The LMA published its long-awaited model provisions for sustainability-linked loans (SLLs) earlier this month. This was preceded by updates to both the SLL Principles and the Guidance on the SLL Principles (Guidance) by the LMA (in conjunction with the LSTA and APLMA) in February 2023.
The model provisions (available in the members' area of the LMA's website) are accompanied by detailed drafted notes and are designed as a starting point. They have been drafted by reference to the LMA’s model Leveraged Facilities Agreement (as that model contemplates a margin rachet) and can be adapted for use with other LMA model facility agreements.
The expectation is that the model provisions will be tailored to the specifics of each transaction and will be further refined over time as market practice evolves.
Some key points to note are:
- The model provisions contemplate key performance indicators (KPIs) and sustainability performance targets (SPTs) being in place on signing, rather than by a long-stop date.
- While the model provisions contemplate four KPIs, that is for illustrative purposes and is not a recommendation that four KPIs be agreed for each SLL.
- The LMA’s model definition of “SLL Reference Period” suggests that the period is a financial quarter, financial year or calendar year. In line with the February 2023 updates to the Guidance, the LMA’s drafting notes highlight that where there is a strong justification for a longer reference period on a particular deal, the parent/borrower should still report on its SPTs, and obtain verification of its performance against those SPTs, at least once per year.
- Market practice varies on how to approach restrictions on publicity, disclosure and reporting of SLLs after a ‘declassification event’ has occurred. While the model provisions do not require obligors to remove historic references to a loan being an SLL, the LMA notes that parties may wish to include provisions to that effect on a case-by-case basis.
- The LMA notes that market practice has not yet settled on whether ‘all lender’ or ‘majority lender’ consent is needed for amendments, waivers or consents in respect of SLL provisions so the drafting contemplates both options.
- The model provisions do not envisage the Sustainability Coordinator being a party to the facilities agreement. Instead, they envisage the Sustainability Coordinator being able to rely on the relevant provisions of the facilities agreement (such as the indemnity to the Sustainability Coordinator) via the English Third Party Rights Act. As there is no equivalent ‘third party rights’ legislation in Ireland, the Sustainability Coordinator would need to be party to an Irish law-governed SLL to take the benefit of those provisions.
- Sustainability-specific conditions precedent have not been included.
Our multi-disciplinary ESG Group has extensive experience in advising on SLLs and all other forms of sustainable finance. To discuss the above in more detail, please get in touch with Imelda Shiels or Grainne Hennessy.
(Jane Reddin and Eve Hackett also contributed to this update).