LMA launches new 'major operational disruption' wording in primary documents01 August 2005
The Loan Market Association has issued new drafting for use if parties to a loan transaction wish to address the possible aftermath of a major operational disruption to the financial markets or the payments or communications systems owing, for example, to a terrorist attack.
The project was initiated in response to a report by the Financial Markets Law Committee (FMLC), which looked at possible risks to the financial systems were such an event to occur. The paper urged trade associations and other institutions which produce template documents for use in the capital markets to review those documents to see if they needed alteration to cater for such an eventuality. The drafting produced by the LMA focuses on giving the Agent more flexibility to respond in a practical way to major operational disruption, addressing various situations, such as the Agent being unable to communicate with the syndicate of lenders. It also allows for grace periods for payment failures, where they are the result of major operational disruption which renders a party unable to make a payment.
The LMA has worked with The Association of Corporate Treasurers in producing this drafting, and has sought to address concerns which might relate to both lenders and borrowers. It is hoped that the new drafting will give parties to a transaction comfort that they would be able to deal pragmatically with a disaster of the type
envisaged in the wording. It is also expected that borrowers will want to include similar grace periods for major operational disruption in all their debt documentation, to avoid cascades of cross-defaults.
The new edition of the LMA Recommended Form of Primary documents also includes a note to Lenders that they may wish to consider the effect of Basel II in relation to their transaction, taking into account the credit standing of the borrower, the likely capital cost to be incurred by Lenders in respect of the Facility as a result
of Basel II, and alternative means, if any, by which any Basel II costs may be addressed. These could be, for example, a margin ratchet or inclusion of a negotiation provision to address what happens if the Borrower's risk weighting changes after the date of the Facility Agreement. Optional wording is provided for cases where it is considered appropriate to exclude Basel II from the Increased Costs clause. If this is to be the case, it is anticipated that the exclusion provision will be included in a Facility Agreement both prior to and following the implementation of Basel II.