LMA launches new facility agreement for developing market jurisdictions20 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 developing market jurisdictions. The Developing Markets Facility Agreement was created in response to demand from market participants who felt that there was an increased need for LMA-style documentation in developing market loan transactions.
The Developing Markets Facility Agreement, which uses the same basic structure and "boilerplate" as the recommended form of single currency term facility for multiple borrowers and guarantors as the Primary Documents, 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 that the transaction is an unsecured single currency term loan to obligor companies incorporated in one or more developing market jurisdictions. Although it is envisaged that the transaction will be governed by English law, no particular jurisdiction of incorporation is assumed with regards to the obligors themselves. Therefore, whilst the document contains provisions applicable to developing markets generally, users must also consider any relevant legal or other issues arising in the jurisdiction in which the obligors are incorporated.
The Developing Markets Facility Agreement presents the draftsman with a large range of optional provisions, including numerous footnotes, intended either to draw attention to provisions that may be particularly sensitive to jurisdiction-specific concerns or to set out suggested wording that may be used as a starting point for provisions that have been left blank.
Commenting on the document, Clare Dawson, LMA Managing Director, said:
"The LMA Facility Agreement for Developing Markets Transactions is representative of the work we are doing to further one of the LMA's key objectives: to improve liquidity within the syndicated loan markets. Whilst this document is not intended to be a "one size fits all" for every developing market jurisdiction, it is hoped that an LMA recommended form document, with its common language and framework, will lead to increased efficiencies within this increasingly important area of the syndicated loan market."
Further information is provided below:
1. 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 developing market finance transactions. 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 market practice, accommodate the relevant regulatory and legal framework and continue to meet the needs of participants in the market. Although this document requires users to consider any relevant legal or other issues arising in the specific jurisdiction in which the obligors are incorporated, it does contain provisions applicable to developing markets generally.
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.
2. What type of 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 an unsecured single currency term loan financing governed by English law, and a syndication process which takes place primarily in the London and Western European markets. The document also assumes that the Obligors are companies, incorporated in one or more developing market jurisdictions (without any particular jurisdiction being assumed).
3. Why would this documentation make new investors to developing markets 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 many of the developing market jurisdictions, it is hoped that the creation of the LMA document will make these markets 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 developing market finance transactions to new investors.
4. 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 developing market jurisdictions 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 developing market finance transactions.
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 developing market finance transactions. 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 developing markets document was put together and agreed by an experienced working party, consisting of major developing market 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.