Increased trading of distressed debt between the U.S. and Europe over the past two years has prompted the U.K.'s Loan Market Association to make its documentation of these trades closer to those of the Loan Syndications and Trading Association.
The LMA's distressed debt documentation was launched more than six years ago. Since then, the European distressed debt market has grown rapidly and the increased trade between the U.S and Europe has brought attention to the inefficiency of having two different forms of documentation. The European distressed debt market was worth ?12 billion ($14.7 billion) in 2004, according to the LMA.
A working party representing sellers, buyers and broker dealers led the review. The LSTA also advised on the changes. Clare Dawson, executive director of the LMA, said the changes to the documentation will make distressed debt trading between the U.S and Europe more efficient. "The problem is that people in the U.S are more familiar with LSTA documents. As trading activity between Europe and the USA has increased, there is more appreciation that it will make everyone's life easier and will settle trades more efficiently if the documentation converges," she said.
A big change the LMA has introduced is preventing parties from walking away from a trade once a price has been agreed to. Previously, if a trade had been agreed, subject to certain conditions and one of these conditions had not been fulfilled by a certain date, the trade could be cancelled. Now, parties have to find a way to settle a trade regardless of whether conditions have been met or not.
Another change relates to a seller's ancillary rights and claims. In addition to the rights that pass automatically on a legal transfer of debt the right to receive fees, interest and principal and to sue for repayment of debt the seller is now obliged to sell all claims that it may have in relation to the traded debt.
The new documents also treat non-recurring fees one-off fees such as upfront fees, amendment or consent fees and recurring fees fees that accrue based on the time elapsed in relation to the traded debt differently. Previously, there was no distinction between the two.