30 October 2023
On 12 October 2023, the Loan Market Association (LMA) released an updated version of its standard term sheet for leveraged acquisition finance transactions, including sustainability-linked loan (SLL) terms. This completes the draft provisions for SLLs introduced in May – aiming at streamlining drafting practices in this field.
Within the usual spirit, the standardized precedent simplifies matters for business parties, enabling them to focus on the substance of sustainability provisions rather than the technicalities. Moreover, it aims to ensure that the product's integrity remains intact.
The sustainability-specific clauses are neatly organized in Part 8 of the term sheet, making them easy to find and refer to.
Four Key Performance Indicators (KPIs) are introduced, indicating that multiple factors should be taken into account. The description of KPIs is (obviously) left blank – leaving it to the borrower in agreement with the other parties to provide a clear definition, including the applicable scope or parameters, the calculation methodology, a definition of a baseline and benchmark against an industry standard and/or industry peers where feasible.
A mechanism for adjusting the interest rate margin is included, both up and down, based on the number of Sustainability Performance Targets (SPTs) achieved. It offers flexibility by allowing for no margin adjustment or an increase if fewer than two SPTs are met. The [ambitious] calibration of the SPTs depends again on the specifics of the individual SLL.
In case the loan undergoes a declassification process, the term sheet mentions that any margin adjustment will cease. This approach ensures that the economics of the loan remain as if it was no SLL from the beginning.
The term sheet already introduces the provision for re-negotiating KPIs, also known as a “rendezvous option” in case the obligors' group structure changes or the calculation method needs adjustments.
Regarding the frequency of providing sustainability compliance certificates, the parties may decide whether they are issued on a quarterly or annual basis. Importantly, the term sheet underscores the importance of involving an external reviewer (such as a qualified auditor, environmental consultant and/or independent ratings agency) to maintain the product's integrity.
In line with the draft SLLs precedent, the term sheet maintains the principle of declassification as a one-way process – there's no provision for reclassification once the loan is declassified.
The term sheet does not include specific sustainability conditions precedent. This aligns with the absence of such conditions in the precedent drafting guidance provided earlier this year by the LMA but leaves room for the parties to negotiate on a transaction-specific basis.
To sum up, the new term sheet allows parties to discuss and agree SLL specific points at a very early stage, avoiding a reinvention of the wheel in terms of drafting and enabling them to focus on the substance. The latter is of utmost importance, adhering to the industry standards developed by the Asia Pacific Loan Market Association, the Loan Market Association and the Loan Syndications and Trading Association in order to create a reliable product and give no room for any accusation of greenwashing.