LMA launches new PXF facility agreement20 September 2012
The LMA is pleased to announce the launch of its new recommended form of Single Currency Term Facility Agreement intended for use in pre-export finance transactions. The PXF Agreement was created in response to increased demand from practitioners in the pre-export finance market, who felt that an LMA recommended form would help improve efficiencies within the PXF market, by providing a common framework and language for PXF transactions.
The PXF Agreement, which uses the same basic structure and "boilerplate" as the recommended form of facility agreement for leveraged acquisition finance transactions (or, where appropriate, the recommended forms of primary document for the investment grade market) was produced with input from an experienced working party, consisting of representatives from banks (including in-house lawyers) and major City law firms.
The document assumes a traditional pre-export finance structure whereby a term loan facility is made available to a borrower who is the seller of specified products to specified buyers under sales contracts, with security taken over those sales contracts, associated letters of credit and certain bank accounts into which payments under the sales contracts are made or swept. The document contains provisions specific to pre-export finance transactions in relation to those sales contracts and certain cover ratios by reference to which performance under those sales contracts is tested.
Commenting on the document, Clare Dawson, LMA Managing Director, said:
"The LMA Facility Agreement for Pre-Export Finance Transactions represents a further move by the LMA into a different area of the syndicated loan market, and demonstrates its desire to extend its suite of documentation to include more specific debt sectors. It is hoped that this will result in bringing about the same benefits to these markets which LMA documentation has already achieved so successfully in the corporate lending space. We hope that it will be a useful starting point for law firms drafting facility agreements for PXF transactions and that it will lead to more efficient and productive negotiation of documentation."
Further information is provided below:
What benefits will the new LMA document bring to the market?
The LMA document will bring numerous benefits to the market. Firstly, increased efficiency resulting from the standardisation of boilerplate terms and provision of a common and recognisable legal framework, with the ultimate aim of improving liquidity in the market. A lack of standardisation can lead to increased negotiation and time taken for transactions to complete. It can also mean that a market is less attractive to new investors.Secondly, the LMA reviews its documents on a regular basis, thus ensuring that they reflect current marketpractice, accommodate the regulatory and legal framework and continue to meet the needs of participants in the market. Finally, simultaneously with the launch of the LMA document, the LMA will hold a series of training events and seminars, both in London and abroad.
What type of PXF transaction is this applicable to and what scale of investment?
Firstly, the document is designed for syndicated loan transactions i.e. a loan where two or more institutions contract to provide credit to a particular corporate or group. Such a facility tends to be more suited to medium to large borrowers, with borrowing requirements in excess of £50 million.Secondly, the document assumes a traditional pre-export finance structure whereby a parent company is the 100% direct shareholder of the borrower to which senior finance is made available. Within this remit however, various optional provisions have been included in square brackets in order that a "menu of clauses" is available to the draftsman should those clauses be required. This is not to say that the document will not need to be adapted – depending on the structure and the commercial terms, it will still need to be tailored to each individual transaction. This is in keeping with other LMA documents which are intended to provide a sensible starting point, and do not attempt to deal with the potential complexities of every possible type of transaction.
Why would this documentation make new investors to the PXF market more likely to invest?
For new types of investor to the market, standardisation of documentation makes the market more accessible. Since there is currently no standardised approach within the market, it is hoped that the creation of the LMA document will make this market more attractive to such investors. Furthermore, as part of the launch, the LMA will be engaged in various educational events, some of which will be aimed at explaining the workings of PXF finance transactions to new investors.
Why do you expect the new document to be adopted by market participants?
LMA documentation is already widely recognised within the corporate loan markets as a good basis for negotiation. It is anticipated that the LMA's approach to appropriate standardisation will be attractive in the PXF finance sector in the same way as it has been in the corporate markets. The LMA corporate documents will already be familiar to many of the law firms and market participants active in the PXF finance markets.
It should also be highlighted that prior to starting the project, the LMA did considerable market sounding of LMA members who are actively engaged in the PXF finance market. This confirmed that the document was seen as meeting a specific need for greater efficiency by standardisation, particularly following the financial crisis, when management of legal risk and focus on tightly drafted documentation has become increasingly important. Accordingly, the PXF document was put together and agreed by an experienced working party, consisting of major PXF players from banks (including in-house lawyers) and major City law firms. This process should mean that the document is widely acceptable as a starting point for negotiations and is reflective of the current market.