LMA Webinar Introduction to the LMA Pre-Export Finance Facility Agreement

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1 LMA Webinar Introduction to the LMA Pre-Export Finance Facility Agreement Andrew Taylor, Partner Hogan Lovells, London David Leggott, Partner Hogan Lovells, London

2 Structure of the Webinar What is Pre-Export Finance (PXF)? LMA PXF Facility Agreement Assumed structure/ drafting assumptions Differences/ similarities to other LMA templates Key features 2

3 What is Pre-Export Finance (PXF)? Buyer(s) Sales Contracts Borrower (Seller) Loan Facility Agent/ Security Agent Lenders Surplus from Collection Account Payments under Sales Contracts Collection Account Debt Service from Collection Account 3

4 What is Pre-Export Finance (PXF)? Funds advanced against expectation of future sale proceeds Secured structure Over sales contracts Over designated bank account(s) Not over the goods themselves Lenders assume payment risk and performance risk 4

5 What is Pre-Export Finance (PXF)? Sales Contracts also of key importance Historic performance of PXFs has been good Due diligence and ongoing monitoring essential 5

6 LMA's PXF Facility Agreement Launched in September 2012 Challenges: What is a "standard" PXF transaction? Product-specific issues Jurisdiction-specific issues A sensible starting point Familiar LMA structure and style maintained 6

7 LMA's PXF Facility Agreement Assumed Structure Parent (Guarantor) Loan Buyer(s) Sales Contracts Borrower (Seller) (Term Facility) Security Lenders Payments under Sales Contracts Subsidiary 1 of Borrower (Guarantor) Subsidiary 2 of Borrower (Guarantor) Subsidiary 3 of Borrower (Guarantor) Collection Account DSRA 7

8 LMA's PXF Facility Agreement Assumed Structure Security package Focus on Borrower only and "asset-specific" Beware impact of local law factors Guarantees Again, beware impact of local law factors Matching payment currency to loan currency Requirements for hedging? 8

9 LMA's PXF Facility Agreement Comparison points LMA's Leveraged Document used as starting point Simplified facility structure: Single term facility/ single currency No accordion No Margin ratchet No Defaulting Lenders Security Agent provisions self-contained (Clause 32) Tax Gross-Up (no Qualifying Lender concept) (Clause 14.1) 9

10 LMA's PXF Facility Agreement Comparison points Representations, Undertakings and Events of Default Broadly following LMA Leveraged Document Some specialist points removed, others may not be appropriate for the market Optional emerging market Events of Default included: Foreign exchange/ currency controls (Clause 27.19) Foreign currency moratoria (Clause 27.20) Political and economic deterioration (Clause 27.21) 10

11 LMA's PXF Facility Agreement Comparison points Jurisdiction/ enforcement (Clause 47) Alternative arbitration clause (with option for Lenders to elect for court-based dispute resolution process) 1958 New York Convention for Recognition and Enforcement of Foreign Arbitral Awards Seek local law advice 11

12 Cover ratios (Clause 23) Monitors expected/ actual payment flows versus debt service requirements (short and long term) "Early warning" system Breach = requirements to rectify Specifics are a matter for commercial negotiation 12

13 Cover Ratios (continued) 3 main tests: Debt Service Cover Ratio (DSCR) Loan Life Cover Ratio (LLCR) Look Back test 13

14 Debt Service Cover Ratio (DSCR) "Debt Service Cover Ratio" means, on any Test Date, the ratio of: (a) the Sales Value for the DSCR Calculation Period commencing on that Test Date; to (b) the amount of the Debt Service Obligations falling due during that DSCR Calculation Period, expressed as a percentage; "DSCR Calculation Period" means [each calendar quarter, commencing after the date of this Agreement] [each Interest Period] [each period of [one]/ [three] month[s]] commencing after the date of this Agreement 14

15 Loan Life Cover Ratio (LLCR) "Loan Life Cover Ratio" means, on any Test Date, the ratio of: (a) the Sales Value for the period from that Test Date through to (and including) the Termination Date; to (b) the [Debt Service Obligations]/ [Debt Service Obligations under paragraph (a) of the definition of that term only] from that Test Date through to (and including) the Termination Date, expressed as a percentage; 15

16 Cover Ratios (continued) Cover Ratios vs Financial covenants "Look forward" in nature Financial covenants (probably) still required and some are included: "Leverage" test "Interest cover" test "Net Worth" test 16

17 Look Back Test (Clause 23.4) The Borrower shall ensure that: (a) an amount of proceeds under the Assigned Sales Contracts equal in aggregate to not less than [[ ] per cent. ([ ]%)] of the Debt Service Obligations for each Look Back Test Period has been credited to the Collection Account of the Borrower during that Look Back Test Period; and (b) beginning with the Test Date that is [1 month] or more after the first Utilisation Date, an amount of proceeds under the Assigned Sales Contracts equal to not less than [[ ] per cent. ([ ]%)] of the Debt Service Obligations for the Look Back Test Period in which that Test Date falls has been credited in aggregate to the Collection Account of the Borrower during the calendar month preceding such Test Date. 17

18 Cover Ratios (continued) "Assigned Sales Contract" is (and remains) subject to Transaction Security Buyer has received notice of assignment (and has acknowledged it) Buyer has provided Irrevocable Payment Instructions 18

19 Cover Ratios (continued) "Eligibility Criteria" for Sales Contracts: counterparty is a Buyer minimum tenor remaining payment to be made: in relevant currency within [30] days of delivery without withholding, deduction, set-off, counterclaim freely assignable (or consent to assign is in place) acceptable governing law/ dispute resolution mechanics 19

20 Cover Ratios (continued) "Day One" Buyers and Sales Contracts Additional Buyers and Sales Contracts Ongoing representation as regards Eligibility Criteria Specific reps/ undertakings etc regarding Sales Contracts 20

21 Cover Ratios (continued) "Buyers" Invoice Buyers L/C Buyers Borrower's rights to proceeds under Letters of Credit should be captured by Sales Contract security assignment 21

22 Cover Ratios (continued) "Sales Value" means, on any Test Date, in respect of any period the quantity of Products to be delivered under the Assigned Sales Contracts and for which payment is due during that period multiplied by the Reference Price excluding any Products in respect of which payment has been made prior to the relevant Test Date; "Reference Price" Product specific; no LMA definition provided Debt Service Obligations future LIBOR/ EURIBOR rates 22

23 Cover Ratios (continued) Breach of DSCR/ LLCR Top-Up (Clause 23.3): Voluntary prepayment Increase in quantities Additional Sales Contracts Payment to Debt Service Reserve Account (DSRA) 23

24 Sales Contracts specific provisions Representations and warranties (Clause 20.25) Information undertakings (Clause 21.6) Specific undertakings (Clause 25) 24

25 Sales Contracts Reps and warranties (summary) Sales Contracts in effect Eligibility Criteria satisfied Arm's length terms Borrower has capability to comply with obligations No adverse events 25

26 Sales Contracts Information undertakings (summary) Notify of material developments/ material progress Notify of any default/ suspension event Copies of material documentation Monthly report 26

27 Sales Contracts Specific undertakings (summary) Comply with own obligations Procure compliance by counterparty (best efforts) Diligent pursuit of counterparties for breach Fair market price No amendments/ variations 27

28 Sales Contract failure (Clause 25.7) Buyer failure (Clause 25.8) Default on obligations Insolvency Event Rescission/ repudiation Insufficiently creditworthy 28

29 Additional Sales Contracts/ Additional Buyers (Clause 25.9) Additional Buyers Sanctions assessment Agent may impose conditions Additional Sales Contracts Eligibility Criteria vs Majority Lender discretion 29

30 Bank Accounts (Clause 26) Collection Account Signing rights General authority for Agent to debit for sums due Debt Service Reserve Account (DSRA) Initial deposit and requirement to replenish Funds swept from Collection Account No withdrawals 30

31 Speaker contact details Andrew Taylor Partner, London Hogan Lovells International LLP T M andrew.taylor@hoganlovells.com David Leggott Partner, London Hogan Lovells International LLP T M david.leggott@hoganlovells.com 31

LMA Webinar Overview of the LMA Leveraged Facilities Agreement Edward Aldred, Partner Linklaters LLP

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