On 4 May 2023, the Loan Market Association ("LMA") published a rider containing draft provisions for sustainability linked loans ("SLLs") for inserting into LMA form facility agreements (the "SLL Rider"). These provisions are aligned with the recently updated versions of the sustainability linked loan principles (the "SLLP") and related guidance published by the LMA together with the Loan Syndications & Trading Association and the Asia Pacific Loan Market Association, which we wrote about earlier this year. While the SLLP and related guidance have assisted market participants in the development of the SLL market, the LMA had not previously suggested SLL drafting for inserting into LMA framework loan facility documentation. In this article we will go through the provisions included in the SLL Rider.
Overall the suggested wording is welcome and is broadly in line with how we have seen the SLL market develop in Ireland over the past number of years. There are certain new concepts that have only recently appeared in the Irish market (eg references to declassification events) and it will be interesting to see how these develop over the coming years. Whereas the wording is quite detailed it is a good starting point from which borrowers and lenders can agree the SLL position for each loan. It might not be a one size fits all and would question the appropriateness of the language for borrowers who are not used to dealing with LMA style finance documents. A more tailored, simplified and bespoke approach may be required for borrowers of this nature.
2. Sustainability Margin Adjustment
The SLL Rider contains provisions relating to margin adjustments based on a borrower's performance against key performance indicators ("KPIs"), and sustainability performance targets ("SPTs") in relation to each KPI. The drafting notes advise that the KPIs should be benchmarked against an industry standard where feasible and that the applicable standard should be clearly defined.
The provisions say that the margin shall be adjusted (or not adjusted, as the case may be) depending on how many SPTs have been met per the Sustainability Compliance Certificate delivered to the Agent. The drafting notes highlight that the margin ratchet should be considered on a case-by-case basis taking into account the number of KPIs agreed for a particular transaction. It also provides suggestions for alternative approaches such as a ‘blended ratchet’ featuring a multi-tiered margin ratchet with the margin varying at differing SPT 'thresholds', or a margin ratchet which is structured in a way that affords greater weight to the achievement of particular SPTs.
The SLL Rider also includes a definition of "Sustainability Breach" which is defined as non-compliance with the "Sustainability Provisions" or misrepresentation in relation to the "Sustainability Information". The drafting includes the occurrence and continuance of a Sustainability Breach as a trigger for adjustment to the margin.
The SLL Rider includes a “no misleading information” representation which says that all Sustainability Information was true, complete and accurate in all material respects as at the date it was provided and is not misleading in any respect. This representation is deemed to be repeated on the date of each Sustainability Compliance Certificate.
4. Information Undertakings
The SLL Rider contains a number of sustainability-linked information undertakings, which include the requirement to deliver Sustainability Compliance Certificates (together with a Sustainability Report setting out the Borrower's sustainability-related information for each KPI for the relevant SLL Reference Period and a Verification Report prepared by an External Reviewer in respect of each KPI).
Also included is an undertaking by the Borrower that it shall notify the Agent upon becoming aware of any inaccuracy in a sustainability compliance certificate. This notification should include a description of the inaccuracy and also a revised Sustainability Compliance Certificate which corrects the inaccuracy. Such inaccuracy does not constitute a Sustainability Breach, a Default or an Event of Default.
The drafting also includes an undertaking to notify the Agent of a Sustainability Breach.
5. General Undertakings
The SLL Rider includes a “declassification” concept, which is an anti-greenwashing feature that may generate considerable negotiation in its triggers and consequences.
This concept allows the Agent to declassify the facilities as “sustainability-linked”, following the occurrence of certain events (defined as “Declassification Events”). With effect on and from the date that the Agent has declassified the loan as an SLL, the sustainability margin adjustment mechanism ceases to apply and the borrowing group is prevented from making any disclosure which describes the loan as “sustainability linked”.
The term Declassification Event is deliberately narrowly drafted in the SLL Rider, but there are square brackets and a footnote making it clear that parties can consider additional limbs on a case-by-case basis. This is likely to be something that will develop. It is likely a provision that will be particular to certain market participants taking into account their experience to date, policies, particular borrowers and industry sectors.
6. Events of Default
In line with current practice that we have seen in the Irish market, the provisions in the SLL Rider do not make a Borrower's failure to comply with any of the above sustainability provisions an Event of Default. Misrepresentation relating specifically to Sustainability Information is excluded from the misrepresentation Event of Default in the draft provisions.
7. Sustainability Amendment Events
The SLL Rider also contains a definition of "Sustainability Amendment Events", which are broadly triggered by asset disposals or acquisitions and corporate restructurings which may reasonably be expected to materially affect the KPIs or SPTs.
Following a Sustainability Amendment Event, the Lenders and Borrower enter a period of good faith negotiations to agree such amendments to KPIs, SPTs, calculation methodologies or related provisions to accommodate the consequences of such an event.
8. Sustainability Coordinator
Where a Sustainability Coordinator is appointed in respect of a particular transaction, the LMA does not envisage the Sustainability Coordinator being a party to the relevant facilities agreement. Instead, the provisions have been drafted in a way to allow the Sustainability Coordinator to rely on the relevant provisions of the facilities agreement via the English Third Party Rights Act. There is no equivalent ‘third party rights’ legislation in Ireland so we would suggest that the Sustainability Coordinator would continue, where relevant, to be included as a party to the facility agreement.
Just a starting point……..
The SLL Rider notes that the SLL provisions are intended to provide a starting point for a SLL based on market practice at the time of publication. The SLL Rider also notes that the provisions are not intended to be a comprehensive analysis of SLL transactions and certain provisions which are commonly negotiated between parties have been intentionally omitted from the SLL Rider (for example sustainability-linked conditions precedent which will be for the parties to negotiate on a transaction-specific basis).