July 22, 2024 - The first week of the LSTA 2024 Summer Series concluded on July 18th, after three days of the credit agreement teach-in portion of the series presented by Milbank partners, Mike Bellucci, Kamal Nesfield, and Spencer Pepper. Over the three days of teaching, members learned about the different types of credit facilities, interest and fees, representations and warranties, covenants, events of defaults, assignments and participations, and voting, amongst many other key credit agreement topics. The materials for the sessions included slides, but The LSTA’s Complete Credit Agreement Guide served as the textbook for the sessions.
On day one of the credit agreement teach-in, the presenters started by explaining the differences between term loans and revolvers before progressing to the trickier area of letters of credit which can be a very specialized area of practice. On day two, members learned about the different types of representations that are typically given by borrowers. Two of the most important borrower representations are the representation that there is no material adverse change in the borrower’s business since a particular date (this is known as a MAC) and the second is that there is no adverse litigation. A non-investment grade borrower would typically bring down each of those representations on each borrowing date, and the representation would, of course, then need to be true as of that date. Investment grade borrowers typically have large standby facilities which are not drawn down but are in place because the credit rating agencies rate any commercial paper issued by them. Here, the old commercial paper matures and the borrower issues new commercial paper to pay off the old commercial paper. This cheap form of financing typically has a high short term rating. The rating agencies take comfort that the revolver is effectively available to backstop the commercial paper for credit or market reasons. Notably, investment grade borrowers do not have to make those key representation mentioned above when they make borrowings. Members were cautioned to look out for that exception when they were working on investment grade deals.
In the context of acquisition financings, members were instructed on SunGard conditionality which emerged nearly 20 years ago. SunGard conditionality is a limitation that is intended to minimize the divergence between the acquisition agreement conditions and the commitment letter conditions thereby minimizing the risk of the borrower being required to close an acquisition without the committed financing being available.
Another important topic for LSTA members was addressed on day two – the role of the administrative agent. Importantly, it was highlighted that the administrative agent is not the agent of the borrower (except with respect to maintaining the register of lenders), and it is instead the agent of the lenders. The agent should be viewed as executing a ministerial function only; it is neither a trustee nor fiduciary for the lenders.
On the third day, members learned about the critical distinction between assignments and participations. In an assignment, the lender sells the loan to the assignee, and that assignee becomes a lender of record, and there is privity of contact between the borrower and that new lender. By contrast, in a participation, the lender remains the lender of record, and the borrower can still look to that lender to perform its obligations under the credit agreement, and that lender has the right to vote, enforce, and collect on the loan. Participations in the loan market are important because they give liquidity to lenders and allow lenders to sell their credit exposure in a meaningful way. However, participations do not give the participant any direct rights against the borrower, and the borrower has no direct rights against the participant. Participations can generally be sold without the consent of any party. However, the exception to this rule is in the case of disqualified lenders. Disqualified lenders are typically prohibited from purchasing participations just as they are prohibited from purchasing assignments.
We encourage members who would like an introduction to credit agreements to listen to the replay and to purchase the textbook. Click here for the slides and replays.
