As bond and high-yield loan markets have come closer over time, several elements of the High Yield Bond Covenant have been incorporated into leveraged loans. In several respects (and beyond the main scope of this article), elements have been added that have increased the duration of credit agreements, either by adding new provisions or by providing for much longer provisions. Examples: as credit agreements have become more complex, changes have been followed. There are now more tailored parts of credit agreements that require only certain parties to change, agents obtain additional authorizations with respect to authorized documentation changes, including the implementation of additional facilities and authorized structural adjustments, and there may be different stages of consent levels that, using typical consent levels, “all lenders” and “majority lenders” (i.e., Loans to the super-majority) are. In addition, the recent addition of “short net” lending restrictions for voting on changes to documentation has added other provisions. We published a revised draft agreement on the rate change system (retrospective without change of observation); new agreement on the rate change in the project (retrospective with observation lag); a revised commentary on tariff change agreements; the roadmap for tariff exchange agreements; and the RFR conditions to be used in addition to the revised replacement of the screen throughput language. To create context, you must consider the following. The current LMA-Form senior multicurrency term and the Accord renewable facilities for leverage acquisition financing operations (Senior/Mezzanine) (without footnotes) is 314 pages long. An example of a leveraged loan from 2010 is 205 pages, while an example for 2020 is 473 pages. This very succinct summary shows how, in the market examples (and over time), the duration of credit agreements has increased significantly.
This can be attributed to a number of reasons, some of which are discussed below. While the Association of Corporate Treasurers (ACT) is closely involved in the settlement of the terms of the LMA Facility Agreements for Investment Level Borrowers (the “Investment Degree Documents”), LMA has not obtained the views or comments of the ACT on the terms of the Leverage Agreement. The leverage agreement is therefore a more lender-friendly document than investment level documents and is especially not approved by the ACT. While the finger is often singled out at lawyers who add increasingly complex designs and provisions to applicable documents, they often solve either an already identified existing problem or document a commercially agreed position, which is more involved and complex than the previous transaction. Comparing a credit agreement with the LMA form is perhaps a bit unfair, because while the LMA form is an extremely useful industry standard form document, the business transaction is often based on a “market” precedent that, as described above, has expanded over time to take into account both the practical realities of the creditor-debtor relationship and develop documents in new forms with functions. Additional…
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