Introduction to LMA Syndicated Lending

BDK Syndicated Finance Conference, Belgrade December 2011

Mayank Gupta, White & Case LLP

Disadvantages of Bilateral Lending

Imbalanced too much exposure to: Client Sector Industry Too much emphasis on relationship lending Poor risk management no risk sharing Led to development of Bond Market and Syndicated Lending Market ..

Introduction to Syndicated Lending

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Main Parties to a Syndicated Loan: Part 1

Pre-Financial Close: Borrower Borrower will negotiate terms & conditions of the new facility with one or more MLA banks. Mandated Lead Arranger(s) Post-Financial Close: Facility will be administered by a single Agent Bank & Security Trustee acting on behalf of the syndicate of lenders to simplify dealings with the borrower. Agent Bank Borrower

Syndicate Bank A

Syndicate Bank B

Syndicate Bank C

Syndicate Bank A

Syndicate Bank B

Syndicate Bank C

Introduction to Syndicated Lending

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The Players: Part 2

Parties to a Syndicated Loan the Finance Parties

Take underwriting risk and manages distribution. League table status Control the syndication process & final make-up of syndicate Book Runner

Leads negotiation with borrower. League table status Bookrunner will be MLA. MLA also likely to be Agent & Security Trustee

Mandated Lead Arranger

May take smaller underwriting risk. Relationship bank Usually commits ahead of general syndication

Joint Lead Arranger

No underwriting risk Largest hold amount in general syndication

Arranger

Mid-level ticket in syndication Limited / no arranging capability

Co-Arranger

Lowest ticket available. Small banks Institutions / CDOs / Hedge Funds

Participant

Introduction to Syndicated Lending

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The LMA
The Loan Market Association was formed in December 1996 and is based in London. Initially established to foster a secondary loan market in Europe, it has now established itself as the arbiter of best standards and practices for documenation in both the primary and secondary markets. Its members number over 250 and consist of banks, law firms, information and systems providers and other market participants. English law LMA documents represent the vast majority (by value and volume) of crossborder, syndicated loan transactions across Europe. The documentary standards have achieved such broad and deep penetration that many local-law transactions are now done on adapted LMA forms.
LMA Mission Statement: The Loan Market Association (LMA) has as its key objective improving liquidity, efficiency and transparency in the primary and secondary syndicated loan markets in Europe, the Middle East and Africa. By establishing sound, widely accepted market practice, the LMA seeks to promote the syndicated loan as the key debt product available to corporate borrowers across the region.

Introduction to Syndicated Lending

White & Case

LMA Standard Forms

Facility Agreements
Investment Grade For plain vanilla loans Generally unsecured; no other tranches of debt (e.g. mezzanine) To companies with ratings of BBB or better Parent company borrower Leveraged (Focus of Presentation) For leveraged finance transactions Can be adapted to multiple other complex facilities Target and subsidiaries to accede post acquisition Multiple borrowers and guarantors Intercreditor with Mezzanine and hedging as well as subordinated debt

Introduction to Syndicated Lending

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Other LMA Documents

Mandate documents, confidentiality agreements Transfer and assignment documents Sub-participations/ risk participations both par and distressed Now has Intercreditor Agreement LMA working on non-English law precedents such as Spanish law facility LMA working on other types of loan agreements such as for trade

finance LMA working to keep up with market developments, such as intercreditor terms to reflect the advent of secured bonds
Many international firms have adapted LMA to work under local laws as

well

Introduction to Syndicated Lending

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Syndicated Financing Under LMA Key Provisions for Participant Banks

Which Tranche?
Syndicated loan may consist of: Term A: lowest interest rate, highest position for partial payments, fastest

amortisation and earliest maturity Term B: slightly higher rate, bullet repayment, right of refusal of early prepayments First loss: term loan with much higher interest, but subordinate to other tranches Capex/ Acquisition facility Revolving credit facility which may or may not require the ability to issue LCs

How Much?
Control of the credit (e.g. enforcement) or blocking stake requires a certain hold Majority Lenders typically 662/3% Protections for minority in the amendments and waivers clause

Introduction to Syndicated Lending

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Syndicated Financing Under LMA Key Provisions for Participant Banks

Funding and Yield Considerations
Floating rate loans combine interbank rate + Margin + mandatory costs Additional costs (Increased Costs) recoverable but prepayment right Interbank disruptions allow participants to claim true funding costs (two-stage

process under new LMA)

Lenders obligations several and not joint Borrower must gross-up for withholding tax subject to some conditions Currency, other indemnities, costs and expenses

Introduction to Syndicated Lending

White & Case

Syndicated Financing Under LMA Key Provisions for Participant Banks

Typical Prepayments:
Voluntary in minimum amounts/multiples (subject possible to refusal right of B) Mandatory of: Illegality Change of Control Cash Sweep? Insurances Disposal Proceeds Acquisition proceeds (contractual damages)

Introduction to Syndicated Lending

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Transferability How to Exit

Several ways to sell down a syndicated loan:

Primary syndication Secondary market by: Transfer by way of transfer certificate (LMA form; note novation and issues about

security and hardening periods) Assignment (LMA form) Sub-participation Funded Participation Risk Participation Derivatives CDS Securitisation

Introduction to Syndicated Lending

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