- with Finance and Tax Executives
- in United States
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In an effort to improve market efficiency and to speed settlement, the Loan Syndications and Trading Association (the "LSTA") is proposing amendments to its trading documents in order to address concerns that market participants are increasingly failing to make timely payment of the "Purchase Price" with respect to their bank loan trade settlements. Although typically only one or two days late, such failures, on a large scale, can prove to be quite costly to loan sellers and disruptive to the market as a whole. The proposal would introduce language into the LSTA Standard Terms and Conditions for its suite of trade confirmations (the "Standard Terms") that would require tardy loan buyers to pay a "Late Payment Fee."
The existing Standard Terms provide that the "payor" of a Purchase Price must make such payment on the "Assignment Effective Date," meaning the date that the administrative agent effects the transfer of the bank loans on its books and records. For various reasons (including back-office limitations initially brought on by the COVID pandemic), payors have increasingly failed to meet this payment deadline and, as a result, their counterparts are facing trade settlement risks and costs that have risen to previously unseen levels.
To this end, the LSTA has suggested modifications to the Standard Terms:
In the event the payor remits the Purchase Price on or after two (2) business days following the Assignment Effective Date, the "payee" will have 30 calendar days from the date upon which it receives the Purchase Price (the "Settlement Date") to submit an invoice to the payor for the Late Payment Fee, which a payor must promptly pay. Exceptions are for payors who (i) provide a Fed Reference Number or SWIFT Payment Reference Number showing payment before such second business day, or (ii) represent that the payment has been delayed due to government-imposed sanctions.
The Late Payment Fee is to be calculated as follows:
(1) for a "Performing Loan," the payor may not be entitled to the economic benefit of owning the underlying loan until it actually pays for same. Accordingly, the payee has the right to send an invoice to the payor equal to any interest and ordinary course fees (and, if applicable, adequate protection payments) that accrue from the Assignment Effective Date through but excluding the Settlement Date (the "Late Payment Period"). For simplicity, the payee can calculate the Late Payment Fee using the most recent loan contract all-in interest rate(s) set forth in the applicable funding memorandum.
(2) for a "Non-Performing Loan," a payee may still demand a Late Payment Fee, but at the "Cost of Carry Rate" for each day of the Late Payment Period. Essentially, until the Purchase Price is received, this mechanism puts the payee in the same position as if the Assignment Effective Date had not occurred. (More importantly, a payee will be able to recoup the Cost of Carry Rate for each day of the Late Payment Period, regardless of whether the "Delay Period" under the trade confirmation had begun.)
(3) for any bank loan otherwise terminated or paid in full prior to settlement of the trade, the payee shall have the right to demand a Late Payment Fee in an amount equal to interest at the Cost of Carry Rate on the Purchase Price, calculated as of the date a payoff letter or proceeds letter was executed and delivered by the parties (the "Payoff Date"), accruing for each day from the Payoff Date through but not including the Settlement Date.
It should be noted that the availability of the Late Payment Fee mechanism is not intended to be an exclusive remedy for loan sellers and that they may be entitled to use any other remedy available under contract or other applicable law with respect to late Purchase Price payments.
For convenience, and to encourage market-wide compliance, the LSTA has circulated sample, user-friendly forms of invoices that can be used by the payee as a means to calculate (and also demand) the Late Payment Fee that is owed. Although it may take a small allocation of operational resources for the payee to generate an invoice, the expected recoupment may be worth the marginal effort. The hope is that the new mechanism will focus the market on the need for timely settlement such that the market reverts back to historical norms.
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.
