lsta form of assignment agreement

LSTA Form of Assignment Agreement

In most syndicated loan transactions, lenders are permitted to sell their loans on the secondary market by assigning their rights and obligations under the loan documentation to new lenders. These transfers are commonly completed by the assignor and assignee executing an assignment agreement, the form of which is often pre-negotiated and attached as an exhibit to the underlying credit agreement.

• Practical Law

LSTA Form of Assignment Agreement

Practical law standard document w-015-5550  (approx. 4 pages).

• United States

Assignment and Assumption: Single Assignment of Loans | Practical Law

Assignment and Assumption: Single Assignment of Loans

Practical law standard document 2-382-1269  (approx. 12 pages).

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Syndicated Finance Transactions: Documentation and Trading, Key Provisions, LSTA Forms

Recording of a 90-minute premium CLE video webinar with Q&A

Conducted on Wednesday, November 10, 2021

Recorded event now available

This CLE course will examine the critical provisions of credit agreements and secondary trading documents currently used in the loan syndication market. The panel discussion will focus on standard loan forms promulgated by the Loan Syndications and Trading Association (LSTA). LSTA trading confirmations and related documents are accepted forms in the industry. The panel will also discuss contrasts with the Loan Market Association (LMA) forms used in European transactions.

Description

In the past 30 years, the corporate loan market has changed dramatically. Where banks used to lend to corporate borrowers and keep those loans on their books, loans today are typically allocated and sold to other institutional lenders and investors. This broader investor base has brought remarkable growth in the volume of loans originated in the primary market and subsequently traded in the secondary market, facilitated in part by the standardization of loan and trading documentation.

Counsel should have a thorough understanding of how various credit facilities are structured for syndication and trading . Repayment, prepayment and pricing terms, reps and warranties, multi-lender provisions, assignment and participation conditions, events of default, and other essential provisions must reflect investor concerns.

The LSTA has created form loan documents including a Revolving Credit Facility for Investment Grade Borrowers (Oct. 2017), an Incremental Facility Amendment (April 2018), and Model Credit Agreement Provisions for use in leveraged finance and other transactions, which provide a good starting point for documenting a primary loan .

Standardized trading procedures and documentation are other components of an efficient and liquid syndicated loan market. Over the years, the LSTA has published a suite of secondary trade documents that parties can use to evidence and settle loan trades--these have gained broad acceptance in the industry. Finance counsel must understand how the arranger allocates loans and how they are subsequently traded , the role of the administrative agent, and the associated documentation.

Listen as our authoritative panel discusses current legal trends and documentation in loan syndication, as reflected in the LSTA primary lending and trading forms. The panel will also analyze some of the differences between the U.S. and European markets, as informed by the LMA forms.

• Brief history of loan syndication
• Types of credit facilities available for syndication
• Multi-lender and other investor concerns
• LSTA loan forms: key provisions
• Secondary trading documentation and procedures
• Comparison to European LMA forms

The panel will review these and other issues:

• What kinds of credit facilities are appropriate for syndication? What kinds are not?
• How does the anticipated syndication of a loan to multiple lenders impact the provisions in loan documents?
• To what extent do the LSTA Form of Revolving Credit Facility and Model Credit Agreement Provisions reflect standard documentation in the industry? Should counsel use them as a starting point?
• What is the role of the arranger in syndicating a commercial loan?

Ms. Marsh is Deputy General Counsel for the LSTA. She heads the LSTA’s Primary Market Committee and Trade Practices and Forms Committee and leads the legal projects for the development and standardization of the LSTA’s documentation. Ms. Marsh is responsible for responding to and addressing secondary loan market trading disruptions and ensuring that the LSTA's primary market and trading documentation reflects current market practices.  She regularly speaks on the loan market at American Bar Association events, and is a Regent of the American College of Commercial Finance Lawyers and a Fellow of the American Bar Foundation.

Ms. Nand represents commercial, cooperative, development and investment banks, as well as hedge funds, sponsors, sovereign wealth funds and Fortune 500 companies in leveraged finance transactions. She has structured, drafted and negotiated over $40 billion of syndicated loan, commercial paper and project financings. Ms. Nand has served as lead counsel on numerous transactions, including cross-border credit facilities, securitizations, syndicated loan transactions, credit-linked notes, convertible debt facilities, private placements, joint venture financings and debtor-in-possession credit facilities. Ms. Nand is a fellow of the American College of Commercial Finance Lawyers.

Ms. Virmani works with the LSTA’s Primary Market Committee and Trade Practices and Forms Committee on legal projects for the development, standardization and revision of the LSTA’s documentation and is also involved in resolving secondary loan market trading disruptions. In addition, she participates in the LSTA’s advocacy efforts, including comment letters and engagement with regulators.

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As many single-investor or club deal loans secured by commercial aircraft (Aircraft Loans) became distressed during the economic downturn that followed 9/11, secondary trading increased dramatically. The Aircraft Loan financing community reacted by morphing from a primary base of commercial banks to a diversified group of commercial banks, investment banks, hedge funds, leasing companies and other aircraft investors. Many of these participants had high-volume syndicated debt-trading desks that were accustomed to trading corporate syndicated bank debt on forms published by the Loan Syndication and Trading Association (LSTA). 1 Because of this familiarity, certain participants began to utilize LSTA trade forms for Aircraft Loan transfers as a means to increase certainty of transaction execution and to reduce transaction costs. While these two goals are key reasons the LSTA forms have attained nearly universal acceptance as the documentation standard in the US syndicated corporate bank debt trading market, the LSTA forms do present a number of issues that require careful attention when they are utilized to close an Aircraft Loan transfer. 2

The most important issues when using LSTA forms are: (i) an LSTA trade confirmation creates a legally binding obligation and, depending on the nature of the transaction, the binding obligation may have been created prior to execution of the trade confirmation; (ii) unless specifically modified by the parties, the LSTA forms do not contain very basic representations and conditions precedent that are customary in Aircraft Loan transfers completed using traditional negotiated Aircraft Loan purchase agreements; and (iii) unless specifically modified by the parties, LSTA forms incorporate a very specific and pre-agreed purchase price calculation.

Timing of Binding Obligation

An LSTA trade confirmation is typically the first agreement entered into when executing a trade utilizing LSTA forms. The confirmation has many of the hallmarks of a nonbinding letter of intent in a typical Aircraft Loan purchase transaction. An LSTA confirmation is a very short document that includes the basic terms of the transaction: (i) the purchase price, (ii) a description of the debt being purchased and (iii) any special terms related to the transaction. 3  However, as its name suggests, when used in a typical corporate syndicated bank debt trade, an LSTA trade confirmation is not a nonbinding indication of intent, but rather a confirmation of a binding trade that has already occurred, and the documentation of the trade using LSTA forms is in many respects an administrative exercise. In fact, in the syndicated corporate debt market, the custom is to verbally agree to the principal terms of the trade over the phone on a recorded line, with the binding obligation being created during the phone call. 4 If the parties to a trade expect there to be any substantive deviations from the LSTA Standard Terms and Conditions, the deviations are typically discussed and agreed to during the phone call. As a result, when utilizing LSTA forms to trade Aircraft Loans, in discussing the terms of the trade during the predocumentation phase, it is important that (i) the parties have a clear understanding and agreement as to if, and when, a binding obligation will be created; and (ii) the parties agree to any additional terms or modifications to the LSTA Standard Terms and Conditions at the time the binding obligation is created, particularly if a binding obligation is intended to arise prior to execution of a trade confirmation. 5

Lack of Basic Representations, Warranties and Conditions Precedent

LSTA forms do not contain basic representations, warranties and conditions precedent that many aviation industry participants are accustomed to seeing in Aircraft Loan transfers completed using negotiated Aircraft Loan purchase agreements. Below are a few examples:

• No Aircraft Documents Representation. LSTA forms do not contain a representation specifically identifying a definitive set of loan documents that include all the obligations that the purchaser will be assuming in connection with the purchased Aircraft Loans. 6
• No Consent Rights over Amendments. LSTA forms do not provide a purchaser with any consent rights over amendments that may be effected after the trade date (i.e., date of trade specified in the LSTA confirmation) and prior to the settlement date (i.e., the closing date of the trade). 7
• No Borrower/Collateral Conditions Precedent. LSTA forms do not contain any conditions precedent regarding the borrower or the collateral (e.g., no default under a credit agreement or lease (in case of a leveraged lease), no loss or damage to the Aircraft, no other liens on the Aircraft, etc.).
• No Documentary Conditions Precedent. LSTA forms do not contain any documentary conditions precedent to speak of (e.g., no opinions, no corporate authority deliverables, etc.).

Any of these terms and conditions may be incorporated into a transaction completed utilizing LSTA forms by including the desired terms, as agreed, in the “Trade Specific Other Terms of Trade” section of the LSTA confirmation.

Pre-agreed Purchase Price Calculation

LSTA forms set forth an agreed Purchase Rate expressed as a percentage that, when multiplied by the outstanding principal amount of loans being purchased, forms the purchase price for the loans. The purchase price is adjusted based on a Target Settlement Date (which is analogous to an Economic Closing Date in typical aviation transactions). For trades completed on LSTA par documents, the Target Settlement Date is seven business days after the trade date and for trades completed on LSTA distressed documents, the Target Settlement Date is 20 business days after the trade date. Generally, the adjustment results in the purchaser receiving a credit for all interest accrued after the Target Settlement Date and the seller receiving a cost-of-carry adjustment on the purchase price from and after the Target Settlement Date calculated on the basis of one month’s LIBOR. 8 While this purchase price calculation methodology is not intrinsically unfair or unworkable, and in many respects is very similar to purchase price adjustments often agreed to in negotiated Aircraft Loan purchase agreements, it is important that parties understand how the calculations work.

LSTA forms were primarily intended to be utilized for transfers of widely syndicated “cash flow” loans. Investors in this asset class do not, as a matter of practice, need to rely on a seller for information regarding loans being sold. This information is typically provided by the administrative agent of the underlying loan facility to both lenders and prospective lenders via a secure data site. Furthermore, widely syndicated cash flow loans derive their value from the cash flows of the underlying business and the credit quality of the borrower. Aircraft Loan investors, on the other hand, are forced to rely on sellers to provide information regarding the underlying loan documents and related aircraft collateral, and the value of an Aircraft Loan is often highly (or solely) dependent on the value of the underlying collateral. This information and valuation dichotomy gives rise to many of the issues discussed above. While the presence of these issues, in and of themselves, should not deter parties from utilizing the LSTA forms for transfers of Aircraft Loans, it is important that transaction parties understand these issues and modify the LSTA trade forms to fit the specific transaction.

1 The Loan Syndication and Trading Association is an industry trade group created in 1995, which is currently comprised of more than 320 banks, brokers, investment funds, law firms and other parties interested in the corporate syndicated bank debt market. See  http://www.lsta.org .

2 The LSTA publishes two sets of trade forms – one for par trades and one for distressed trades. The documentation for par trades consists of an LSTA trade confirmation. The par documents are typically used for trades of performing loans where the expectation is that the loans will pay out in full in accordance with the underlying credit agreement. The documentation for distressed trades consists of an LSTA trade confirmation as well as a long-form LSTA purchase agreement. The distressed documents are typically used for trades of non-performing loans or loans that are at some stage of restructuring (or expected restructuring). Both the par documents and distressed documents incorporate by reference the LSTA Standard Terms and Conditions, which apply to every trade completed on LSTA forms, unless the parties specifically modify those terms in the trade confirmation and/or purchase agreement.

3 The special terms are set forth in the “Trade-Specific Other Terms of Trade” section of the LSTA confirmation and contain terms agreed to by the purchaser and seller that are (i) outside the scope of what is contained in the LSTA Standard Terms and Conditions or (ii) intended to modify the LSTA Standard Terms and Conditions.

4 Further amplifying the binding nature of an LSTA trade, the LSTA Standard Terms and Conditions provide that if, for any reason, the trade cannot be settled by a legal assignment (e.g., if required Borrower/Agent consent is not obtained), the parties will settle the trade by means of participation, and if a participation cannot be effected, the parties will settle the trade by an alternative means to give the parties the economic benefit of the agreed trade. Given the unique nature of Aircraft Loans and the relative effect that the specific aircraft forming the collateral can have on the pricing of, and return that can be realized on, an Aircraft Loan, a forced agreement to settle a trade by means of a participation or the specter of alternative settlement means may present an untenable position for a purchaser of an Aircraft Loan, both from a counterparty risk perspective and an ROI perspective.

5 Because of the varying transaction practices between the syndicated corporate debt market (for which the LSTA forms were created) and the traditional aircraft secondary loan market, some parties enter into a non-binding letter of intent (rather than an LSTA trade confirmation) as a prelude to executing a trade on LSTA forms.

6 While the LSTA distressed purchase agreement contains representations that partially address this point, the form representations are more limited than a purchaser would typically receive in an Aircraft Loan trade completed in a negotiated Aircraft Loan purchase agreement.

7 While this would be virtually unheard of in the context of a negotiated Aircraft Loan purchase agreement of a “controlling position” in a loan transaction, it is the LSTA standard because the LSTA forms are primarily intended to be used in the context of widely syndicated debt, where a seller typically does not have a controlling position that would be necessary to effect, or prevent, an amendment to the underlying credit agreement.

8 While this is a general description of the default purchase price calculation mechanism contained in the LSTA Standard Terms and Conditions, the LSTA Standard Terms and Conditions do contain other “pre-agreed” purchase price calculation options that can be specifically selected.

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United States: Proposed Revisions To The LSTA Par Trade Confirmation: The Risks Of Trading English Law Loans On LSTA Par/Near Par Terms

Recently, the Loan Syndications and Trading Association (LSTA) circulated revised language 1 relating to the trading of English law-governed loans on the LSTA Par/Near Par Trade Confirmation (the LSTA Par Confirm). The purpose of the revised language is to mitigate the risks market participants may encounter when trading English law loans on the LSTA Par Confirm (as opposed to using the LMA form trade documentation) by providing these loans with similar protections afforded to loans governed by New York law (or the law of another state within the U.S.) under the LSTA model form of assignment agreement (the LSTA Form AA). The LSTA sought final comments on the revised language. Once finalized and approved, the additional language would be added as Section 27 to the LSTA Par Confirm.

The LSTA first previewed the issue of trading European law loans on the LSTA Par Confirm in a Market Advisory published on May 22, 2019. In its Market Advisory, the LSTA acknowledged that while there are no "formal" requirements for choosing LSTA or LMA documentation when trading syndicated bank debt on the secondary market, there are a number of factors for determining which documentation regime to use, including, most notably, the governing law of the applicable credit agreement. In situations where the credit agreement is governed by English law (or the law of another European jurisdiction), it is customary for parties to use the LMA form documents. Where the credit agreement is governed by New York law (or the law of another state within the U.S.), the LSTA form documents are typically used. However, situations may arise where market participants trading English law loans choose to trade on an LSTA Par Confirm. In these instances, due to the disparity in the "architecture" of the LMA and LSTA secondary loan trading documentation, market participants should be aware of the potential risks they may face.

The Construction of the LSTA versus LMA Par Trade Documentation

When entering into a trade pursuant to an LSTA Par Confirm, the parties agree that (unless specified otherwise) the form of purchase shall be by assignment. In the case of an assignment, the standard terms of the LSTA Par Confirm provide that the parties execute an assignment agreement in the form set forth in the applicable credit agreement (or, in the absence of such form, a reasonably acceptable assignment agreement containing customary provisions for the sale of par/near par loans). It is customary for large corporate credit agreements governed by New York law to use a form of assignment agreement that is "substantially similar" to the LSTA Form AA. The LSTA Form AA contains several key representations, including those listed below.

Seller's Representations

Assigned Interest. Under the LSTA Form AA, the seller assigns and sells to the buyer all of seller's rights and obligations relating to (a) the loans and commitments being assigned, and (b) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and other rights of the seller arising under or in connection with the credit agreement and any other document or instrument delivered in connection therewith.

Good Title. Seller represents it is the legal and beneficial owner of the Assigned Interest.

No Encumbrances. Seller represents the Assigned Interest is free and clear of any lien, encumbrance or other adverse claims.

Power and Authority. Seller represents it has the power and authority to execute the assignment agreement and consummate the transaction.

Defaulting Lender. Seller represents it is not a defaulting lender.

Buyer's Representations

Due Authorization and Eligible Lender. Additionally, under the LSTA Form AA, the buyer represents it is duly authorized to execute and perform its obligations under the transaction and that the buyer meets the eligibility requirements to become a lender of record under the applicable credit agreement.

It is important to note that the standard terms and conditions to the LSTA Par Confirm do not include any of the above representations set forth in the LSTA Form AA. In fact, the representations made by the parties in the LSTA Par Confirm are limited to (i) the nature and use of syndicate information, (ii) "big boy language" and (iii) ERISA. Unlike the LSTA Par Confirm, the standard terms for par trades relating to bank debt governed by the LMA (the LMA Par Confirm) contain far more extensive representations (the current version of the LMA Par Confirm spans 55 pages). However, unlike the LSTA Form AA, the standard form of English law assignment agreement (the LMA Transfer Certificate) does not typically include the key representations set forth in the LSTA Form AA. The incongruity in the construction of the LSTA and LMA par form documents may subject parties to unforeseen risks when choosing to trade English law loans on the LSTA Par Confirm, as the LSTA Par Confirm and the LMA Transfer Certificate are the two documents containing the fewest protections typically afforded to par market participants. It is this disparity that the additional language in the LSTA Par Confirm seeks to address.

In addition to the addition of Section 27 to the LSTA Par Confirm, the LSTA advises parties electing to trade English law loans on the LSTA Par Confirm to consider the following:

Delayed Compensation. It is important to note that the LSTA delayed compensation regime will apply to these trades, as will all the other provisions of the LSTA Par Confirm.

Settlement by Participation . In the event the parties are unable to settle by assignment, the parties will be required to settle by participation using the LSTA form Participation Agreement. In the case of settlement by participation, the parties should consider the differences in the voting regimes under English/U.S. law and the interpretation of the participation by English/U.S. courts.

Survival . The LSTA advises including a survival provision that both the seller and buyer agree that the representations and warranties set forth in the LSTA Par Confirm survive the consummation of the transaction.

It is critical that market participants understand the material differences in the LSTA and LMA trade documentation regimes. When choosing to trade English law loans on the LSTA Par Confirm, parties should consider including the additional language discussed in this alert so that they may receive the benefit of the basic customary representations and warranties afforded to par market participants.

The additional language in Section 27 to the LSTA Par Confirm may read as follows:

If the Debt has been extended pursuant to a credit agreement that is governed by English law and provides for the assignment or novation of the Debt pursuant to an assignment agreement or a transfer certificate attached as an exhibit to the Credit Agreement (a "Transfer Certificate") that does not contain provisions that are substantially similar to the provisions set forth below, then, notwithstanding any other provision set forth in this Confirmation, Seller and Buyer hereby agree to the following:

• Effective as of the Settlement Date, Seller irrevocably sells and assigns to Buyer, and Buyer irrevocably purchases and assumes from Seller, subject to and in accordance with the Credit Agreement, to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of the Seller (in its capacity as a lender) against any person or entity, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations related to the Purchase Amount of Debt (such rights and obligations sold and assigned by Seller to Buyer pursuant to this clause, together with all of Seller's rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the Purchase Amount of Debt, referred to herein as the "Assigned Interest").
• Seller represents and warrants to Buyer on the Settlement Date that (i) Seller is the legal and beneficial owner of the Assigned Interest; (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim; (iii) Seller has full power and authority, and has taken all actions necessary, to execute and deliver the Transfer Certificate and to consummate the Transaction; and (iv) Seller is not in default of any of its obligations in its capacity as a lender with respect to the Purchase Amount of the Debt.
• Buyer represents and warrants to Seller on the Settlement Date that (i) Buyer has full power and authority, and has taken all actions necessary, to execute and deliver the Form of Purchase and to consummate the Transaction, and (ii) Buyer meets all the requirements to be a lender of record under the Credit Agreement (subject to such consents, if any, as may be required thereunder).

1 The revised language can be found at the end of this alert.

Originally published June 03, 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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