Insight

The Globalization of the Loan Market

It remains a relevant question as to whether any market will ever completely drop its resistance to incorporating terms to which it is not accustomed.

Globalization of Loan Market

With the steady progress of globalization from the 20th into the 21st century, it seemed natural, at least from the end of the 2008 financial crisis, to assume that markets for syndicated loans and the market-based provisions governing these loans would also gradually continue to be globalized and converge around an agreed upon standard for North American, European, and Asian based loans.

However, this convergence has not been steady or linear. We have seen certain loan agreement provisions quickly spread to other markets, such as certain borrower-favorable terms while markets are hot or regulatory provisions that are equally applicable to market participants in other jurisdictions, while in other areas, such as more general covenants/undertakings or events of default, each geographic area clearly has its own preferred way of documenting a loan.

The convergence of the international loan markets is probably most evident in the borrower-favorable provisions that have traveled across the Atlantic in recent years. Some examples include:

The increase in covenant-lite loans with no financial covenants applicable to term loans and only a single financial covenant applicable to revolving credit facilities, which often springs into effect based upon an availability trigger;

Increased flexibility in debt and lien covenants, which permits additional unsecured and secured debt facilities, either under the same loan agreement (such as an incremental debt tranche) or under a separate agreement (such as a side-car facility), subject only to pro forma compliance with a leverage ratio test and/or interest coverage ratio test;

Reduced restrictions around restricted payments and acquisitions, such as builder baskets based upon a percentage of consolidated net income and investment covenants that do not include a fixed cap on acquisition consideration; and

"Certain funds" provisions, a regulatory requirement for any financing arrangement supporting a bid for a U.K. public company, and a concept that spread to the private buyout market throughout Europe. This was adopted in the U.S. market in the form of the SunGard conditionality provisions in commitment papers for U.S. acquisition financings, where the conditions for the banks’ obligation to fund an acquisition are aligned as closely as possible to the conditions for the purchaser’s obligation to consummate the acquisition.

It remains a relevant question as to whether any market will ever completely drop its resistance to incorporating terms to which it is not accustomed.

In addition, certain regulatory provisions have quickly become market standard in all markets, such as provisions relating to Dodd– Frank regulatory reforms, Basel Committee rules, economic sanctions laws, anti-bribery and anti-money laundering statutes, and most recently, “bail-in” provisions affecting European Economic Area financial institutions. The convergence in the various markets is at least partially driven by the rise of trade industry groups, such as the Loan Syndications & Trading Association (LSTA) in the U.S., the Loan Market Association (LMA) in Europe, and the Asia Pacific Loan Market Association (APLMA) in Asia. Each of these groups proposes standard forms and issues market advisories, which help facilitate standardization in each group’s home markets. In addition, each trade association also coordinates with the others and thereby facilitates the globalization of loan market terms. A good example is the recent coordination between the LMA and the LSTA on standard “bail-in” provisions. Like the LSTA, LMA, and PLMA, international law firms also play a role in transmitting market information and practices between and among jurisdictions.

However, practitioners in all jurisdictions would likely agree that this convergence is still uneven and that there is little danger of confusing an LMA or APLMA loan agreement for a U.S.-based credit agreement or vice versa.

We were reminded of this recently at an anecdotal level when negotiating a loan agreement between a European borrower and a European lender for a renewable energy project in the U.S. The parties had started negotiations in Europe with European law firms and then decided to make their agreement governed by New York law and brought in our firm and another New York-based law office to translate their LMA-based agreement to a more customary agreement for the New York market, a process they saw as largely ministerial. This translation led to a series of additional issues that had to be thought through again, from requiring representations and warranties to be repeated on a periodic basis for the life of the loan, to including appropriate covenants and exceptions governing debt, liens, and dispositions, to the lengthy list of events of default (especially the material adverse effect event of default, which remains more common in Europe than in the U.S.).

It remains a relevant question as to whether any market will ever completely drop its resistance to incorporating terms to which it is not accustomed. Instead of a simple, gradual convergence of loan market terms, borrowers, lenders, and their counsel may continue to cherry-pick certain provisions from overseas markets that work in their interests at times when they have the negotiating leverage to compel the other side to accept such provisions.

In recent years, as noted above, we have seen certain borrower-favorable terms spread globally as lenders compete to offer the best terms that they reasonably can to their clients. But in a market downturn, we could very well see lenders scuttle some of these more borrower-favorable terms, cling to more lender-favorable terms from precedent agreements, and possibly even look overseas for provisions that offer lenders more security. Moreover, in light of the Brexit vote, the results of the U.S. presidential election and nationalist currents in Europe, we may even see loan markets in individual states begin to push back against the tide of globalization. Whether any such form of loan market nationalism actually will occur is still an open question.

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