Thomas C. Egg
Trading English Law Loans on LSTA Par/Near Par Terms
The Loan Syndications and Trading Association ("LSTA") recently issued a Market Advisory concerning the risks market participants face when trading English law governed syndicated loans on the LSTA form Par/Near Par Trade Confirmation ("LSTA Par Confirm"). In a nutshell, the LSTA recommends the addition of certain other terms of trade to the LSTA Par Confirm to mitigate these risks. The following is a brief synopsis of the LSTA's Market Advisory.
Although there are no formal requirements governing the usage of LSTA versus Loan Market Association ("LMA") form documents, there are various informal factors for determining which documents should be utilized in a given trade. Perhaps the most important of these factors is the governing law of the applicable credit agreement. In those situations where the credit agreement is governed by English law or the law of another European jurisdiction, it is customary to use LMA form documents. Where, on the other hand, the credit agreement is governed by New York law or the law of another US state, it is customary to use LSTA form documents. Nevertheless, there are situations when market participants may want to trade an English law governed loan under an LSTA Par Confirm. In such situations, market participants need to be aware of the risks they face.
LSTA v. LMA Par Documents
When parties agree to conduct a trade using the LSTA Par Confirm, they also agree (unless otherwise stipulated) that the purchase will be completed as an assignment and that the assignment agreement set forth in the credit agreement will be used. Large corporate credit agreements governed by New York law typically use a form of assignment agreement substantially similar to the LSTA model form of assignment agreement ("LSTA Form AA"). The LSTA Form AA includes several important reps including, among other things, the following:
Assigned Interest. The seller represents that it shall assign and sell to the buyer all of the seller's rights and obligations relating to (a) the loans and commitments being assigned, and (b) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and other rights of the sellers against any person or entity arising under or in connection with the credit agreement and any other document or instrument delivered in connection therewith.
Good Title. The seller represents that it is the legal and beneficial owner of the assigned interest.
No Encumbrances. The seller represents that the assigned interest is free and clear of any lien, encumbrance or other adverse claims against title.
Power & Authority. The seller represents it has the power and authority to execute the assignment agreement and consummate the transaction.
Defaulting Lender. The seller represents it is not a defaulting lender under the credit agreement.
Due Authorization. The buyer represents that it is duly authorized to execute and perform its obligations under the transaction.
Eligible Lender. The buyer represents that, subject to the receipt of any required consents. it meets the eligibility requirements to become a lender under the credit agreement.
The standard terms and conditions to the LSTA Par Confirm do not include any of the above representations because they are included in the LSTA Form AA. It is this lack of representations in the LSTA Par Confirm which can subject parties to unforeseen risks when using it in a trade involving English law governed loans. Unlike the LSTA Form AA, the customary form of English Law assignment agreement/transfer certificate does not typically include any of the LSTA Form AA representations. This is so because the LMA form par trade confirmation contains extensive representations. Thus, parties to a trade involving the assignment of English law governed loans under the LSTA Par Confirm are using the two documents providing the fewest protections. Accordingly, the LSTA recommends that the parties to such a trade consider adding the representations set forth in the LSTA Rider to the Market Advisory.
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