United States: New LSTA Par/Near Par Delayed Compensation Regime

» Click here to DOWNLOAD the four flow charts referenced in the following alert.

After a brief postponement, the Loan Syndication and Trading Association (LSTA) published revised Standard Terms and Conditions, effective September 1, 2016,  for its Par/Near Par Trade Confirmation (Revised Standard Terms) to implement a new regime for par/near par delayed compensation. The changes represent the most significant revision of LSTA loan pricing in the almost 20 years since the LSTA was formed. Going forward, a buyer under an LSTA par/near par loan trade is not always entitled to "delayed compensation."

Delayed compensation refers to the buyer's entitlement, starting on the seventh business day after the trade date (i.e., T+7), to interest and accruing fees on the loan, minus an amount intended to compensate the seller for its cost of funds during the delay period.1 Until now, buyers have been entitled to delayed compensation as a matter of right on a no-fault basis. Under the new requirements model, the buyer is only entitled to delayed compensation if it fulfills a number of requirements or if the seller fails to satisfy certain of its requirements. These requirements pertain to the timing by which the LSTA Par/Near Par Trade Confirmation (Confirmation) and the assignment agreement in the form provided with the relevant credit agreement (Assignment Agreement) are executed and circulated. They also dictate when a buyer must be ready to close and when they are required to fund upon the settlement of the trade. The new rules are scheduled to be implemented in two stages, phase one and phase two. Some key provisions will be applicable for transactions entered into from September 1, 2016 to October 31, 2016 (Phase I). The rest of the provisions will go into effect for transactions entered into on or after November 1, 2016 (Phase II).

This note and the attached charts highlight some of the key changes to the LSTA delayed compensation pricing regime. Note that changes are not being implemented for LSTA distressed trades. Nor are they yet being proposed by the Loan Market Association (LMA), under which most European loans trade.

The Revised Standard Terms include two separate sets of requirements to determine entitlement to delayed compensation. The vast majority of LSTA par/near par transactions will follow the "Settlement Platform Requirements," which are applicable to transactions that settle on electronic settlement platforms, such as ClearPar or Virtus Trade Settlement Inc. The "Paper Requirements" are applicable to transactions that do not use an electronic settlement platform, but rather are settled on paper documents. The following diagrams outline key steps in the process of determining a buyer's entitlement to delayed compensation, using either paper documents or an electronic settlement platform. Note that unless stated otherwise, these flow charts reflect the Phase II in the implementation of these rules.

Settlement Platform Requirements for Secondary Trades

» See flow chart.

Paper Requirements for Secondary Trades

» See flow chart.

Specific Exceptions to the New Delayed Compensation Rules

The new delayed compensation rules, as stated in the Revised Standard Terms, are somewhat softened by a number of specific rules and scenarios in which the buyer will remain entitled to delayed compensation even if certain requirements were not met in a timely fashion, including:

  1. Participation Agreements. The selection of "Participation" as the form of purchase in the relevant Confirmation indicates that, after settlement, the seller will remain the lender of record on the books and records of the administrative agent. Under such circumstances, the buyer remains entitled to delayed compensation on a no-fault basis under the Revised Standard Terms.
  1. Failure to Obtain Consent. A delay in settlement caused by a failure to obtain any required consents to the assignment, such as those imposed by the administrative agent or borrower, will not cause the buyer to lose its entitlement to delayed compensation as long as the buyer otherwise satisfies its Paper Requirements or Settlement Platform Requirements (as applicable).
  1. New CLO Issuers. If the buyer is a special-purpose entity formed for the purpose of issuing collateralized loan obligations under an indenture, prior to T+7 the buyer may notify the seller of this and elect to have up to five consecutive business days preceding the effective date of the buyer's indenture treated as a "CLO Blackout Period." In the event that the buyer notifies the Seller of a CLO Blackout Period, a failure to close the transaction during the CLO Blackout Period will not result in the buyer losing its delayed compensation.
  1. Buyer Due Diligence/Know Your Customer. The buyer will not forfeit its delayed compensation if it delays in executing the Confirmation and/or the Assignment Agreement on account of having requested but not yet received required "know your customer" (KYC) or other "onboarding" materials from the seller. The buyer must have requested these materials prior to the date that it would otherwise be required to submit any documents under the Revised Standard Terms. Once the information or materials have been received, the buyer must facilitate the prompt settlement of the transaction.
  1. Purchase Price Calculation Error. If the buyer does not timely fund the purchase price due to the buyer's good-faith belief that the purchase price calculations are incorrect and provides the seller with notice detailing such belief, the buyer will still be entitled to delayed compensation for the transaction as long as the buyer has otherwise satisfied its Paper Requirements or Settlement Platform Requirements (as applicable).
  1. Material Error in the Assignment Agreement. If a buyer discovers a material error in an assignment agreement, the buyer may refrain from executing and delivering such assignment agreement without affecting the buyer's entitlement to delayed compensation as long as the buyer timely executes and delivers its signature to the confirmation and provides notice of the assignment agreement error within T+3. In the event the error is fixed within T+4, the buyer shall continue to be obligated to satisfy its Paper Requirements or Settlement Platform Requirements (as applicable).
  1. Force Majeure. In a provision applicable only to transactions settled on electronic settlement platforms, a buyer will not lose its entitlement to delayed compensation if it is unable to satisfy its Settlement Platform Requirements due to a failure in the functionality of the relevant electronic settlement platform that is outside of the buyer's control.

Early Day Trades

The Revised Standard Terms also revises the delayed compensation rules for "Early Day Trades." These are transactions often agreed to prior to the effective date of a credit facility and with a trade date no later than six business days after the Trigger Date of such credit facility. The Trigger Date is the date upon which the funds under the credit facility were advanced, or, in a case in which there is no initial funding, the effective date of the credit agreement. The delayed compensation rules for such trades are a bit different than those for regular trades. For early day trades, the important date under the Revised Standard Terms is the "Trigger Date" plus 14 business days. "Trigger Date plus 14" for early day trades can be compared to "T+7" for regular secondary trades, in that it is the targeted settlement date and the date the buyer becomes entitled to delayed compensation if it meets its requirements. Requirements are adjusted accordingly around Trigger Date plus 14. For example, an early day trade buyer must be prepared to settle and fund on Trigger Date plus 14 business days and buyer must have signed the Confirmation and Assignment Agreement on or prior to Trigger Date plus 10 business days.2

Timing of Purchase Price Funding

Another important aspect of the new delayed compensation rules deals with the obligation of buyers to promptly fund on the settlement date once all required consents have been obtained. If the buyer delays in funding, they will lose their entitlement to some or possibly all of the delayed compensation that they would have otherwise received.

Complicating the funding obligations is the fact that many off-shore entities need a day of lead time in order to fund. During Phase I, lead times can be any amount of time. In recognition of these limitations, under Phase II the electronic settlement platforms will contain a mechanism to allow buyers to select in advance that they will need an extra day to fund. In such circumstance, buyers may forfeit one day of delayed compensation that they would have been entitled to had they been able to fund on the settlement date.

The following charts highlight some of the key purchase price funding requirements under the new delayed compensation regime for transactions under the Paper Requirements and for those under the Settlement Platform Requirements.

Timing Requirements for Funding the Transaction (Settlement Platform)

» See flow chart.

Timing Requirements for Funding the Transaction (Paper)

» See flow chart.

Conclusion

These fairly revolutionary changes of the LSTA par/near par delayed compensation rules are likely to have far-reaching ramifications for the loan market. In contrast to other changes intended to affect settlement times, such as the BISO, these changes will likely succeed in reducing median par/near par settlement times to times much closer to the T+7 goal. The successful implementation of these changes is likely, however, to demand significant additional resources of already often understaffed middle office groups of both buyers and sellers. Under the new regime, parties will be under greater pressure to process trade documents quickly, while also being obligated to be prepared to close transactions on any business day. Additionally, a version of these changes is likely to be first replicated in the primary market and eventually even for secondary distressed trades for which settlement times are even longer. Any material success of the Revised Standard Terms in shortening settlement times is also likely to induce the LMA to move to a requirements-based model for delayed compensation.


New LSTA Par/Near Par Delayed Compensation Regime


Footnotes

1 This amount is calculated as the average one-month London Interbank Offered Rate (LIBOR) multiplied by the purchase price for the duration of the delay period.

2 For transactions entered into on or between September 1, 2016 and October 31, 2016, the applicable date is Trigger Date plus 12 business days.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions