Following the increasing popularity of sustainability-linked loans (SLL), the Loan Market Association (LMA) has published draft model provisions (the SLL Model Provisions).
The SLL Model Provisions are intended to be inserted in the LMA's senior multicurrency term and revolving facilities agreement for leveraged acquisition finance transactions but provide useful template drafting for anyone looking to incorporate SLL provisions in their arrangements. The LMA has described their decision to produce SLL Model Provisions as a "vital tool to protect the integrity of the SLL market", providing basic clauses and drafting notes to assist parties with the negotiation of a sustainability linked loan agreement. Up until now, there has been variation in drafting between law firms, so the new SLL Model Provisions may prompt a move towards the standardisation of drafting in the SLL market.
The SLL Model Provisions introduce new sustainability provisions into the standard LMA loan terms. It is important to note that the SLL Model Provisions do not provide example KPIs, or a method of calculation as these should be bespoke to the borrower and their business. Instead the new SLL Model Provisions include model clauses for sustainability margin adjustment, representations relating to the sustainability aspects of the facility, details of the sustainability information that needs to be provided by the borrower (which includes a sustainability report, verification report, compliance certificate and provisions dealing with publicity and breaches).
The SLL Model Provisions include wording for what happens if certain key sustainability provisions are not met (for example the provision of a compliance certificate) or a misrepresentation in relation to the sustainability information occurs (a Sustainability Breach). The consequences of a Sustainability Breach include any margin adjustment being temporarily disapplied or revised and even (if applicable) for the loan to be "declassified" as a SLL without affecting the continuance of the underlying loan terms. The SLL Model Provisions state that any breach of a sustainability provision or misrepresentation in relation to sustainability information will not be an event of default under the facility, which is in line with current market practice. However, the SLL Model Provisions include a concept of declassification, where the loan is no longer classified as "sustainability-linked" upon a "Declassification Event" occurring and any public advertisement of the loan as being sustainability linked will need to end. The definition of "Declassification Event" includes a failure to agree any amendments to the SLL provisions and has a placeholder for additional events to be included. The market has not yet reached a consensus on what those additional events may be that could prompt a funder to declassify a loan. From a borrower perspective, the reputational fallout from a Declassification Event could be significant. The notes to the SLL Model Provisions note that the market varies in the approach to restrictions on publicity, disclosure and reporting of SLLs following the occurrence of a Declassification Event and the LMA is following such developments closely.
While the SLL Model Provisions are a welcome move towards standardising SLL drafting in the market, the drafting notes acknowledge that no consensus has been reached yet on certain terms, including the frequency of providing an external verification report (though the LMA recommends at least once per year), commercial terms relating to KPIs and their related calculations, and the type of margin ratchet used on the achievement of KPI targets. These commercial terms will be for the parties to agree between themselves and there is wide scope to tailor these to the borrower's business.
The SLL Model Provisions allow for the parties to enter into negotiations to agree any amendments that may be required to the relevant SLL terms triggered by a "sustainability amendment event", which includes certain events that may affect a KPI or target. However, there is scope to include other specific events that may trigger an amendment event and the SLL guidance published by the LMA recommends inclusion of safeguards to prevent amendments to annual targets being less ambitious than what has been publicly announced. The market has not yet settled on appropriate conditions to agreeing amendments and has also not yet agreed an approach to the level of lender consent required to such amendments, so it will be interesting to see where the market settles on these points.
The SLL Model Provisions provide a strong starting point for the negotiation of SLL facility documents and are a welcome addition to the LMA library of documentation. However, this is a fast-moving area and there are still a number of provisions that the market is yet to come to a consensus on and, as such, the scope for negotiation of these clauses is still very wide. We expect the LMA to further revise the provisions as the SLL market develops.
