30 May 2012
Practice Group:
Revised LMA Secondary Debt Trading
Documentation
Finance
By Stephen Moller and Juliette Challenger
Background
Revised versions of the secondary debt market suite of documents were recently published by the
Loan Market Association ("LMA"). The revisions amend the default position in the documents in
relation to delayed settlement compensation. They also include some clarification in relation to
each party's obligations to meet the costs of a transfer.
The revised documents apply to trades effected on or after 14 May 2012. The amended documents
aim to, amongst other things, resolve the debate amongst participants in the secondary debt market
in relation to the interpretation of the delayed compensation language in the documentation in
relation to both sellers and buyers in the event of the delayed settlement of a trade.
Unless otherwise stated, all defined terms used in this note are as defined in the LMA Standard
Terms and Conditions for Par and Distressed Trade Transactions (Bank Debt/Claims).
Amendments to document
LMA Standard Terms and Conditions for Par and Distressed Trade
Transactions (Bank Debt/ Claims)
In relation to delayed settlement, the default position is now that the Agreed Terms will
incorporate the Delayed Settlement Compensation. This is where the buyer is compensated for
interest and fees that it would have been entitled to (as the party on risk) under the relevant Credit
Agreement if the transaction had settled on the target Settlement Date (being 10 Business Days
from the Trade Date in the case of a Par Trade or 20 Business Days from the Trade Date in the
case of a Distressed Trade) and the seller is compensated for its cost of funding the traded portion
of debt during the period between the target Settlement Date and the actual Settlement Date.
Previously this had to be expressly specified in the Agreed Terms. If Delayed Settlement
Compensation is not intended to be incorporated in the Agreed Terms, this must be expressly
disapplied. This is a change from the previous position taken by the LMA that the payment of
Delayed Settlement Compensation was a commercial agreement to be reached between the buyer
and seller on a case by case basis.
In respect of the transfer costs, the default position is now that the buyer and seller each pay the
transfer fees in equal shares, unless otherwise provided in the Agreed Terms. In addition, the
revised documentation contemplates the situation where multiple sellers and/or multiple buyers
are involved in the trade. It provides that, unless expressly excluded, where there are multiple
sellers they shall together be responsible for half the relevant transfer fee and likewise, where
there are multiple buyers they shall together be responsible for the other half of the fee. Where it is
agreed between the parties that either the buyer or the seller will be responsible for the whole of
the transfer fee, this must be expressly stated in the Agreed Terms.
Revised LMA Secondary Debt Trading Documentation
In relation to payment of interest and fees, the documents have been amended to clarify that the
interest payment is only required to be made after the due date and the expiry of any relevant
grace period.
The LMA Trade Confirmation (Bank Debt), LMA Trade Confirmation (Claims) and LMA Trade
Confirmation (Risk Participation) standard forms have also each been amended to reflect the
above changes to the Standard Terms and Conditions.
The LMA Secondary Debt Trading Documentation (Par and Distressed Debt)
Users Guide (the "User Guide")
The User Guide contains the corresponding amendments to the standard form LMA
documentation. It also includes new worked examples of settlement amount calculations in respect
of Par Trades. The previous version of the User Guide had only provided worked examples in
relation to Distressed Trades.
Consequences for clients
In relation to delayed settlement, the payment of Delayed Settlement Compensation will
automatically apply, unless expressly disapplied by the parties, and is not conditional on receipt of
payment from any third party. Therefore, clients should ensure that any loans which they acquire
in primary syndication, but in relation to which they do not immediately acquire legal title, enable
sufficient access to the cash flows to meet any Delayed Settlement Compensation for which they
may be liable under the Agreed Terms to a purchaser in the event that the transaction does not
settle within the relevant time period (10 Business Days from the Trade Date in relation to a Par
Trade and 20 Business Days from the Trade Date in relation to a Distressed Trade). Likewise, a
buyer of a loan in default should be aware that they may have to compensate the seller for its cost
of carry in a delayed settlement scenario without receiving any offsetting fees or interest from the
seller at settlement.
In respect of transfer fees, it is important to be clear as between the buyer and seller how the fees
are intended to be apportioned, and to specify this in the Agreed Terms.
The revised documentation makes provision for trades entered into by multiple sellers and
multiple buyers which will provide greater clarity on the responsibility of each party for fees in the
circumstances where there are multiple buyers or multiple sellers.
Authors:
Stephen Moller
stephen.moller@klgates.com
+44.20.7360.8212
Juliette Challenger
juliette.challenger@klgates.com
+44.(0).20.7360.8260
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Revised LMA Secondary Debt Trading Documentation
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