July 26, 2023 - In the July 20th Summer Series Session, the LSTA’s Ellen Hefferan discussed the nuances of LSTA primary allocation and par secondary trade documentation and settlement procedures. She explained the differences between selecting Assignment, Participation, or Assignment Only while noting that regardless of the form of purchase chosen, a Trade-is-a-Trade. Below are some key takeaways.
Settlement: If a trade cannot be settled by assignment or participation, the parties must settle on the basis of a mutually agreeable alternative structure or other arrangement that affords Buyer and Seller the economic equivalent of the agreed-upon trade.
Credit Documentation: A Buyer may request that a Seller deliver Credit Documents provided that the Buyer: (i) was not a Lender on the Trade Date and (ii) made the request on or prior to the Trade Date. While LSTA Confirms provide that, while a trade is open, a Seller need not solicit the Buyer’s vote with respect to any amendment or waiver, market practice is that sellers will consult with their buyers.
SWOA: While bond markets settle with accrued interest, performing loans typically Settle without Accrued Interest (“SWOA”) unless the parties specify otherwise at the time of trade. The Administrative Agent will typically pay the accrued interest and fees directly to the Seller for the period up to but not including the Settlement Date, and to the Buyer thereafter.
Revenue: Non-recurring Fees (waiver or amendment fees) payable from and after the Trade Date are always for the account of the Buyer unless otherwise stated in the trade confirm. Paid-in-Kind (PIK) Interest (interest owed by the Borrower which is added to the principal amount) that is capitalized prior to the Trade Date is included in the principal portion of the Purchase Amount. When capitalized or accreted on or after the Trade Date, it is for the account of the Buyer for no additional consideration.
The Mysteries of Delayed Comp: On and after the Commencement Date up to but not including the Settlement Date (aka the “Delay Period”), the Seller (assuming it is the Seller that is receiving the Purchase Price) pays Delayed Compensation (the Interest plus Accruing Fees) to the Buyer and the Buyer pays Cost of Carry (average daily SOFR plus a credit spread adjustment of .11448%) to the Seller. The importance of understanding “Trigger Dates”, “Ready Dates” and Commencement Dates” was emphasized. Pre-Trigger and Post-Trigger Allocations and their respective relationships to Pre-Trigger and Post-Trigger Trades were distinguished utilizing flowcharts and purchase price calculations, proving that a buyer that qualifies for delayed compensation on such primary allocations, will not lose money if the facility is subsequently sold in the secondary market to a buyer that also is entitled to delayed compensation. This is not the case with Early Day Trades as compensation is not earned on the previous respective primary allocation.
Facilitating Liquidity: Buyer must not be on a Disqualified Lender List. For liquidity purposes, parties ideally would adhere to the LSTA recommendation that if a Borrower does not respond to a request for consent to a pending assignment within 5 Business Days, consent is deemed to have been given.
If all the types of trades and rules become overwhelming, a useful “cheat sheet” can be found on the last page of the slides which, together with the replay.
