Thanks, Mike – May 2022 | Issue 177 – Loan Market Update | Cadwalader, Wickersham & Taft LLP

Lots of news in the loan market. SOFR remains a priority, we have new forms from the LSTA, and what was seen as an “existential threat” to the syndicated loan market has re-emerged. Here is the recap.

LSTA forms

The Loan Syndications and Trading Association (the “LSTA”) has advised its members that it has updated its Revolving Credit Facility Form (which includes term SOFR) and Credit Agreement Form and investment grade term and revolving loan.

The LSTA continues to revise and refine the extensive set of materials available to its members. The LSTA Form of Credit Agreement establishes a baseline of where the market stands with respect to the rights and obligations of the parties to a financing transaction. The parties can often agree that they will go with the “LSTA standard” for certain parts of their credit agreement.

With respect to the revised agreement, the changes cover several topics but, significantly, there are updated provisions that relate to the use of the term SOFR as a reference. This is important to many market participants because while some banks have developed their own language for their Term SOFR agreements, many other banks and their boards rely heavily on the model language produced by the LSTA. Other changes relate to erroneous payment arrangements and DQ arrangements. The LSTA plans to issue these revised agreements early next month.

We also note that about a month ago the LSTA provided revised guidance regarding U.S. sanctions issues in lending transactions, which has been helpful in shaping these provisions in credit agreements, particularly with respect to relates to US sanctions that relate to matters relating to certain natural persons. and business entities in Russia. We understand that the LSTA is working on further revisions to the guidelines to remedy the situation if a lender is sanctioned.

SOFR, too good

The Alternative Reference Rates Committee (“ARRC”) has now approved the use of the 12-month term SOFR. While we mostly see 1 month and 3 month tenors (although 6 months is an option in most deals), the question of whether the ARRC would approve a 12 month SOFR for syndicated loans has been left open. We now have confirmation that the 12-month SOFR is indeed within the scope of corporate lending.

Litigation Update − Are Loans Securities?

The question of whether syndicated loans constitute securities under federal and state securities laws has been raised at various times for decades. We have been tracking the latest cases for some time. In this latest case, a federal district court in New York considered the issue where a litigation trust arising from the millennium bankruptcy case sued agent banks that had taken out a $1.75 billion loan to the debtor and alleged that the agent banks violated state securities laws when they originated the loans. The U.S. District Court for the Southern District of New York issued a decision declaring that the syndicated loan at issue was not a security. The plaintiff appealed the decision to the Court of Appeals for the Second Circuit. The briefing is in progress, then the second circuit will hear the arguments and should issue an opinion on the subject afterwards.

The LSTA has warned that treating these loans as securities could pose an “existential threat” to the agency industry and the lending market as a whole. The LSTA filed a friend brief with the Court explaining its position. We could also see federal regulators being asked to step in. We will follow that.