The Loan Market Association Transparency Guidelines
Historically, the vast majority of loans entered into in the European syndicated loan market have been based on the standard form documents prepared and maintained by the Loan Market Association (LMA). The European secondary loan market has also generally operated as a private, unregulated market, with lenders entitled to receive, on a confidential basis, non-public information regarding the underlying borrower and its group, such as management accounts and budget projections. This information provides the necessary detail for the lenders to monitor on an ongoing basis the current and expected financial performance of the underlying borrower.
Throughout the life of a syndicated facility, it is entirely possible that, at any given time, different lenders may have different levels of information regarding the underlying borrower. For example:
- Public lenders: Where the borrower has also issued publicly traded instruments, such as bonds or listed equity, some lenders may wish to be free to trade in those instruments, so may choose not to receive any non-public information from the borrower so as to avoid being restricted from trading under any applicable laws on insider dealing.
- Shareholder/board rights: Other lenders may hold shares, or have the right to appoint a director or an observer to the board, which would give them access to information regarding the underlying borrower, which would not otherwise be available to the syndicate.
- Relationship or material lenders: The borrower may also choose to consult with relationship banks or larger lenders on key amendments or waiver decisions before seeking the wider approval of the syndicate as a whole.
This disparity of information is only likely to be exacerbated if the borrower enters into a period of financial distress. The borrower is likely to seek to engage with key relationship lenders to elicit their support and, once ad hoc committees of creditors are put in place, there will inevitably be a delay between the provision of information to the committee and the dissemination of that information to the wider syndicate. In some instances, more sensitive information may never be fully disseminated to the syndicate as a whole.
The LMA Guidelines
The potential for a lack of parity of information between lenders could provide the party holding better information with an advantage when determining whether or not to enter into a trade. In view of this, in June 2011, the LMA published the LMA Guidelines on transparency and the use of information in the secondary loan market (the LMA Guidelines). The LMA Guidelines were amended in November 2012. No further amendments have been made since this date.
The LMA Guidelines seek to provide the LMA’s view of best practice when determining whether it is appropriate to enter into a trade. According to the LMA’s press release issued in 2011, the aim of the LMA Guidelines is to ‘promote high standards of integrity by loan market participants in the context of the loan market as a whole’.
What is the legal effect of the LMA Guidelines?
The LMA Guidelines do not have any legal effect and are solely intended to record the LMA’s view on best practice for guidance. A breach of the LMA Guidelines will not, therefore, of itself give rise to a legal liability owed by one lender to another.
However, where an entity that is engaging in a loan trade is FCA-regulated, a breach of the LMA Guidelines could form the basis for a regulatory complaint. Under the FCA’s principles of business, principle 5 provides that ‘a firm must observe proper standards of market conduct’. As the LMA’s standard documents for secondary loan trades are widely used for the vast majority of trades relating to loans and claims in the European market, it is likely that the LMA’s view as to what constitutes best practice in the European secondary loan market will be taken into account by the FCA when considering whether a regulated party has complied with principle 5, or, indeed, with principle 1 – ‘a firm must conduct its business with integrity.’
However, it should be noted that the LMA Guidelines are not the only guidance provided by an industry body with regard to the secondary loan market. In response to the LMA Guidelines, the Alternative Investment Managers Associations (AIMA) issued its own note on sound practice in the secondary loan market (the AIMA Guidelines), which takes a different approach to the LMA Guidelines on certain issues outlined later in this chapter. It is, therefore, possible that the FCA could also take the AIMA Guidelines into account when determining what constitutes proper standards of market conduct, and market participants will need to form their own views as to which set of guidelines to follow where there is inconsistency between the two.
Syndicate confidential information
The LMA Guidelines attempt to distinguish between two types of information: syndicate confidential information (SCI) and borrower confidential information (BCI).
The LMA Guidelines provide that all market participants may trade loans on the basis of SCI, which is defined as information that is available to the whole syndicate.
Examples of SCI listed in the LMA Guidelines include, among other things, financial reports, financial projections, covenant compliance reports and plans to acquire or dispose of assets.
In practice, any information that a borrower is required to provide under the terms of the credit agreement, or is otherwise disseminated to the syndicate either directly by the facility agent or through a managed data-site, should be caught within the definition of SCI.
As a general rule, SCI will be provided to lenders on a confidential basis, although lenders will generally be permitted to disclose the information to third parties, including potential purchasers of their debt, subject to any restrictions set out in the underlying credit agreement.
During the course of restructuring negotiations, it is often the case that the borrower will provide additional confidential information to its lenders, which goes beyond the ordinary course confidential information to which lenders would otherwise be entitled under the terms of the credit agreement. This information will generally provide more current and specific detail on the performance and prospects of the borrower’s business and will be used by the lenders when carrying out their due diligence and analysis to determine whether or not they are prepared to stand still following a covenant breach or default, or to support a restructuring proposal more generally.
Any additional information may be provided subject to the existing confidentiality provisions set out in the underlying credit agreement. However, it is not uncommon for a lender wishing to receive additional information to be required to sign up to either a more restrictive confidentiality agreement, or to a wider restructuring framework agreement, such as a letter based on the LMA form acknowledging the appointment of a coordinating committee. As it is the lender’s option as to whether or not it wishes to sign up to receive the additional information, it is likely that not every member of the syndicate will sign up, and so the information will not, in practice, be in the hands of the syndicate as a whole. However, the fact that all members of the syndicate are entitled to sign up to the documents and receive the information is sufficient for the relevant information to be considered as SCI. Lenders in possession of this enhanced level of information should, therefore, be permitted to trade under the LMA Guidelines.
As noted above, the information provided by a borrower to its lenders under a loan agreement will typically be provided on a confidential basis and subject to the restrictions set out in the underlying facility documents or otherwise arising under any relevant local law.
While under the LMA Guideline a lender will not be restricted from trading private bank debt with either another lender or a third-party buyer or seller while in receipt of SCI, the SCI may constitute inside information that restricts the lender from trading in any public instruments issued by the borrower or any of its related entities under the EU Market Abuse Regulation (Regulation 596/2014) or equivalent local legislation.
For this reason, any lender wishing to retain the ability to trade in any relevant financial instruments, while also wishing to hold or trade private bank debt, will need to ensure that they put sufficient arrangements in place to ensure that they do not receive any inside information. This is discussed in more detail in Chapter 11 on the insider/outsider conundrum.
This will normally be achieved by the lender either declining to receive any SCI at all for the duration of the period in which it intends to remain public or, where possible, designating itself a ‘public’ lender and electing to receive only information that the borrower considers public information from the facility agent.
Where an existing lender or a third-party buyer or seller has designated itself public, a lender who is in possession of SCI will still be permitted to trade with a public lender who does not hold the SCI under the LMA Guidelines, subject to satisfying itself that there are no other relevant restrictions that would prevent it from trading. Again, this is on the basis that the trade counterparty is entitled to receive the SCI, but has elected, based on its own judgement, not to receive that information.
Disparity of information between trade counterparties
Although the LMA Guidelines permit a lender in possession of SCI to enter into a trade with a third party, public or otherwise, who has elected not to receive that information (a ‘non-SCI counterparty’), the relevant lender will need to consider carefully whether there are any other fetters on its ability to trade and whether it should insist on agreeing any express terms of trade to protect its position.
As a minimum, the lender will wish to ensure the terms of the trade include a ‘big boy’ representation, pursuant to which the non-SCI counterparty expressly acknowledges the disparity in information.
As noted above, in Europe, the vast majority of trades are carried out under the LMA secondary trading documents. The current form of LMA Standard Terms and Conditions, which will be incorporated (as amended by any additional terms agreed at time of trade) into any contract for the sale of bank debt that is expressed to be agreed on LMA terms, includes a big boy-style representation in Clause 21 (Non-Reliance and Independent Investigation).
This clause includes the usual provisions requiring each party to confirm that it is a sophisticated buyer and seller and that it has carried out its own independent investigation based on the information it deems appropriate before deciding whether or not to enter into the transaction. The clause also contains the following key provision dealing with any disparity of information:
21.5 Material information
Each of the Buyer and Seller acknowledges and agrees that:
(a) the other may possess material information not known to it; and
(b) the other shall have no liability and no action or proceedings may be taken with respect to the non-disclosure of any such information except to the extent that such information renders inaccurate an express representation made pursuant to the Agreed Terms or these Conditions by the party possessing such information.
Notwithstanding these provisions are included in the LMA Standard Terms and Conditions, many market participants elect when trading with a non-SCI counterparty to expressly refer to the big boy representations at the time of trade and, in some cases, to either include additional big boy language on the face of the trade confirmation or enter in a separate side letter signed by both parties.
However, a big boy provision will not assist where any of the information contained in the SCI in its possession would render inaccurate any express representation that it is required to give under the terms of trade.
Where there is parity of information between the trade counterparties, normal practice would be to amend the standard representations to carve out liability for the known defect, which will already have been factored into the trade price by the relevant trade counterparty. Where the non-SCI counterparty does not wish to have any information disclosed to it, the current lender will not wish to give any representation that it knows, at the time it is given, would result in a misrepresentation, which may preclude the current lender from agreeing to the trade with that counterparty unless an appropriate disclosure of the relevant information can be made.
Finally, the terms of any additional documents that may restrict the current lender from trading with a non-SCI counterparty will also need to be taken into account. For example, if the current lender has signed up to a coordination committee letter in order to receive information, it is common for the terms of that letter to require that the current lender procures that any successor-in-title accedes to that letter as well. In these circumstances, the current lender and the non-SCI counterparty will need to make appropriate arrangements with the borrower or coordination committee to ensure that the non-SCI counterparty will not receive any private information by virtue of being required to sign the relevant letter.
Borrower confidential information
Where a lender or prospective lender is in possession of BCI, the LMA Guidelines provide that, subject to certain limited exceptions, a market participant should not generally enter into trades until that information has been disclosed to the wider syndicate and has, therefore, become SCI.
Any market participant choosing to join an ad hoc committee of lenders will, therefore, need to give serious consideration before joining, as by doing so, it will inevitably receive information ahead of the wider syndicate, which could constitute BCI and may restrict its ability to trade in the underlying debt going forward.
The LMA Guidelines define BCI as information that is material and has not been made available to the whole of the lending syndicate. Information is considered material if it would significantly impact the price of the relevant loan if it were known to the entire syndicate.
Examples provided by the LMA Guidelines of information that could be deemed to be material include:
- material information provided to an ad hoc or steering committee or sounding group that has not yet been passed on to the wider syndicate;
- material information provided to a lender in a different capacity, such as a board member or a shareholder;
- requests for soundings on material amendments, waivers and re-financings;
- material information provided to only a core group of the syndicate; or
- material information provided to a related party that could affect the price of a traded loan.
Practical difficulties with BCI
It can be a difficult matter for a market participant to determine whether the information it holds would significantly impact the price of a loan in the market. Given the limited liquidity in the distressed debt market, the price at which a particular loan will trade will be determined by a broad range of factors, including the availability of willing buyers and sellers. As such, information is more likely to be construed as BCI where it correlates in some way to the likely recovery of the lenders as a whole. This could include positive news, such as an unexpected improvement in trading numbers, an asset sale or a pending refinancing, or negative news, such as a drop off in trading activity, a defect in collateral or security, or the collapse of a material negotiation.
The LMA Guidelines also consider it best practice that ad hoc committee members share BCI with the broader syndicate as quickly as possible and that borrowers should be required to undertake in writing to disclose all material information to potential lenders during the life of the transaction. However, in practice, members of the ad hoc committee may receive access to sensitive information that borrowers are reluctant to share more widely and some information, including detailed contingency plans, may never be shared.
In view of this, potential members of an ad hoc committee and their advisers may wish to agree a cleansing process with the borrower in advance of information being shared to ensure that all information can be shared in due course with the wider syndicate. Absent such an arrangement, members of an ad hoc committee could find themselves restricted from trading under the LMA Guidelines until they are able to determine that information has become stale and is no longer material.
One potential solution for market participants is to arrange for an information barrier to be put in place between anyone holding BCI and the person making any trading decisions. The LMA Guidelines provide that the guidance only applies to the person within an institution who is making the decision to trade or effect trades. As such, trading behind an effective information barrier is permitted.
For market participants who choose to join an ad hoc committee, this exemption is likely to be of limited efficacy. The purpose of an ad hoc committee is to bring together a group of creditors who are prepared to work together in the short-to-medium term to support the borrower and agree a restructuring. The imposition of an information barrier would undermine the participation of a lender in this process if there is a risk that a lender’s position could be sold at any point in time without the knowledge of those persons participating in the ad hoc committee.
Information barriers also present significant challenges to smaller lenders, such as distressed funds, who may not be able to achieve the necessary physical segregation between team members to allow an effective information barrier to operate in practice.
Trades between ad hoc committee members
The LMA also considers it best practice that no trade is entered into between counterparties, even if both parties to the trade have access to the same BCI.
This is the principal point of difference between the LMA Guidelines and the AIMA Guidelines, as the AIMA Guidelines consider that trades between parties that have access to the same BCI are permitted.
Given the inherent uncertainty this creates, it may be that the prudent course for a lender wishing to trade with another ad hoc committee member without the risk of acting contrary to the LMA Guidelines is to comply with the safe harbour provisions set out below.
Safe harbour provisions
Following the publication of the original LMA Guidelines, a number of concerns were raised by market participants as to whether participating in an ad hoc committee would restrict their ability to manage their risk by accessing market liquidity. This led to a perceived reluctance on the part of some market participants to participate in ad hoc committees.
In view of these concerns, the LMA revised the LMA Guidelines in November 2012 to clarify the circumstances in which it may be appropriate for a market participant with access to BCI to enter into a trade.
Under the revised LMA Guidelines, the LMA considers that a member of an ad hoc or steering committee or a supporting lender may reasonably make a judgement (subject to applicable law) that it is consistent with the appropriate standards of professional integrity and fair dealings to trade, irrespective of whether or not the counterparty was in possession of or had the ability to receive BCI where:
- the relevant lender discloses to its trade counterparty that it is in possession of BCI (although it is not necessary for the actual BCI to be disclosed);
- where the relevant lender is selling, it procures that its counterparty agrees that it will disclose to any downstream counterparty in the terms of any onward sale that some or all of the relevant loans were purchased from a lender holding BCI, unless the relevant trade counterparty determines, acting reasonably and consistently with appropriate standards of professional dealings, that there is no longer any need to do so in the circumstances (and, in particular, taking into account the amount of time that has elapsed since the original trade); and
- the relevant lender has reasonably made a judgement, consistent with appropriate standards of professional integrity and fair dealings, that the transaction will not adversely affect other members of the syndicate or market.
The relevant lender should ensure that the necessary disclosures are made to comply with the first limb prior to and at the time the trade is agreed (whether by telephone or another method of communication), and are documented, along with an appropriate undertaking to deal with the second limb on the face of any recap email sent immediately after the trade and in the trade confirmation itself.
Where a trade is being made under the safe harbour provision in circumstances where there is a disparity of information between the trade counterparties, the same considerations referred to in the section on ‘Disparity of Information between Trade Counterparties’ above with regard to entering into a trade with a non-SCI counterparty will also need to be taken into account in relation to entering into a trade with a non-BCI counterparty.
Do lenders owe fiduciary duties to other lenders?
The third limb of the safe harbour provision referred to above is more complex and seems to imply a broader duty owed by the ad hoc committee members to other lenders and market participants.
While this language has not, to date, been tested by the UK courts, the question of whether lenders are under a duty to disclose all relevant information to other lenders participating in restructuring negotiations has been considered by the UK High Court in National Westminster Bank plc v. Rabobank Nederland ( EWHC 1056 (Comm)). In that instance, the Court determined that there is no established practice of banks disclosing all material information to each other, despite it being good practice to do so, and there is no legal duty for them to do so unless expressly required by contract.
However, it should be noted that there is a difference between a breach of a duty that would give rise to a legal liability to another lender and the requirement for an FCA-regulated entity to conduct its business with integrity (FCA, General Principle 1) and to observe proper standards of market conduct) (FCA, General Principle 5).
As such, lenders who wish to take advantage of the safe harbour provisions should give careful consideration as to the likely impact of any trade that they may enter into on both the other members of the syndicate as a whole and the market generally, and to properly document their conclusions (and the reasoning behind it) as to why the proposed trade will not have any adverse impact.