Wednesday, September 9, 2009

Potential Changes to Market Disruption Clause

Doing Business in Oman

Following on from last month’s article on market disruption clauses, we consider here how the market disruption clause could be negotiated from a borrower’s perspective in a new loan agreement or amended in existing loan documentation. We are using the English style Loan Market Association syndicated loan agreement as the starting point for this discussion. However, even if a different starting point is used, many of the points will be equally applicable. From a borrower’s perspective, the main aim will be to tighten the wording of the market disruption clause. Clearly, lenders and the agent will try and resist many of these changes and will emphasis that anything that is different from the standard in this clause will make it harder to syndicate and close the transaction. Issues that could be raised on the market disruption clause by the borrower include:
  • consultation: currently there is no requirement for consultation between the lenders and the borrower when the lenders determine their actual cost of funds. The only requirement on a lender is to provide the costs of funds from “whatever source it may reasonably select”. A borrower would want to know that a lender had considered a broad range of funding options and selected the cheapest. In addition, the borrower may want to request a certificate from each lender certifying its source and costs of funds.
  • reasonableness: a borrower may seek to impose an obligation of reasonableness on the lenders in triggering this clause, such as a requirement that a lender’s actual cost of funding exceed an agreed amount above the relevant screen rate for LIBOR (London Interbank Offer Rate) – current wording merely refers to it being “in excess of LIBOR”. A further requirement could include an obligation on the lenders to negotiate in good faith in relation to agreeing on a substitute basis of interest and to use reasonable efforts to minimize their actual cost of funds.
  • increase the trigger threshold: the threshold for triggering this clause is a set percentage (usually between 25% and 50%) of participations in the loan. The threshold could be increased to make it harder for one or two lenders to trigger it.
  • reference banks: a borrower might seek to use the average funding costs of a number of reference banks (including some of the syndicate lenders) as the basis for calculating the interest rate payable as opposed to the relevant screen rate for LIBOR. This would be a move back to the previous market practice before the use of LIBOR was introduced.
  • interest periods: a borrower might seek the right to invoke shorter interest periods than the typically one-, three- or six-month periods, such as one week interest periods to assist the affected lenders in minimizing the actual costs of funds. However, this will create additional work for the agent and has potential cash flow implications for the borrower as interest is payable at the end of each interest period.