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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