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DLA Piper

GLOBAL FINANCE UPDATE

2014

Martin S. Navias, Of Counsel

DLA Piper London

Today's Agenda

1. Update on FATCA

2. BASEL III and Increased Costs

3. Unitranche Financing

4. The new LMA screen rate and interpolation provisions

5. Recent changes to the LMA provisions and English case

law on agency/security trustee protections

6. Zero LIBOR floors

2014 54044424.1 2

FATCA update – A Reminder – what is

FATCA?

The US Foreign Account Tax Compliance Act

Has massive global/extra-territorial reach

Third party reporting regime imposed on non-US "Foreign

Financial Institutions" (FFIs)

Potential 30% withholding "tax"

2014 54044424.1 4

Withholding Payments

2014 54044424.1 5

ITALIAN BANK

US COMPANY

30% FATCA Withholding on

interest and principal $2 billion loan

Passthru Withholding Payment by FFI

Spanish Bank must either sign on FFI or cease doing business

with anyone who might sign up

2014 54044424.1 6

GERMAN BANK

Participating FFI SPANISH BANK

$3 billion deposit

FATCA withholding on

interest and principal

What are the critical dates? – US

source income & FFI registration

Originally we were looking at FATCA coming in in March 2012, with a

"grandfathering" cut-off date of 31 December 2012

"Grandfathering" means if you have a facility drawn or committed before that

date, FATCA doesn't apply – unless you later "materially amend" the facility

That original grandfathering cut-off date then changed to 31 December 2013

The IRS announced in July 2013 that some critical dates were being pushed

back 6 months (mainly because Regulations still not finalised)

19 August 2013 - US registration portal for FFIs opened with the US issuing

"global intermediary identification numbers" ("GIINS") for registered FFIs

once FATCA regulations finalised in 2014

25 April 2014 – FFIs have to have finalised their registrations to ensure their

place on the first registered FFIs list. Note that even if there is an

intergovernmental agreement (an "IGA") in place between their country and

the IRS, FFIs still have to register with the IRS

30 June 2014 - new grandfathering date for US source payments: loans,

derivatives, debt securities

2014 54044424.1 7

What are the critical dates? – "Pass-

thru"

1 January 2017 - withholding on US gross source

proceeds (sale proceeds of US Assets or the repayment of

principal by a US obligor) – note: no change from

previously announced date

1 January 2017 (at the earliest) - foreign passthru

withholding (which is still not defined) on non US source

payments by an FFI (no IGA) that has signed an IRS

Agreement – note: no change from previously

announced date

2014 54044424.1 8

IGA Models

Model 1 – FFIs report to local tax authorities which report to

IRS

Model 1A – reciprocal reporting between local tax authorities

and IRS

Model 1B – one way reporting

Model 2 – FFIs report direct to IRS

2014 54044424.1 9

Where are we on IGAs?

As at today's date there are:

7 Model 1 IGAs in place with the UK, Norway, Denmark,

Germany, Ireland, Mexico & Spain

Model 1B (BVI will enter)

2 Model 2 IGAs in place with Japan and Switzerland

We have heard that the US IRS is currently in talks with more

than 80 jurisdictions on potential IGAs which is another reason

why the timetable has been pushed back

Off-shore jurisdictions such as the Cayman Islands, BVI,

Jersey, Guernsey & the Isle of Man have also confirmed they

will be signing up

2014 54044424.1 10

LMA FATCA Riders

Rider 1 – borrower risk – no gross up but contractual recovery

Rider 1B – provides for borrower gross up if there is FATCA

withholding

Rider 2 – assumes grandfathering – lender risk but lender can

be taken out if grandfathering lost

Rider 3 – lender risk – no take-out provisions and no grossing

up if there is FATCA withholding

2014 54044424.1 11

BASEL III and Increased Costs

(1) Increased costs clause

19. INCREASED COSTS

19.1 Increased costs

a) Subject to Clause 19.3 (Exceptions) the Parent shall, within

three Business Days of a demand by the Agent, pay for the

account of a Finance Party the amount of any Increased

Costs incurred by that Finance Party or any of its Affiliates

as a result of (i) the introduction of or any change in (or in

the interpretation, administration or application of) any law

or regulation or (ii) compliance with any law or regulation

made after the date of this Agreement.

b) In this Agreement "Increased Costs" means:

i. a reduction in the rate of return from a Facility or on a

Finance Party's (or its Affiliate's) overall capital;

ii. an additional or increased cost; or

2014 54044424.1 13

(1) Increased costs clause

iii. a reduction of any amount due and payable under any

Finance Document,

which is incurred or suffered by a Finance Party or any of its

Affiliates to the extent that it is attributable to that Finance Party

having entered into its Commitment or an Ancillary Commitment or

funding or performing its obligations under any Finance Document

or Letter of Credit.

2014 54044424.1 14

(2) Exceptions

19.3 Exceptions

a) Clause 19.1 (Increased Costs) does not apply to the extent

any Increased Cost is:

i. attributable to a Tax deduction required by law to be made by

an Obligor;

ii. compensated for by Clause 18.3 (Tax indemnity) (or would

have been compensated for under Clause 18.3 (Tax

indemnity) but was not so compensated solely because any

of the exclusions in paragraph (b) of Clause 18.3 (Tax

indemnity) applied);

iii. [compensated for by the payment of the Mandatory Cost;] or

iv. attributable to the wilful breach by the relevant Finance Party

or its Affiliates of any law or regulation.

2014 54044424.1 15

(3) Amendment to Exceptions Clause (19.3)

"(v) attributable to the implementation or application of or compliance

with the "International Convergence of Capital Measurement and

Capital Standards, a Revised Framework" published by the

Basel Committee on Banking Supervision in June 2004 in the

form existing on the date of this Agreement (but excluding any

amendment arising out of Basel III) ("Basel III") or any other law

or regulation which implements Basel II (whether such

implementation, application or compliance is by a government,

regulator, Finance Party or any of its Affiliates)."

2014 54044424.1 16

(4) Amendment to Increased Costs Clause (19.1)

""Basel III" means:

(A) the agreements on capital requirements, a leverage ratio and

liquidity standards contained in "Basel III: A global regulatory

framework for more resilient banks and banking systems", "Basel

III: International framework for liquidity risk measurement,

standards and monitoring" and "Guidance for national authorities

operating the countercyclical buffer" published by the Basel

Committee on Banking Supervision in December 2010, each as

amended, supplemented or restated;

(B) the rules for global systemically important banks contained in

"Global systemically important banks: assessment methodology

and the additional loss absorbency requirement – Rules text"

published by the Basel Committee on Banking Supervision in

November 2011, as amended, supplemented or restated; and

(C) any further guidance or standards published by the Basel

Committee on Banking Supervision relating to "Basel III"."

2014 54044424.1 17

Unitranche

Facilities

1. Unitranche Providers in the UK

2014 54044424.1 19

2. Unitranche Characteristics

Combines senior and subordinated debt

One Lender no Visible Syndicate

Use of blended rate

Non amortising-bullet

Call protection

Bespoke covenants

2014 54044424.1 20

3. Borrower Advantages

Simplified Debt Structure

Potentially less onerous maintenance covenants

Higher leverage than an all Senior facility

Speed of execution – one credit process, one set of diligence

requests, one set of conditions precedent etc

Simplicity of Lender decision making during life of Unitranche

facility

Cheaper than a Senior/Subordinated Debt Structure

2014 54044424.1 21

4. Borrower Disadvantages

Borrower is not party to the "Agreement Among Lenders" so

has no knowledge of underlying Lenders in Unitranche

Therefore less of reliance on protections of relationship

banking

Expensive compared to traditional Senior Debt

Potential arguments between Super-Senior Lender and

Unitranche Lender

2014 54044424.1 22

5. Super Senior Revolving Credit

Facilities

Required to service the Borrower's Working Capital needs

Provided by Clearing Banks eg in the UK Lloyds, RBS,

Barclays, HSBC

Are they really "Super Senior"?:

Only "super" on enforcement

Otherwise ranks pari passu to the Unitranche loan (and in fact

behind Unitranche in some circumstances, eg prepayments)

2014 54044424.1 23

6. Super Senior RCF Key Terms

"Material Defaults" entitling Super Senior RCF lender to accelerate:

non payment in relation to RCF

Insolvency of an Obligor/ "Significant Company"

Breach of Clean Down

Breach of Negative Pledge

Breach of Financial Information Covenants (with extra grace periods)

Breach of Disposals Covenant (but may be limited so only in relation to a

"Significant Disposal")

Breach of Leverage Covenant (with extra headroom)/SS RCF Leverage Covenant

Breach of Guarantor Coverage test (with lower threshold)

Standstill Periods before SS RCF can accelerate

between 60-180 days if Unitranche has not taken action

may negotiate in a longstop acceleration right after 8-9 months even if Unitranche

has taken action

2014 54044424.1 24

Screen Rate and

Interpolation Provisions

LIBOR Wheatley Report recommendations

Government role

Integrity of system

BBA removed

Civil and criminal sanctions

New Code of Conduct

Discontinuation of screen rate

for various currencies & tenors

2014 54044424.1 26

Screen rates

2014 54044424.1 27

Libor Screen

Rates

terminated

Reduction in Maturities

SEK CHF Discontinued – 2 weeks

4,5,7,8,9,10,11 months

Continuing overnight/spot – next,

1 week, 1, 2, 3, 6 and 12 month(s)

NZD GBP

CAD EUR

AUD USD

DKK JPY

Discontinued maturity

2014 54044424.1 28

"Interpolated Screen Rate" means, in relation to LIBOR [or EURIBOR]

for any Loan, the rate [(rounded [to the same number of decimal places

as the two relevant Screen Rates])] which results from interpolating on a

linear basis between:

(a) the applicable Screen Rate for the longest period (for which that

Screen Rate is available) which is less than the Interest Period of

that Loan; and

(b) the applicable Screen Rate for the shortest period (for which that

Screen Rate is available) which exceeds the Interest Period of that

Loan,

each as of the Specified Time on the Quotation Day for the currency of

that Loan.

Discontinued currencies

2014 54044424.1 29

1. Domestic benchmarking

2. LIBOR plus F/X swap

3. Central Bank interest rates

New Agency

Provisions

Who wants to risk being an Agent or a

Security Trustee now?

In September 2012 the LMA substantially enhanced the

protective clauses of the LMA standard facility agreements and

the LMA intercreditor

2014 54044424.1 31

Miscellaneous agent protections –

Clause 4

Clause 4.1(Initial conditions precedent) – expanded to include

a standing authorisation to the Agent from the Lenders to give

notice of satisfaction of the conditions precedent unless the

Majority Lenders withdraw that authorisation in writing to the

Agent before the Agent issues the cp satisfaction notice

The Agent is not to be liable for any damages, costs or

losses as a result of giving that notification

2014 54044424.1 32

Changes to the Agency provisions –

Clause 32

New Clause 32.2 (Instructions) has been added which

replaces and strengthens old Clause 32.7 and covers:

on whose instructions the Agent is to act or refrain from doing

something (unless specified otherwise) ie:

all Lenders if the Finance Docs specify an all Lender decision;

the Super Majority Lenders if the Finance Docs so specify;

in all other cases, the Majority Lenders

Agent not liable if acts or refrains from acting in accordance with

those instructions

Agent can request instructions, or clarification of any

instructions, as to whether and how it should exercise/refrain

from exercising any right or power or discretion and needn't

act until it receives those instructions

2014 54044424.1 33


Responsibility for documentation

Now made clear none of Agent, Arranger or Issuing Bank is

liable for (not just responsible for) the adequacy, accuracy or

completeness of any information supplied in the Finance

Docs/Information Memorandum/Reports.

The Agent is expressly excluded from having any duty to

enquire whether any Default has occurred/as to the

performance, default or breach of any Party of its obligations

under the Finance Docs or whether any other event specified

in the Finance Docs has occurred

2014 54044424.1 34


Clause 32

Clause 32.10 (Exclusion of Liability) has been substantially

strengthened to restrict the Agent's liability (as well as that of

the Issuing Bank/an Ancillary Lender)

Extended to exclude damages/costs/losses/diminution in value

or any liability whatsoever as a result of taking or not taking

any action (other than, as before, directly caused by its gross

negligence or wilful misconduct)

Now also specifically excludes Agent's liability for exercising or

not exercising any right, power, authority or discretion under

Finance Documents or any associated documents entered into

2014 54044424.1 35


Clause 32

Wide drafting now excludes Agent's liability for, broadly, force

majeure events

Excludes liability for any damages, costs, diminution in value

etc arising as a result of:

anything not reasonably within its control

the general risks of investment in, or holding of assets in, any

jurisdiction

including, in each case, those arising as a result of nationalisation,

expropriation, other government actions; regulations, currency

restriction, devaluation of fluctuation; market conditions affecting the

execution or settlement of transactions or value of assets (including

a Disruption Event); breakdown, failure, malfunction of 3rd party

transport, telecommunications, computer services or systems;

natural disasters or acts of God, war, terrorism, insurrection,

revolution; strikes or industrial action

2014 54044424.1 36


Clause 32

Agent now has no obligation to check what extent any

transaction contemplated by the Facility Agreement might be

unlawful for any Lender

The Agent's liability is limited to the amount of actual loss

which has been finally judicially determined to have been

suffered but without reference to any special conditions or

circumstances known to the Agent at any time which increase

the amount of that loss.

Agent has no liability for loss of profits, goodwill, reputation,

business opportunity or anticipated saving or for special,

punitive, indirect or consequential damages, even if Agent

informed those possible

2014 54044424.1 37


Clause 32

Clause 32.12(d), which allows for an Agent to flex agency

terms to attract successor agents, and Clause 32.18, which

allows an Agent to charge for management time are no longer

set out as options in square brackets but are the

recommended LMA position now

That enhances the Agent's ability to step out of the agency

position or charge for additional costs so making the role more

attractive

2014 54044424.1 38

Increased protections for the Security

Agent in the LMA intercreditor

The Security Agent provisions have been amended to reflect

as far as possible the strengthened Facility Agent provisions in

the Leveraged Facilities Agreement so:

right to charge for management time

enhanced right to rely on certificates

express right to engage independent legal advice for itself in its

capacity as Security Trustee

enhanced and more explicit liability exclusions

2014 54044424.1 39

Agent & Security Trustee protections

– some recent English case law

Saltri III Ltd v MD Mezzanine S.A Sicar & Others [2012] EWHC

3025 (November 2012) – a Security Trustee case

Torre Asset Funding Ltd v Royal Bank of Scotland PLC [2013]

EWHC 2670 (Ch) – judgment 3 September 2013 – an Agent

Case

2014 54044424.1 40

Zero LIBOR Floors

LIBOR Definition

"LIBOR" means, in relation to any Loan:

(a) [the applicable Screen Rate;][the Base Reference Bank Rate]

(b) [(if no Screen Rate is available for the Interest Period of that Loan) the

Interpolated Screen Rate for that Loan;] [or

(c) if:

(i) no Screen Rate is available for the currency of that Loan; or

(ii) no Screen Rate is available for the Interest Period of that

Loan [and it is not possible to calculate an Interpolated

Screen Rate for that Loan],

the Base Reference bank Rate,]

as of [, in the case of paragraphs (a) and (c) above,] the Specified Time on the

Quotation Day for the currency of that Loan and for a period equal in length to

that Interest Period of that Loan [and, if that rate is less than zero, LIBOR

shall be deemed to be zero.]

2014 54044424.1 42

LIBOR positive – zero floor

Borrower must pay margin [4%] plus LIBOR

Borrower does not want total interest to exceed 5%

Pays hedge counterparty swap fixed rate [1%]

Facility agreement borrower required to pay margin + LIBOR

4% + [2.5%] = 6.5%

Hedge agreement floating rate is 2.5% fixed rate is 1% = net

payment to borrower of 1.5%

Borrower pays total of 5%

2014 54044424.1 43

LIBOR negative – zero floor




LIBOR drops below zero [to -1.5%] but is deemed zero


4% + 0 = 4%

Hedge agreement floating rate is -1.5% fixed rate is 1% net

payment to Hedge company of 2.5%

Borrower pays total of 6.5%

2014 54044424.1 44

LIBOR negative – no zero floor




LIBOR drops below zero [to -1.5%]


4% - 1.5% = 2.5%

Swap

Floating rate is -1.5%

Fixed rate is 1%

Net payment to hedge counterparty = 2.5%

Net payment = 5%

2014 54044424.1 45