In general, sovereign loan agreements provide that unanimous lender consent is required to amend loan payment terms. This has led to inefficient (or has prevented) sovereign loan restructurings due to minority dissenting lenders and/or unresponsive lenders refusing to provide their consent. This has been particularly highlighted over the past two years, during which sovereign debtors have been experiencing increased levels of financial distress further to (amongst other things) the pandemic, the Ukraine-Russia crisis and commodity price rises.
On 1 November 2022, various industry bodies (including the APLMA, ICMA, IIF and the LMA) published a guidance and explanatory note titled "Guidance and Explanatory Note relating to new specimen clauses for inclusion in Commercial Loan Agreements for Sovereign Borrowers" (the Guidance). The Guidance recommends that lender unanimity for payment term amendments be replaced by a 75% majority lender voting threshold (by value measured by reference to principal) to decrease minority creditor holdout risk and minimise undue delays in sovereign loan restructurings. It considers that this will be particularly useful for scenarios such as extension of due dates for payments, reduction in payment amounts, interest deferrals and/or interest capitalisations arising as a result of a natural disaster or as a consequence of a pandemic and replacements of bullet repayment mechanisms with instalment repayment schedules.
Annexes 1 to 8 to the Guidance contain the specimen clauses for English law governed loans closely aligned to the LMA form (although there is no LMA recommended form of sovereign loan agreement, the LMA recommended form of Single Currency Term and Revolving Facilities Agreement for use in developing market jurisdictions is often used as the starting point). The specimen clauses are voluntary and are to be used as a guide and be considered and amended as applicable on a case by case basis (for example, where there is a sovereign guarantee, the ability to amend payment terms by a majority action needs to extend to the payment terms of that sovereign guarantee and so the majority voting provisions will also need to be incorporated into the guarantee).
The specimen clauses to effect the majority lender vote for payment term amendments are set out in Annex 1 to the Guidance. In a typical sovereign loan agreement, the parties will need to:
- remove the payment term amendment sub-clauses (which usually relate to reducing the margin or payment of principal, interest or fees and to extending the due date for payments) from the all lender consent list in the amendments and waivers clause; and
- amend the definition of "Majority Lender" (usually defined as a lender/lenders whose commitment(s) aggregate more than 66⅔% of the total commitment) so that for the purposes of the payment term amendments, "Majority Lender" shall mean a lender/lenders whose commitment(s) aggregate more than 75% of the total commitments.
The Guidance contains a number of additional specimen clauses, which it suggests are complementary to the payment term voting threshold amendments. An overview of these clauses is detailed below.
- Revised pari passu provision set out in Annex 2 to expressly disavow the "payment parity" interpretation (i.e. where the clause operates to prevent a debtor from paying one of its creditors ahead of any other when it is not in a position to pay all creditors in full) of such provision in order to be consistent with the form of pari passu provisions in international sovereign bonds.
- New "snooze you lose" provision (commonly used in leveraged loan markets) set out in Annex 3 to require that a lender votes on an amendment or waiver within a specified period (suggested in the drafting as 20 Business Days) or its vote will be disregarded. This is likely to be particularly useful where hedging arrangements have resulted in indirect communication flows and delays.
- New "yank the bank" provision (commonly used in leveraged loan markets) set out in Annex 4 to provide the borrower with a right of replacement of a dissenting minority lender.
- New unitised voting provision set out in Annex 5 to be used where a lender has de-risked part of its exposure so that the lender of record has the flexibility to split votes to reflect the preferences of those entities with an economic interest in the loan.
- Amended event of default clause set out in Annex 6 to exclude "Permitted Debt Relief Discussions" from triggering an event of default.
- Inclusion of an exchange offer provision in syndicated sovereign loans to address how the participations in such loans of lenders who accept an exchange offer should be properly treated. Sovereign loans tend to be restructured by exchange offers (being offers from a sovereign to all of its lenders to exchange or convert all or part of its loan into some other obligation/security of the distressed company, with a view to providing some debt relief to the distressed company). The specimen clause set out in Annex 8 in essence extends the prepayment clause such that lenders' participations are treated as having been prepaid upon their exit by way of an exchange offer.
The specimen clauses annexed to the Guidance are voluntary and the market's reaction to these provisions remains to be seen. Based on the high levels of use of the equivalent payment term amendment provisions in the sovereign bond market, we expect that these will be commonly utilised in the sovereign loan market and are likely to lead to more efficient sovereign loan restructurings going forward with a collective benefit for the majority lenders. It should be highlighted that these provisions only apply on a future-looking basis and so will not have an effect on current sovereign loans, which are still likely to include unanimous lender consent for payment amendments.