The Loan Syndications and Trading Association (LSTA) and a team of business and legal professionals from major loan market firms have wrapped up a model credit agreement after nearly two years of work on the project. The agreement standardizes certain technical provisions regarding the arrangements between the agents, lenders and borrowers and it should reduce the time and the money spent on creating credit agreements. "It establishes a very valuable benchmark," said Mark Cahaney, managing director in CIBC World Markets' credit advisory group, adding that the new legal boilerplate would diminish the need for unnecessary negotiation when credit agreements are compiled. "It's the first definitive articulation of a market standard." The model does not seek to standardize the aspects applying to the economics of the specific borrower, such as the operating and financial covenants, but rather to reflect provisions broadly used by the loan market. It was designed around the concept of an unsecured credit agreement for the investment-grade borrower with a single tranche revolving credit facility. For a leveraged borrower with term loans, the agreement will have to be modified accordingly. Moreover, the model does not include any provisions that have not previously appeared in other credit agreements. The purpose was to take provisions that are common to all credit agreements, said Jane Summers, the LSTA's general counsel.
The model will also help facilitate secondary market liquidity because buyers coming into the credit will only have to review the aspects of the credit agreement that are exceptions to the standard. The assignment and participation agreements incorporated into the model are the agreements that the LSTA completed in 2002. The LSTA anticipates revisiting those agreements in 2004 to assess whether or not any updates should be made. Summers noted that other provisions, such as the sharing of payments provision, may have to be updated in the future due to developments in the financial markets.
Provisions made uniform under the new model credit agreement include: yield protection; setoff; sharing of payments by lenders; administrative agent's clawback; agency; notices, effectiveness, electronic communication; expenses, indemnity and damage waiver; assignments and participations; governing law and jurisdiction; waiver of jury trial; counterparts, integrations, effectiveness, and electronic execution; treatment of certain information, confidentiality; extension of commitment termination date; and assignment agreement. In order to promote the implementation of the model, the LSTA is making the document available to the public. To view the document, go to www.lsta.org.