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TRANSCRIPT
Today's Agenda
1. Update on FATCA
2. BASEL III and Increased Costs
3. Unitranche Financing
4. The new LMA screen rate and interpolation provisions
5. Recent changes to the LMA provisions and English case
law on agency/security trustee protections
6. Zero LIBOR floors
2014 54044424.1 2
FATCA update – A Reminder – what is
FATCA?
The US Foreign Account Tax Compliance Act
Has massive global/extra-territorial reach
Third party reporting regime imposed on non-US "Foreign
Financial Institutions" (FFIs)
Potential 30% withholding "tax"
2014 54044424.1 4
Withholding Payments
2014 54044424.1 5
ITALIAN BANK
US COMPANY
30% FATCA Withholding on
interest and principal $2 billion loan
Passthru Withholding Payment by FFI
Spanish Bank must either sign on FFI or cease doing business
with anyone who might sign up
2014 54044424.1 6
GERMAN BANK
Participating FFI SPANISH BANK
$3 billion deposit
FATCA withholding on
interest and principal
What are the critical dates? – US
source income & FFI registration
Originally we were looking at FATCA coming in in March 2012, with a
"grandfathering" cut-off date of 31 December 2012
"Grandfathering" means if you have a facility drawn or committed before that
date, FATCA doesn't apply – unless you later "materially amend" the facility
That original grandfathering cut-off date then changed to 31 December 2013
The IRS announced in July 2013 that some critical dates were being pushed
back 6 months (mainly because Regulations still not finalised)
19 August 2013 - US registration portal for FFIs opened with the US issuing
"global intermediary identification numbers" ("GIINS") for registered FFIs
once FATCA regulations finalised in 2014
25 April 2014 – FFIs have to have finalised their registrations to ensure their
place on the first registered FFIs list. Note that even if there is an
intergovernmental agreement (an "IGA") in place between their country and
the IRS, FFIs still have to register with the IRS
30 June 2014 - new grandfathering date for US source payments: loans,
derivatives, debt securities
2014 54044424.1 7
What are the critical dates? – "Pass-
thru"
1 January 2017 - withholding on US gross source
proceeds (sale proceeds of US Assets or the repayment of
principal by a US obligor) – note: no change from
previously announced date
1 January 2017 (at the earliest) - foreign passthru
withholding (which is still not defined) on non US source
payments by an FFI (no IGA) that has signed an IRS
Agreement – note: no change from previously
announced date
2014 54044424.1 8
IGA Models
Model 1 – FFIs report to local tax authorities which report to
IRS
Model 1A – reciprocal reporting between local tax authorities
and IRS
Model 1B – one way reporting
Model 2 – FFIs report direct to IRS
2014 54044424.1 9
Where are we on IGAs?
As at today's date there are:
7 Model 1 IGAs in place with the UK, Norway, Denmark,
Germany, Ireland, Mexico & Spain
Model 1B (BVI will enter)
2 Model 2 IGAs in place with Japan and Switzerland
We have heard that the US IRS is currently in talks with more
than 80 jurisdictions on potential IGAs which is another reason
why the timetable has been pushed back
Off-shore jurisdictions such as the Cayman Islands, BVI,
Jersey, Guernsey & the Isle of Man have also confirmed they
will be signing up
2014 54044424.1 10
LMA FATCA Riders
Rider 1 – borrower risk – no gross up but contractual recovery
Rider 1B – provides for borrower gross up if there is FATCA
withholding
Rider 2 – assumes grandfathering – lender risk but lender can
be taken out if grandfathering lost
Rider 3 – lender risk – no take-out provisions and no grossing
up if there is FATCA withholding
2014 54044424.1 11
(1) Increased costs clause
19. INCREASED COSTS
19.1 Increased costs
a) Subject to Clause 19.3 (Exceptions) the Parent shall, within
three Business Days of a demand by the Agent, pay for the
account of a Finance Party the amount of any Increased
Costs incurred by that Finance Party or any of its Affiliates
as a result of (i) the introduction of or any change in (or in
the interpretation, administration or application of) any law
or regulation or (ii) compliance with any law or regulation
made after the date of this Agreement.
b) In this Agreement "Increased Costs" means:
i. a reduction in the rate of return from a Facility or on a
Finance Party's (or its Affiliate's) overall capital;
ii. an additional or increased cost; or
2014 54044424.1 13
(1) Increased costs clause
iii. a reduction of any amount due and payable under any
Finance Document,
which is incurred or suffered by a Finance Party or any of its
Affiliates to the extent that it is attributable to that Finance Party
having entered into its Commitment or an Ancillary Commitment or
funding or performing its obligations under any Finance Document
or Letter of Credit.
2014 54044424.1 14
(2) Exceptions
19.3 Exceptions
a) Clause 19.1 (Increased Costs) does not apply to the extent
any Increased Cost is:
i. attributable to a Tax deduction required by law to be made by
an Obligor;
ii. compensated for by Clause 18.3 (Tax indemnity) (or would
have been compensated for under Clause 18.3 (Tax
indemnity) but was not so compensated solely because any
of the exclusions in paragraph (b) of Clause 18.3 (Tax
indemnity) applied);
iii. [compensated for by the payment of the Mandatory Cost;] or
iv. attributable to the wilful breach by the relevant Finance Party
or its Affiliates of any law or regulation.
2014 54044424.1 15
(3) Amendment to Exceptions Clause (19.3)
"(v) attributable to the implementation or application of or compliance
with the "International Convergence of Capital Measurement and
Capital Standards, a Revised Framework" published by the
Basel Committee on Banking Supervision in June 2004 in the
form existing on the date of this Agreement (but excluding any
amendment arising out of Basel III) ("Basel III") or any other law
or regulation which implements Basel II (whether such
implementation, application or compliance is by a government,
regulator, Finance Party or any of its Affiliates)."
2014 54044424.1 16
(4) Amendment to Increased Costs Clause (19.1)
""Basel III" means:
(A) the agreements on capital requirements, a leverage ratio and
liquidity standards contained in "Basel III: A global regulatory
framework for more resilient banks and banking systems", "Basel
III: International framework for liquidity risk measurement,
standards and monitoring" and "Guidance for national authorities
operating the countercyclical buffer" published by the Basel
Committee on Banking Supervision in December 2010, each as
amended, supplemented or restated;
(B) the rules for global systemically important banks contained in
"Global systemically important banks: assessment methodology
and the additional loss absorbency requirement – Rules text"
published by the Basel Committee on Banking Supervision in
November 2011, as amended, supplemented or restated; and
(C) any further guidance or standards published by the Basel
Committee on Banking Supervision relating to "Basel III"."
2014 54044424.1 17
2. Unitranche Characteristics
Combines senior and subordinated debt
One Lender no Visible Syndicate
Use of blended rate
Non amortising-bullet
Call protection
Bespoke covenants
2014 54044424.1 20
3. Borrower Advantages
Simplified Debt Structure
Potentially less onerous maintenance covenants
Higher leverage than an all Senior facility
Speed of execution – one credit process, one set of diligence
requests, one set of conditions precedent etc
Simplicity of Lender decision making during life of Unitranche
facility
Cheaper than a Senior/Subordinated Debt Structure
2014 54044424.1 21
4. Borrower Disadvantages
Borrower is not party to the "Agreement Among Lenders" so
has no knowledge of underlying Lenders in Unitranche
Therefore less of reliance on protections of relationship
banking
Expensive compared to traditional Senior Debt
Potential arguments between Super-Senior Lender and
Unitranche Lender
2014 54044424.1 22
5. Super Senior Revolving Credit
Facilities
Required to service the Borrower's Working Capital needs
Provided by Clearing Banks eg in the UK Lloyds, RBS,
Barclays, HSBC
Are they really "Super Senior"?:
Only "super" on enforcement
Otherwise ranks pari passu to the Unitranche loan (and in fact
behind Unitranche in some circumstances, eg prepayments)
2014 54044424.1 23
6. Super Senior RCF Key Terms
"Material Defaults" entitling Super Senior RCF lender to accelerate:
non payment in relation to RCF
Insolvency of an Obligor/ "Significant Company"
Breach of Clean Down
Breach of Negative Pledge
Breach of Financial Information Covenants (with extra grace periods)
Breach of Disposals Covenant (but may be limited so only in relation to a
"Significant Disposal")
Breach of Leverage Covenant (with extra headroom)/SS RCF Leverage Covenant
Breach of Guarantor Coverage test (with lower threshold)
Standstill Periods before SS RCF can accelerate
between 60-180 days if Unitranche has not taken action
may negotiate in a longstop acceleration right after 8-9 months even if Unitranche
has taken action
2014 54044424.1 24
LIBOR Wheatley Report recommendations
Government role
Integrity of system
BBA removed
Civil and criminal sanctions
New Code of Conduct
Discontinuation of screen rate
for various currencies & tenors
2014 54044424.1 26
Screen rates
2014 54044424.1 27
Libor Screen
Rates
terminated
Reduction in Maturities
SEK CHF Discontinued – 2 weeks
4,5,7,8,9,10,11 months
Continuing overnight/spot – next,
1 week, 1, 2, 3, 6 and 12 month(s)
NZD GBP
CAD EUR
AUD USD
DKK JPY
Discontinued maturity
2014 54044424.1 28
"Interpolated Screen Rate" means, in relation to LIBOR [or EURIBOR]
for any Loan, the rate [(rounded [to the same number of decimal places
as the two relevant Screen Rates])] which results from interpolating on a
linear basis between:
(a) the applicable Screen Rate for the longest period (for which that
Screen Rate is available) which is less than the Interest Period of
that Loan; and
(b) the applicable Screen Rate for the shortest period (for which that
Screen Rate is available) which exceeds the Interest Period of that
Loan,
each as of the Specified Time on the Quotation Day for the currency of
that Loan.
Discontinued currencies
2014 54044424.1 29
1. Domestic benchmarking
2. LIBOR plus F/X swap
3. Central Bank interest rates
Who wants to risk being an Agent or a
Security Trustee now?
In September 2012 the LMA substantially enhanced the
protective clauses of the LMA standard facility agreements and
the LMA intercreditor
2014 54044424.1 31
Miscellaneous agent protections –
Clause 4
Clause 4.1(Initial conditions precedent) – expanded to include
a standing authorisation to the Agent from the Lenders to give
notice of satisfaction of the conditions precedent unless the
Majority Lenders withdraw that authorisation in writing to the
Agent before the Agent issues the cp satisfaction notice
The Agent is not to be liable for any damages, costs or
losses as a result of giving that notification
2014 54044424.1 32
Changes to the Agency provisions –
Clause 32
New Clause 32.2 (Instructions) has been added which
replaces and strengthens old Clause 32.7 and covers:
on whose instructions the Agent is to act or refrain from doing
something (unless specified otherwise) ie:
all Lenders if the Finance Docs specify an all Lender decision;
the Super Majority Lenders if the Finance Docs so specify;
in all other cases, the Majority Lenders
Agent not liable if acts or refrains from acting in accordance with
those instructions
Agent can request instructions, or clarification of any
instructions, as to whether and how it should exercise/refrain
from exercising any right or power or discretion and needn't
act until it receives those instructions
2014 54044424.1 33
Changes to the Agency provisions –
Responsibility for documentation
Now made clear none of Agent, Arranger or Issuing Bank is
liable for (not just responsible for) the adequacy, accuracy or
completeness of any information supplied in the Finance
Docs/Information Memorandum/Reports.
The Agent is expressly excluded from having any duty to
enquire whether any Default has occurred/as to the
performance, default or breach of any Party of its obligations
under the Finance Docs or whether any other event specified
in the Finance Docs has occurred
2014 54044424.1 34
Changes to the Agency provisions –
Clause 32
Clause 32.10 (Exclusion of Liability) has been substantially
strengthened to restrict the Agent's liability (as well as that of
the Issuing Bank/an Ancillary Lender)
Extended to exclude damages/costs/losses/diminution in value
or any liability whatsoever as a result of taking or not taking
any action (other than, as before, directly caused by its gross
negligence or wilful misconduct)
Now also specifically excludes Agent's liability for exercising or
not exercising any right, power, authority or discretion under
Finance Documents or any associated documents entered into
2014 54044424.1 35
Changes to the Agency provisions –
Clause 32
Wide drafting now excludes Agent's liability for, broadly, force
majeure events
Excludes liability for any damages, costs, diminution in value
etc arising as a result of:
anything not reasonably within its control
the general risks of investment in, or holding of assets in, any
jurisdiction
including, in each case, those arising as a result of nationalisation,
expropriation, other government actions; regulations, currency
restriction, devaluation of fluctuation; market conditions affecting the
execution or settlement of transactions or value of assets (including
a Disruption Event); breakdown, failure, malfunction of 3rd party
transport, telecommunications, computer services or systems;
natural disasters or acts of God, war, terrorism, insurrection,
revolution; strikes or industrial action
2014 54044424.1 36
Changes to the Agency provisions –
Clause 32
Agent now has no obligation to check what extent any
transaction contemplated by the Facility Agreement might be
unlawful for any Lender
The Agent's liability is limited to the amount of actual loss
which has been finally judicially determined to have been
suffered but without reference to any special conditions or
circumstances known to the Agent at any time which increase
the amount of that loss.
Agent has no liability for loss of profits, goodwill, reputation,
business opportunity or anticipated saving or for special,
punitive, indirect or consequential damages, even if Agent
informed those possible
2014 54044424.1 37
Changes to the Agency provisions –
Clause 32
Clause 32.12(d), which allows for an Agent to flex agency
terms to attract successor agents, and Clause 32.18, which
allows an Agent to charge for management time are no longer
set out as options in square brackets but are the
recommended LMA position now
That enhances the Agent's ability to step out of the agency
position or charge for additional costs so making the role more
attractive
2014 54044424.1 38
Increased protections for the Security
Agent in the LMA intercreditor
The Security Agent provisions have been amended to reflect
as far as possible the strengthened Facility Agent provisions in
the Leveraged Facilities Agreement so:
right to charge for management time
enhanced right to rely on certificates
express right to engage independent legal advice for itself in its
capacity as Security Trustee
enhanced and more explicit liability exclusions
2014 54044424.1 39
Agent & Security Trustee protections
– some recent English case law
Saltri III Ltd v MD Mezzanine S.A Sicar & Others [2012] EWHC
3025 (November 2012) – a Security Trustee case
Torre Asset Funding Ltd v Royal Bank of Scotland PLC [2013]
EWHC 2670 (Ch) – judgment 3 September 2013 – an Agent
Case
2014 54044424.1 40
LIBOR Definition
"LIBOR" means, in relation to any Loan:
(a) [the applicable Screen Rate;][the Base Reference Bank Rate]
(b) [(if no Screen Rate is available for the Interest Period of that Loan) the
Interpolated Screen Rate for that Loan;] [or
(c) if:
(i) no Screen Rate is available for the currency of that Loan; or
(ii) no Screen Rate is available for the Interest Period of that
Loan [and it is not possible to calculate an Interpolated
Screen Rate for that Loan],
the Base Reference bank Rate,]
as of [, in the case of paragraphs (a) and (c) above,] the Specified Time on the
Quotation Day for the currency of that Loan and for a period equal in length to
that Interest Period of that Loan [and, if that rate is less than zero, LIBOR
shall be deemed to be zero.]
2014 54044424.1 42
LIBOR positive – zero floor
Borrower must pay margin [4%] plus LIBOR
Borrower does not want total interest to exceed 5%
Pays hedge counterparty swap fixed rate [1%]
Facility agreement borrower required to pay margin + LIBOR
4% + [2.5%] = 6.5%
Hedge agreement floating rate is 2.5% fixed rate is 1% = net
payment to borrower of 1.5%
Borrower pays total of 5%
2014 54044424.1 43
LIBOR negative – zero floor
Borrower must pay margin [4%] plus LIBOR
Borrower does not want total interest to exceed 5%
Pays hedge counterparty swap fixed rate [1%]
LIBOR drops below zero [to -1.5%] but is deemed zero
Facility agreement borrower required to pay margin + LIBOR
4% + 0 = 4%
Hedge agreement floating rate is -1.5% fixed rate is 1% net
payment to Hedge company of 2.5%
Borrower pays total of 6.5%
2014 54044424.1 44
LIBOR negative – no zero floor
Borrower must pay margin [4%] plus LIBOR
Borrower does not want total interest to exceed 5%
Pays hedge counterparty swap fixed rate [1%]
LIBOR drops below zero [to -1.5%]
Facility agreement borrower required to pay margin + LIBOR
4% - 1.5% = 2.5%
Swap
Floating rate is -1.5%
Fixed rate is 1%
Net payment to hedge counterparty = 2.5%
Net payment = 5%
2014 54044424.1 45