LMA’s precedent sustainability linked loan provisions set a new reference point for the global sustainable finance market
On 4 May 2023, the Loan Market Association (LMA) released a set of model provisions to be used when drafting sustainability linked loan (SLL) facilities. The LMA has been involved in publishing and maintaining a set of SLL principles and guidance since 2019 (with the most recent edition released earlier this year), but this marks the first instance where it has offered SLL drafting provisions.
The model SLL provisions are for use in conjunction with the precedent LMA leveraged acquisition facility, but can be tailored for use in other loan documentation. These provisions offer a useful starting point for parties, with detailed drafting notes setting out points for parties to consider when negotiating SLL documentation. Such provisions also offer an insight into what the LMA considers to be market practice for SLLs currently. LMA intends to continuously update the model provisions to evolve with the market.
The model SLL provisions reflect much of the existing SLL principles and guidelines, including mechanics such as:
- detailed calculations of key performance indicators;
- continuous reporting requirements in respect of sustainability performance targets (SPTs);
- margin adjustments based on the number of SPTs met, supported by a sustainability compliance certificate attaching externally reviewed verification reports; and
- a mechanism for lenders to declassify the facility as ‘sustainability-linked’ following the occurrence of certain ‘declassification events’.
The model provisions also include the concept of a ‘Sustainability Amendment Event’, which requires the borrower to give notice of the occurrence of a disposal of an asset, acquisition of a company or a business, a merger or restructuring (or similar transaction) which could reasonably be expected to affect a key performance indicator (KPI) or a SPT. The borrower and the lenders must then enter into negotiations in good faith with a view to agreeing amendments to the calculation methodology, KPIs or SPTs as necessary to take into account the effect of the relevant Sustainability Amendment Event. This mechanism is not often included in Australian SLLs but we expect that it will gain traction in this market as lenders look to ensure that SLLs remain responsive to changes in borrowers’ businesses.
The model provisions take a similar approach to dealing with the consequences of breaches or misrepresentations in relation to the SLL provisions as is common in the Australian market – i.e. a breach or misrepresentation in respect of those provisions will not constitute an event of default. However, an event of default could occur if the borrower continues to make disclosures or announcements that its facilities are ‘sustainability-linked’ after the facilities have been ‘declassified’.
While the LMA has developed the model provisions independently from the Asia Pacific Loan Market Association and the Loan Syndications and Trading Association, we expect that similar model provisions will be developed for the Asia Pacific market in the near future.
A detailed article will follow.
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