Launch of 2015 Revised APLMA Documents 17 March 2015
DRAFTING PRINCIPLES
Geoff Geha
17 March 2015
© Clayton Utz
DRAFTING PRINCIPLES Start
with LMA
» Streamline syndication offshore » Facilitate use of other LMA docs (eg. Secondary trading documents) » Closer alignment = easier to track updates
DRAFTING PRINCIPLES Existing
» » » » »
work of committee retained
Notice clauses LoL language for trustee lenders Vote splitting Snooze / lose Scheduled verification certificate for CPs
Otherwise,
only depart form LMA if required:
» by law » market practice (noting that this was already impacted by the existing agreement)
PRO RATA TRANSFERS Previous Agreement
required a Lender to transfer pro rata across all Facilities Not current market Different lenders will take different percentages in facilities (e.g. Revolver) Lenders want to be able to sell one Facility but not the other
PRO RATA INTEREST SETTLEMENT Transferee
becomes lender of record Transferor and Transferee agree how interest will be settled Typically Transferee will receive interest and pay pro rata share to transferor LMA provides for Agent to apportion Optional for Agent
RELIQUEFICATION Customary
clause in Australian deals Lender could sell bill in the market and achieve liquidity Consultations indicated that no longer used Difficult explaining clause to offshore lenders/new Borrowers
CURRENCY AND TERM LOANS Prior
document enabled change of currency of term loan Did not reflect market All term loans are now single currency Create separate tranches for different currencies
CURRENCY EQUALISATION Prior
document had no currency equalisation clause for Multicurrency Revolver New clause where A$ equivalent is recalculated quarterly/end of interest period If exceed [ ]% of Commitments, then must repay so that A$ equivalent is equal to Commitments
AUTHORISED OFFICERS Previous Agreement
contained definition of Authorised Officer for obligors and lenders New Agreement deletes the definition and addresses the requirements for obligors throughout the document: » CP requires authorised signatory list and KYC on each authorised signatory » Representation and warranty that authorised signatory is authorised » Information requirement for new authorised signatories with specimen signatures subject to completion of KYC
www.claytonutz.com
Regulatory and market related changes Caroline Jury 17 March 2015
New interest rate set provisions – Some context to the interest rate set provisions – What went wrong – Initial market reaction – The reality – Reference Bank mechanic Others – Market disruption and cost of funds – Agency protections – Privacy laws – Anti-money laundering and sanctions – Confidentiality – FATCA
Regulatory and market related changes
Clifford Chance
Rate setting - context
Screen Rate
Regulatory and market related changes
Reference Banks
Cost of funds
Clifford Chance
What went wrong…
The GFC and the LIBOR 'scandal'
The Wheatley Review 2012 – LIBOR should not be replaced but should be reformed – LIBOR submissions should be supported by transaction data – Banks must play an active role IOSCO's 2013 report on benchmarks, EU Benchmark Regulation and LIBOR Code of Conduct
Regulatory and market related changes
Clifford Chance
By June 2013
For "less common" currencies and maturities, screen rate BBA LIBOR disappeared ("insufficient trade data to corroborate submissions") No LIBOR rate Australian Dollars (AUD)
Danish Krone (DKK)
Canadian Dollars (CAD)
New Zealand Dollars (NZD) Swedish Krona (SEK)
LIBOR continued BUT fewer maturities
Discontinued maturities
British Pound
GBP
2 weeks
Euro
EUR
4, 5, 7, 8, 9, 10, 11 months
Japanese Yen
JPY
Continuing maturities
Swiss Franc
CHF
Overnight / Spot – next
US Dollar
USD
1 week 1, 2, 3, 6, 12 months
Regulatory and market related changes
Clifford Chance
Initial market reaction...
"It shouldn't be an issue, we barely use those tenors or currencies and, in the few deals where we do, Reference Banks will be fine...."
Market participant December 2012
Regulatory and market related changes
Clifford Chance
The reality – unexpected difficulties with discontinued currencies (and tenors) by mid 2013
Screen Rate
Amend? Likely need for unanimity
Reference Banks
No Reference Bank quotes… – LIBOR Code of Conduct
Cost of funds
– Multiple rates of interest – Administratively unworkable – And lack of transparency
– "Wrong" question – Risk aversion – No transactions on which to base quotations
Regulatory and market related changes
Clifford Chance
Something must be done...
Restructure fallbacks Improve Reference Bank and Cost of funds mechanics Facilitate use of other interest rate benchmarks
Regulatory and market related changes
Clifford Chance
New interest rate set provisions
The LMA amended their loan documents to introduce these solutions and prepared slot in drafting for the other benchmarks towards the end of 2014 The LMA consulted with the APLMA who in turn consulted with AFMA to determine the Australian benchmark rates The new investment grade documents of the APLMA have been updated to incorporate these solutions (adapted for Australia) and have also introduced slot in drafting for other benchmarks
Regulatory and market related changes
Clifford Chance
Reference Bank mechanic
Express confidentiality restriction on Agent
Optional exclusion of liability for Reference Banks Third Party Reference Banks Revised definition of Reference Bank Rate – Refines question asked of submitters – Reflects current question and provides for future proofing
Regulatory and market related changes
Clifford Chance
Market disruption and cost of funds
An 'Affected Lender' is a Lender that gives a market disruption notice
Cost of funds will apply to the participation in the Loan by the Affected Lenders only The cost of funds as a 'final resort' fall back rate includes a new weighted average option
Confidentiality of funding rates
Regulatory and market related changes
Clifford Chance
Agency protections
Five themes
1. Conditions precedent 2. Liability/indemnities 3. Prefunding 4. Ease of resignation 5. Uncomfortable with generalities
Regulatory and market related changes
Clifford Chance
Privacy laws
Is this dealt with in the agreement?
Generic privacy statement
Regulatory and market related changes
Clifford Chance
Anti-money laundering and sanctions
How is this dealt with?
– Generic anti-money laundering provision inserted, client specific language to be considered – Sanctions and anti-bribery laws that apply to jurisdiction of incorporation or business of the Lenders to be considered on case by case basis
Regulatory and market related changes
Clifford Chance
Confidentiality
Permits disclosure to
– 'Related Funds' and Affiliates – Investors, service providers and advisers of potential assignees – Service providers – Numbering service providers Aligns with LMA secondary trading documents – Also pro rata interest on settlement
Regulatory and market related changes
Clifford Chance
FATCA
Former 'Rider 3' of the 2013 LMA FATCA Riders
FATCA is lender risk
Regulatory and market related changes
Clifford Chance
Clifford Chance, Level 16, No. 1 O’Connell Street, Sydney, NSW 2000, Australia © Clifford Chance 2015 Clifford Chance is a law firm with liability limited by a scheme approved under Professional Standards legislation We use the word 'partner' to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications
Rate fixing and notices
Diccon Loxton
Allens is an independent partnership operating in alliance with Linklaters LLP.
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Rate fixing - the new language What rates are covered? Main document
BBSY Bid
LIBOR
EURIBOR
Optional “Benchmark Rates” in Schedule prepared by LMA (times need adjusting)
BKBM (Warning)
CDOR
Swedish and Danish rates
Not included
SIBOR
HIBOR 2
The Rate Set Cascade
Screen Rate
Interpolated Screen Rate
Options • for corrected rate • for rate always ≥ 0
Fall back Period (Optional)
Historic Rates (Screen and Interpolated)
Reference Bank Rate (Optional)
Cost of Funds
(Optional) Not for A$
If Market Disruption go straight here 3
The Rate Set Cascade – Australian dollars
Screen Rate
• • • • •
Interpolated Screen Rate
Fall back Period (Optional)
Historic Interpolated Screen Rate
Reference Bank Rate (Optional)
Cost of Funds
(Optional) Not for A$
BBSY Bid set by AFMA Read at 10.30am Fall back BBSW + 5bp What happens if screen rate corrected? AFMA half-month pooling conventions 4
The Rate Set Cascade – Australian dollars
Screen Rate
Interpolated Screen Rate
Fall back Period (Optional)
Historic Interpolated Screen Rate
Reference Bank Rate (Optional)
Cost of Funds
(Optional) Not for A$
• Can specify any period 1 month to 6 months • Period less than 1 month (or > 6) requires majority/all consent • No screen rates available for < 1 month, RBA o/night rate not suitable • So no interpolated screen rate < 1 month. Options: • Go to screen rate for shortest available period (1 month) • Go straight to Reference Bank Rate
5
The Rate Set Cascade – Australian dollars
Screen Rate
Interpolated Screen Rate
Fall back Period (Optional)
Historic Interpolated Screen Rate
Reference Bank Rate (Optional)
Cost of Funds
(Optional) Not for A$
• A shorter period
6
The Rate Set Cascade – Australian dollars
Screen Rate
Interpolated Screen Rate
Fall back Period (Optional)
Historic Interpolated Screen Rate
Reference Bank Rate (Optional)
Cost of Funds
(Optional) Not for A$
• NCDSURVEYI0 (produced by AFMA) • Market rate “observed” by Reference Banks • If no market, Reference Banks’ own rate 7
The Rate Set Cascade – Australian dollars
Screen Rate
Interpolated Screen Rate
Fall back Period (Optional)
Historic Interpolated Screen Rate
Reference Bank Rate (Optional)
Cost of Funds
(Optional) Not for A$
If Market Disruption go straight here 8
Notice clauses — boring, but important Long and fierce debate
WHY? •
Snooze you lose — have you snoozed and lost?
•
Has the Agent complied with valid instructions?
•
Is the Borrower in default? Have you validly enforced?
•
Fraudulent drawdown notices and payment directions.
•
Affects internal systems 9
Notices – Previous language Method of service? When deemed?
Fax (deemed served if no message failure response in 2hrs)
Leaving at address (deemed served)
Post (deemed served 5 days after posting)
Email, only if agreed – no deemed service
Website only if specified – no deemed service unless agreed
Requirements for notices?
• Must be signed by Authorised Officer
10
The Real World Market practice left clause behind • Notices generally sent by email
only really important ones sent by other means
• Loan IQ did not sign emails
11
Notices – New language Method - Emails possible
- Deemed service provisions for emails - But possible exception for really important notices - Website possible with deemed service provisions Requirements for notices • Only Borrower notices and specifications of accounts need be signed
• Loan IQ etc. automatically generated emails OK
12
Email Notices – Division of Responsibility Sender
• To have legible commonly used format • To have reasonable size attachments, or separately notify of big ones • To respond to prompt notices of difficulties in receipt (other than ‘out of office’) Recipient • To have ‘manned’ available current address (‘out of office’ no saviour) ‒ so need to have group address • To respond promptly notifying difficulties
13
Email notices - deemed service An email notice is deemed served: • on despatch, unless notice of non-delivery etc (excluding ‘Out of office’) within 2 hours • on delivery confirmation; or • on being available to be read at address.
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