Market Disruption Clauses In Syndicated Loan Agreements
Market disruption clauses, commonly found in syndicated loan
agreements, set out how the interest rate applicable to a loan will
be calculated in the event that either:
1) LIBOR/EURIBOR cannot be determined (on the basis that no
screen rate is available and none or only one of the reference
banks nominated in the loan agreement can provide a rate); or
2) one or more of the lenders in the syndicate notify the
Facility Agent that the cost of their funding in the London
interbank market in respect of that loan exceeds the LIBOR/EURIBOR
rate applying to that loan under the terms of the loan
The effect of these clauses is that lenders can increase the
interest rate charged to a borrower to reflect the actual costs of
funds to those lenders.
Recent market events and the liquidity crisis have put market
disruption on the agenda for many market participants for the first
time. Lenders in respect of various Asian loans have been one of
the first to invoke market disruption provisions, for example a
US$1.035 billion dual-tranche loan for Taiwanese electronic parts
and components manufacturer Hon Hai Precision Industry and Quanta
Computer's US$360 million loan. This trend is expected to be
followed in Europe and the US, raising a number of issues as to how
the standard clauses work in practice.
Who Can Invoke a Market Disruption Clause?
Usually, only a lender (or lenders) whose participation in a
loan aggregates 30 percent or 50 percent (the specific percentage
is a matter of negotiation) is entitled to trigger a market
However, well-advised borrowers will have amended the Loan
Market Association ("LMA") standard wording to make clear
that the market disruption clause can be invoked only where a bank
is unable to fund all or part of a requested loan as a result of
"circumstances affecting the Relevant Interbank Market
generally". This expressly avoids the borrower paying for a
lender's own lack of creditworthiness.
The Applicable Rate of Interest in the Event of Market
If a market disruption provision is invoked, LIBOR/EURIBOR will
cease to form part of the calculation of interest, and the rate of
interest will be calculated on a lender-by-lender basis using the
rate notified by each lender to the Facility Agent as being that
lender's cost of funding its participation in the loan (from
whatever source it reasonably selects), together with the
applicable margin and mandatory costs.
This revised calculation...
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