrower or Agent Consent Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural Person ) ; provided that (i) such Lender s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, and (iii) the Borrower, the Administrative Agent, the Issuing Banks and Lenders shall continue to deal solely and directly with such Lender in connection with such Lender s rights and obligations under this Agreement. 39

40 Participant May Vote on the Sacred Rights but This Will Depend on the Terms of the Participation Agreement A. Participation agreement shall provide that the lender/grantor shall retain the right to enforce the credit agreement and to approve any amendment, but the participation agreement may provide that such lender will not, without the participant s consent, agree to any amendment with respect to the sacred rights, i.e., those terms requiring unanimous lender consent. B. What if the lender/grantor of the participation has sold its position to many different participants? What if the lender/grantor is permitted, under the terms of the participation agreement, to count the interests of its affiliates when determining the majority participants? 40

41 DISQUALIFIED INSTITUTIONS 41

42 LSTA MCAPs Include A Disqualified Institution Structure A. Health Warning! LSTA DQ Structure should be viewed as a package deal. B. DQ List: The DQ List includes the names of the institutions which the borrower does not want to own its loans and be in the syndicate. C. LSTA MCAPs define Disqualified Institution as follows: Disqualified Institution means, on any date, (a) any Person designated by the Borrower as a Disqualified Institution by written notice delivered to the Administrative Agent on or prior to the date hereof and (b) any other Person that is a Competitor of the Borrower or any of its Subsidiaries, which Person has been designated by the Borrower as a Disqualified Institution by written notice to [the Administrative Agent and the Lenders (including by posting such notice to the Platform) not less than [_] Business Day[s] prior to such date]; provided that Disqualified Institutions shall exclude any Person that the Borrower has designated as no longer being a Disqualified Institution by written notice delivered to the Administrative Agent from time to time. 42

43 DQ List May Be Updated With Names of Borrower s Competitors A. Updating: DQ List is created on or before the date of the credit agreement, and the names of borrower s competitors may also be added after CA date. The LSTA form does not provide a definition of Competitor ; instead, a drafting note suggests that the term be defined with specificity in reference to the particular borrower and its business. B. Transparency: LSTA DQ Structure assumes that the DQ list will be posted to the public side of a platform so that lenders may easily access and review it before they trade (the agent should also give the DQ List to a lender upon request). C. No Pop-ups: Assignees should not need to finalise AA. 43

44 DQ List Applies To Both Assignments and Participations A. The DQ List applies to assignments and participations. B. But the DQ List has no retroactive effect. Thus, trades entered into with a party that is added to DQ list post-trade date (ie, a competitor of the borrower) may be settled. For the avoidance of doubt, with respect to any assignee that becomes a Disqualified Institution after the applicable Trade Date (including as a result of the delivery of a notice pursuant to, and/or the expiration of the notice period referred to in, the definition of Disqualified Institution ), (x) such assignee shall not retroactively be disqualified from becoming a Lender and (y) the execution by the Borrower of an Assignment and Assumption with respect to such assignee will not by itself result in such assignee no longer being considered a Disqualified Institution. Any assignment in violation of this clause (h)(i) shall not be void, but the other provisions of this clause (h) shall apply. 44

45 Borrower May Yank A Disqualified Institution and Prepay Their Loans Borrower s remedies: If an assignment or participation is made to a Disqualified Institution, borrower may yank the DI or require the DI to assign its loans to an Eligible Assignee. The LSTA form leaves it to the parties to decide whether the borrower should prepay or purchase the term loans at par, the price paid by the DI, or market price. If any assignment or participation is made to any Disqualified Institution without the Borrower s prior written consent or if any Person becomes a Disqualified Institution after the applicable Trade Date, the Borrower may terminate any Revolving Credit Commitment of such Disqualified Institution and repay all obligations of the Borrower owing to such Disqualified Institution in connection with such Revolving Credit Commitment, (B) in the case of outstanding Term Loans held by Disqualified Institutions, purchase or prepay such Term Loan by paying the [lowest] [lesser] of (x) the principal amount thereof [and][,] (y) the amount that such Disqualified Institution paid to acquire such Term Loans [and (z) the [market price] of such Term Loans], in each case plus accrued interest, accrued fees and all other amounts (other than principal amounts) payable to it hereunder and/or (C) require such Disqualified Institution to assign, without recourse all of its interest, rights and obligations under this Agreement to one or more Eligible Assignees. 45

46 LSTA s DQ Structure Is Finely Balanced a Package Deal A. LSTA s DQ Structure works when each element of the paradigm is present. B. If the DQ List is to apply not only to assignments but also to participations, then it must be posted so lenders may easily review it. C. If the agent has no responsibility for monitoring the list, then parties must be able freely and regularly to access it and share it with prospective assignees. D. If the list is capable of being updated for competitors post-closing, then there must be a notice period before the updated DQ List takes effect. E. Parties are urged to remember that the elements of the LSTA s DQ Structure are carefully intertwined; changing one aspect without regard for the whole can impact its effectiveness. 46

47 Disqualified Institutions are Walled Off From Borrower Information and Lender Actions A. The LSTA DQ Structure provides that all Disqualified Institutions are prohibited from receiving confidential borrower information, engaging in fundamental lender actions and taking part in creditor decisions in connection with insolvency scenarios. (See clause (h)(iii) in the Successors and Assigns section of the MCAPs). B. MCAPs Confidentiality Provision also expressly provides that the DQ List may be disclosed to any assignee or participant, or prospective assignee or participant. This is important because the assignee confirms in the Assignment Agreement that it meets all the requirements to be an assignee under the Successors and Assign provision of the CA and thus is also confirming that it is not a Disqualified Institution. 47

48 MCAPs Confidentiality Provisions Include Carveouts Which Help the Loan Market Function A. As noted above, the DQ List may be disclosed to any assignee or participant or any prospective assignee or participant. B. In addition, the agent and lenders may disclose the existence of the credit agreement and information about it to market data collectors and similar service providers to the lending industry. C. With respect to borrower confidential information, Lenders must keep that information confidential except that it may be disclosed to, amongst others, affiliates, regulators, as required by law, and subject to a confidentiality agreement with substantially the same terms as the confidentiality provision to any assignee/participant and any prospective assignee/participant; any actual or prospective party to a swap; any rating agency; and the CUSIP Service Bureau. 48

49 BUYBACKS 49

50 Buybacks More Prevalent When Average Bid Level in Secondary Market 90 Percentage of Par Value Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Source: S&P/LSTA Leveraged Loan Index 50

51 Borrower May Seek To Buyback Their Loans Which Trade Below Par A. Borrower buybacks emerged in 2008, when many loans traded well below par in the secondary market, and, therefore, borrowers sought to take advantage of their loans discounted market prices and delever. However, credit agreements did not provide for such buybacks, and thus credit agreements began to include buyback provisions. B. The LSTA memorialised buyback provisions in the LSTA Model Credit Agreements in C. Although loan prices have recovered and the median trade price remains above par (60% of loans priced above par in April 2017), borrowers like the flexibility of buyback provisions and still seek to include them in their credit agreements. 51

52 Different Rules Apply To Borrower and Affiliated Lender Buybacks A. There are different types of buybacks: 1. Borrower buybacks 2. Affiliated lender buybacks B. Borrower buybacks: Any Lender may assign its term loans on a non-pro rata basis to the Borrower in accordance with reverse Dutch Auction procedures under an offer made available to all lenders on a pro rata basis subject to certain limitations. C. Affiliated lender buybacks: Sponsors / sponsor affiliates are typically permitted to buyback loans through non pro rata open market purchases because the sponsor will use its own funds or use funds from agreed permitted restricted payments. 52

53 Borrower May Buyback Loans Pursuant To Dutch Auction A. Borrower Buyback Limitations 1. No Excluded Information: borrower represents that neither it, nor its affiliates, has any Excluded Information that has not been disclosed to the term lenders ( Excluded Information means any non-public information with respect to the Borrower or its Subsidiaries or any of their respective securities to the extent such information could have a material effect upon, or otherwise be material to, an assigning Term Lender s decision to assign Term Loans or a purchasing Term Lender s decision to purchase Term Loans ). 2. Acquired loans to be extinguished: the purchased term loans will be extinguished immediately, and the borrower shall have no rights as a term lender under the credit agreement by virtue of such assignment. 3. No proceeds of revolvers used: the borrower cannot use the proceeds of any revolving loans to fund the buybacks. 4. No default or event of default: no default or event of default shall have occurred and be continuing before or immediately after giving effect to such assignment. 53

54 LSTA MCAPs Include Basic Borrower Buyback Auction Procedures A. Notice Procedures 1. Auction notice to contain maximum amount of loans borrower is willing to purchase 2. Range of discounts to par at which borrower would be willing to purchase term loans B. Reply Procedures 1. Each lender wishing to participate in the Dutch auction shall give the auction manager a notice which specifies a discount to par (reply price) within the discount range 2. Principal amount of terms loans that such lender is willing to offer for sale at the reply price 3. Lender must execute and deliver an assignment agreement C. Proration Procedures 1. Based on reply prices/amounts the auction manager will calculate the lowest purchase price (applicable threshold price) within the discount range that will allow the borrower to complete the Dutch Auction by purchasing the full auction amount. 2. The borrower shall purchase by assignment loans from each lender whose bid is within the discount range and contains a reply price that is equal to or less than the applicable threshold price (qualifying bid). All term loans included in qualifying bids received at a reply price lower than the applicable threshold price will be purchased at a price equal to the applicable reply price and are not subject to proration. 54

55 Affiliate Buybacks May Be Done Through Non Pro Rata Open Market Purchases A. There are two categories of Affiliated Lender: Debt Fund Affiliate and Non-Debt Fund Affiliate. Both categories may buy back loans done through open market purchases but different rules apply to them. B. Debt Fund Affiliate means an Affiliated Lender that is a bona fide debt fund or an investment vehicle that is primarily engaged in making, purchasing, holding or otherwise investing in commercial loans, bonds and similar extensions of credit in the ordinary course of business and with respect to which none of the Borrower [or the Sponsor] or any Affiliate of the Borrower [or the Sponsor] makes investment decisions or has the power, directly or indirectly, to direct or cause the direction of such Affiliated Lender s investment decisions. A. Non-Debt Fund Affiliate means an Affiliated Lender that is not a Debt Fund Affiliate. 55

56 Non-Debt Fund Affiliates May Buyback Debt But Are Subject To Restrictions A. A lender may assign its term loans on a non-pro rata basis to an Affiliated Lender through open-market purchases subject to certain limitations: 1. Assignments to Non-Debt Fund Affiliates: a) Non-Debt Fund Affiliate must identify itself as an Affiliated Lender b) No lender-only information: Non-Debt Fund Affiliate has no right to receive information given to the other lenders by agent, to attend meetings, or to access platforms established for lenders c) Cap: Aggregate principal amount of term loans held by Non-Debt Fund Affiliates may not exceed agreed percentage in the credit agreement d) No Vote on Plan of Reorganisation: Non-Debt Fund Affiliate cannot vote on plan of reorganisation, except to the extent such plan adversely affects it more than other lenders e) Voting: Non-Debt Fund Affiliate s vote will effectively not be counted on amendments, except for matters requiring a unanimous vote or an all-affected lender vote that adversely affects the Non Debt Fund Affiliate more adversely than other lenders 56

57 Restrictions on Non-Debt Fund Affiliates Do Not Apply to Debt Fund Affiliates A. Debt Fund Affiliates are thought to act independently of the sponsor and thus are not subject to the same buyback restrictions as Non-Debt Fund Affiliates. B. On Required Lender votes, the portion of any loans held by Debt Fund Affiliates in the aggregate in excess of 49.9% of the amount of loans required to be held by lenders for such lenders to constitute Required Lenders shall be disregarded in determining Required Lenders. That is, a majority of the consenting lenders in a Required Lender vote must not be Debt Fund Affiliates. 57

58 AMEND & EXTENDS 58

59 Amend & Extend Volume $80 $70 $60 $50 Pro rata Amend & Extend Volume Institutional Amend & Extend Volume Billions $40 $30 $20 $10 $ Source: S&P/LCD 59

60 A&E Transactions Permit Borrower to Extend Maturity of Some -Not All- Loans A. After the financial crisis, borrowers took advantage of A&Es to extend the maturity of their loans in exchange for a fee and/or better pricing. B. Credit agreements now incorporate A&E mechanics that allow borrowers to complete an A&E at a future date without obtaining lender approval other than the extending lenders. C. The market has coalesced around the drafting of these A&E mechanics and those market standard provisions were added to the 2014 MCAPs. 60

61 The Extended Term Loans Are Required To Meet Certain Pro Rata Requirements A. Under the LSTA MCAPs, all lenders of a particular class must be given an equal opportunity to participate on a pro rata basis and on the same terms and conditions as each other Lender of that class. B. The terms of the extended loans should not be more favorable than the existing, non-extending loans. C. The provisions of the LSTA MCAPs require that the extended term loans: 1. Are subject to customary maturity and weighted average life limitations; 2. Rank pari passu with the existing term loans; and 3. Must receive no better than pro rata treatment in connection with prepayments. 61

62 Borrower May Request An A&E By Written Notice To Agent A. The borrower may request at any time, and from time to time, an extension of the maturity of any class of loans and commitments by written notice to the agent. Notice to specify: 1. amount of the applicable loans and/or commitments to be extended; 2. date on which the extension shall be effective; and 3. identify the relevant class of revolving credit commitments and/or term loans to which the extension relates. B. The procedures of the A&E shall be established by, or reasonably acceptable to, the agent and the borrower. C. If the A&E is oversubscribed, then the applicable loans and/or commitments of lenders of the applicable class shall be extended ratably up to the maximum amount specified in the extension notice. 62

63 A&Es Are Subject To Certain Conditions Precedent (i) [N]o Default or Event of Default shall have occurred and be continuing immediately prior to and immediately after giving effect to such Extension, (ii) the representations and warranties set forth [in the credit agreement and other loan documents] shall be deemed to be made and shall be true and correct in all material respects on and as of the effective date of such Extension, (iii) the Issuing Bank and Swingline Lender shall have consented to any Extension of the Revolving Credit Commitments, to the extent that such Extension provides for the issuance or extension of Letters of Credit or making of Swingline Loans at any time during the extended period, and (iv) the terms of such Extended Revolving Credit Commitments and Extended Term Loans shall comply with the [terms of this section]. 63

64 The 2014 MCAPs Provide Certain Terms Applicable To Any A&E A. The final maturity date of any extended commitment and/or loan shall be no earlier than the respective existing maturity date, B. There shall be no scheduled amortization of the loans or reductions of commitments and the average life to maturity of the extended loans shall be no shorter than the remaining average life to maturity of the existing term loans, C. The extended loans and/or commitments will rank pari passu with the existing loans and commitments and the borrower and guarantors shall be the same, D. The economics applicable to the extended loans and/or commitments shall be determined by the borrower and the applicable extending lenders, 64

65 The 2014 MCAPs Provide Certain Terms Applicable To Any A&E (cont d) A. The extended term loans may participate on a pro rata or less than (but not greater than) pro rata basis in voluntary or mandatory prepayments with the other term loans and borrowing and prepayment of extended revolving loans or reductions of extended commitments, and participation in letters of credit and swingline loans, shall be on a pro rata basis with the other revolving loans or commitments (other than upon the maturity of the nonextended loans and commitments), and B. The terms of the extended commitments or loans, as applicable, shall be substantially identical to the terms set forth in the credit agreement (except as set forth in the Amend and Extend provisions). 65

66 An Extension Amendment Does Not Need The Consent Of Any Other Lender A. The borrower, agent and each extending lender shall deliver to the agent an extension amendment (and any other reasonable documentation) to evidence the extension. B. The extension amendment may, without the consent of any other lender, effect such amendments to the credit agreement and other loan documents as may be necessary or appropriate, in the reasonable opinion of the agent and the borrower, to implement the terms of any such extension. C. The agent is responsible for notifying each lender that the amendment is effective. 66

67 A Record 78% of 1Q17 Institutional Loan Volume Was Refinancing Activity $300 Institutional Loan Volume 100% Refinancing New Money $250 80% Volume (billions) $200 $150 $100 $50 60% 40% 20% $- 0% Source: Thomson Reuters LPC 67

68 Cashless Rolls Have Become Common A. In recent years, the market has seen an overwhelming number of repricings given the low interest rate environment. B. Existing lenders, for a variety of reasons, often request to roll their loan into the new loan on a cashless basis. C. In response, the cashless roll mechanism was developed to address that request - a lender just applies its principal amount in the new facility to the existing loan rather than receiving a cash payment. D. Cashless rolls are useful where existing loans would otherwise be repaid in cash at par with proceeds of new or amended term loans. 68

69 Cashless Rolls Are Expressly Permitted In The 2014 MCAPs A MCAPs contain a new Cashless Settlement provision explicitly permitting cashless rollovers in a refinancing or other loan modification. B. Notwithstanding anything to the contrary contained in this Agreement, any Lender may exchange, continue or rollover all or a portion of its Loans in connection with any refinancing, extension, loan modification or similar transaction permitted by the terms of this Agreement, pursuant to a cashless settlement mechanism approved by the Borrower, the Administrative Agent and such Lender. 69

70 LSTA Published A Form Cashless Roll Letter A. These refinancings are often documented in a separate letter agreement. 1. LSTA published its form Cashless Roll Letter together with the August 2014 MCAPs. B. The LSTA form letter provides for the exchange mechanism where the Borrower offers, and the Lenders agree, to exchange the existing loans for the right to receive the new term loans on a cashless basis. 1. Agent retains the right to allocate the new loans to existing lenders in its discretion. 2. Limitation on Agent s liability. 70

71 BAIL-IN LANGUAGE 71

72 European Banks Must Include Bail-In Language in Many NY Law Governed Contracts A. EU s Bank Recovery and Resolution Directive (BRRD) gives regulators bailin powers: BRRD is part of a series of banking reforms passed in response to the global financial crisis. B. Under the BRRD, regulators can bail-in a failing financial institution by writing down, converting into equity, or otherwise modifying certain of their liabilities. Policy makers did not want taxpayers to be required to bail-out banks again in another banking crisis. C. Article 55 of the BRRD requires certain EEA affected institutions, including European banks, to include a contractual recognition of bail-in in many non EU law governed contracts, including those governed by NY law. D. EU member states were required to implement this by January 1, (BRRD is a Directive; thus, EU member states must enact national implementing legislation giving it effect; expected to apply to additional EEA member states (Norway, Iceland and Liechtenstein) from the end of 2016.) 72

73 EU Bail-in Powers Apply Very Broadly A. BRRD sets out two categories of liabilities to which Article 55 does not apply: 1. Liabilities excluded from bail-in under Article 44(2) of the BRRD; and 2. Liabilities which are preferred in insolvency under Art 108(a) of BRRD. B. Article 44 of the BRRD provides that bail-in applies to all liabilities which are not excluded. Excluded liabilities under Article 44(2) include: 1. Secured liabilities (to the extent of security s value) 2. EU insured deposits 3. Certain liabilities to suppliers of goods or services 4. Certain liabilities to employees 73

74 When Does a Liability Trigger the Article 55 Requirements? A. A contractual recognition clause is only required in relation to liabilities issued or entered into after the relevant implementation date. B. The following liabilities are caught: 1. Liabilities created after that date regardless whether they are created under relevant agreements entered into before that date (including under master or framework agreements between the contracting parties governing multiple liabilities); 2. Liabilities created before or after that date under relevant agreements entered into before that date which are subject to material amendment; 3. Liabilities issued under debt instruments issued after that date; and 4. Liabilities under debt instruments issued before or after that date under relevant agreements entered into before that date which are subject to a material amendment. 74

75 EBA Did Not Specify the Exact Terms of a Contractual Recognition Provision A. In the RTS, the EBA did not prescribe a form of contractual recognition provision; rather, it listed the key mandatory contents which include: 1. Express acknowledgment and consent of counterparty to application of writedown and conversion powers by resolution authority and their potential effects, including: a) Reduction of amount outstanding, including to zero b) Conversion of the liability into shares c) Variation of terms in connection with the exercise of the write-down and conversion powers, for example, variation of the maturity of a debt instrument. 75

76 There are Minor Differences Between the LSTA and LMA Variants A. Because the EBA did not publish a prescribed form of contractual recognition provision, many global trade associations worked together to produce suitable forms of contractual recognition provisions. B. On December 22, 2015, the LSTA and LMA published a Joint Statement relating to the publication of the contractual recognition provision published by the LSTA, the LSTA Variant, and by the LMA, the LMA Variant. C. LSTA and LMA Variants don t match exactly because of differences in terminology, structure, and governing law; need for the LMA Variant to be flexible enough to be adapted for use in a variety of different legal documents; need for the LSTA Variant to be suitable for use in the US loan market and for inclusion in New York law governed loan documents; and the LMA's desire to provide optional wording capable of being used to provide for possible future legal and regulatory developments both in Europe and elsewhere. 76

77 LSTA Variant of the Contractual Recognition Provision Acknowledgement and Consent to Bail-In of EEA Financial Institutions. Notwithstanding anything to the contrary in any Loan Document or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any EEA Financial Institution arising under any Loan Document, to the extent such liability is unsecured, may be subject to the write-down and conversion powers of an EEA Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by: A. the application of any Write-Down and Conversion Powers by an EEA Resolution Authority to any such liabilities arising hereunder which may be payable to it by any party hereto that is an EEA Financial Institution; and B. the effects of any Bail-in Action on any such liability, including, if applicable: C. a reduction in full or in part or cancellation of any such liability; D. a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such EEA Financial Institution, its parent undertaking, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Agreement or any other Loan Document; or E. the variation of the terms of such liability in connection with the exercise of the write-down and conversion powers of any EEA Resolution Authority. 77

78 Definitions in the LSTA Variant A. Bail-In Action means the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution. B. Bail-In Legislation means, with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law for such EEA Member Country from time to time which is described in the EU Bail- In Legislation Schedule. C. EEA Financial Institution means (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent; D. EU Bail-In Legislation Schedule means the EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor person), as in effect from time to time. E. Write-Down and Conversion Powers means, with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule. 78