secondary debt tradi ng documentation (par and …

For the avoidance of doubt, this guide and the documents referred to in this guide are in a non-binding, recommended form. Their intention is to be used as a starting point for negotiation only. Individual parties are free to depart from their terms and should always satisfy themselves of the regulatory implications of their use.

SECONDARY DEBT TRADING DOCUMENTATION (PAR AND DISTRESSED)

20 April 2016

USERS GUIDE

LMA Users Guide 20 April 2016

CONTENTS

Section Page

1. Important Notice ............................................................................................................ 2

2. Introduction .................................................................................................................... 6

3. Anatomy of a Trade ....................................................................................................... 9

4. Confidentiality Letter ................................................................................................... 15

5. Trade Confirmation ...................................................................................................... 19

6. Standard Terms and Conditions ................................................................................... 30

7. Assignment and Transfer Agreement .......................................................................... 76

8. Funded/Risk Participation Agreements ....................................................................... 82

9. Termination and Transfer Agreements ........................................................................ 97

10. Netting Agreements ................................................................................................... 104

11. Taxation ..................................................................................................................... 113

Schedule 1 Example Settlement Amount Calculations ......................................................... 122

LMA Users Guide 20 April 2016

DISCLAIMER

This Users Guide has been prepared for the Loan Market Association ("LMA"). Whilst every care has been taken in the preparation of this Users Guide, neither the LMA nor Clifford Chance LLP gives any representation or warranty as to the suitability of any of the documents in the Package for any particular transaction, or that the documents in the Package will cover every or any eventuality, or as to the accuracy or completeness of the contents of this Users Guide. Any person utilising the documents in the Package or entering into a transaction whether on the basis of the documents in the Package or otherwise must obtain and rely upon its own legal advice as to the suitability, validity and enforceability of the documents in the Package and the terms of such transaction and may not rely upon the contents of this Users Guide. Neither the LMA nor Clifford Chance LLP can be liable for any losses suffered by contracting on the terms of the documents in the Package or arising from the presence of any errors or omissions in this Users Guide.

LMA Users Guide 1 20 April 2016

1. IMPORTANT NOTICE

For the avoidance of doubt, this guide and the documents referred to in this guide are in a non-binding, recommended form. Their intention is to be used as a starting point for negotiation only. Individual parties are free to depart from their terms, and should always satisfy themselves of the regulatory implications of their use.

Users of the documentation referred to in this guide should satisfy themselves as to the taxation and accounting implications of its use.

In particular, but while stressing that these are not the only issues affecting sales of loan assets, the following should be noted:

1.1 Nature of Asset

The standard form documentation has been designed to be as flexible as possible. However, this should not be seen as implying that it is appropriate to use it in relation to all types of asset (for example, where the asset is subject to the laws of a jurisdiction other than England) and users should carry out their own diligence in each case.

1.2 Taxation

A number of taxation issues arise in the context of the buying and selling of interests in loans including, but not limited to:

• whether any amounts payable - by borrower, seller or buyer - are or become subject to a withholding liability on the payer;

• whether, in the case of a participation, there is any reason why the Grantor is not entitled to a tax deduction for its payments to the Participant; and

• whether any stamp duty and/or stamp duty reserve tax may be payable on the sale.

Users should note that Condition 29.1 (Tax) of the Standard Terms and Conditions states that the Buyer is responsible for making its own independent tax analysis of all Credit Documentation and each transaction. This is particularly relevant in the case of participations, since the standard form documentation does not provide for the gross-up of payments made by the Grantor (Seller) to the Participant (Buyer). It should also be noted that if, after a payment has been made without a withholding, HM Revenue & Customs ("HMRC") (or another jurisdiction's tax authority) determines that tax should have been withheld and retrospectively claims the amount of tax due from the Grantor, the standard form documentation does not provide for the Grantor to recover this from the Participant.

Users should therefore ensure that they take appropriate advice in relation to the circumstances of each transaction.

Certain tax issues which may be of particular interest to users and in respect of which there have been recent developments are dealt with in outline in Section 10


(Taxation). In addition, there are complex rules for Banks within the UK tax net which may require consideration when such a Bank holds, acquires or disposes of distressed debt (such rules relate to recognition and timing of any losses arising in respect of such debt and the tax and accounting treatment of such debt, or any assets other than debt instruments received in respect of such debt). An outline of some of the main considerations is set out in the HMRC Corporate Finance Manual at CFM 21670.

1.3 The Contracts (Rights of Third Parties) Act 1999 (the "Third Parties Act")

The Third Parties Act entitles persons who are not parties to a contract to enforce contractual terms where a contract expressly provides or the term confers a benefit on that party. The provisions of the Third Parties Act apply unless expressly excluded. An exclusion of the Third Parties Act has therefore been included in the standard form documentation except in the case of:

(a) the Standard Terms and Conditions which grant exclusions of liability to the LMA, the LMA Pricing Panel and the Determination Agent in connection with the Buy-in/Sell-out provisions; and

(b) the Confidentiality Undertakings which grant certain rights to third parties including the Borrower.

It should however be noted that the Third Parties Act supplements any rights that a third party would otherwise have under existing law.

1.4 Rome II

The governing law and jurisdiction clauses in the standard form documentation cover non-contractual obligations. This is to reflect that Regulation EC No 864/2007 ("Rome II") became effective in all EU member states (other than Denmark) from 11 January 2009. In broad summary, Rome II provides that, where it applies, parties pursuing a "commercial activity" can, in a "freely negotiated" agreement, agree the law which will govern any non-contractual dispute that may arise between them.

1.5 Financial Accounting Standards Board Statement ASC 860 Transfers and Servicing ("ASC 860")

ASC 860 is relevant to entities which report, or whose groups report, under US GAAP.

One of the implications of ASC 860 is that, in order to achieve off-balance sheet treatment for sales of loan assets, the buyer of the asset must not be subject to credit risk on the seller, even in the event of the seller's insolvency.

This is primarily a concern in the case of Participations, where the Euromarket standard is that the rights of the Participant (in this context the Buyer of the asset) are purely contractual against the Grantor of the participation (the Seller), and the Participant is exposed to credit risk on the Grantor.


This issue can prove to be somewhat intractable and a Grantor which is subject to US GAAP should take its own legal, tax and accounting advice if it wishes to obtain off balance sheet treatment under ASC 860 in respect of Participations.

1.6 International Accounting Standard 39 (Financial Instruments : Recognition and Measurement) ("IAS 39")1

Under IAS 39 a financial asset may be derecognised when:

(a) the contractual rights to the cash flows from the asset expire; or

(b) the transferor has transferred a financial asset and the transfer qualifies for derecognition.

The transfer of an asset for derecognition purposes occurs only if the transferor either:

(i) retains the contractual rights to receive the cash flows of the financial asset but assumes a contractual obligation to pay those cash flows to one or more recipients in an arrangement that meets the following three specified conditions:

(A) the transferor has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original asset;

(B) the transferor is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows; and

(C) the transferor has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay. In addition the transferor is not entitled to reinvest such cash flows, except for investments in cash or cash equivalents during the short settlement period from the collection date to the date of required remittance to the eventual recipients, and interest earned on such investments is passed to the eventual recipients; or

(ii) transfers the contractual rights to receive the cash flows of a financial asset.

The standard forms of LMA Funded Participation contain provisions that reflect these requirements. However advice should be taken from auditors as to whether or not on

1 IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's replacement of IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 Financial Instruments carries over (without amendments) from IAS 39 the requirements for derecognition of financial assets and financial liabilities. The version of IFRS 9 issued in 2014 supersedes all previous versions and is mandatorily effective for periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements).


any specific transaction, the participation agreement contains the requisite elements for derecognition for the purposes of IAS 39.

On the transfer of an asset, IAS 39 requires an assessment by the seller of whether it has transferred substantially all the risks and rewards of ownership of the transferred asset. If it has retained substantially all such risks and rewards it continues to recognise the transferred asset. If it has transferred all such risks and rewards it derecognises the transferred asset. If it has neither transferred nor retained substantially all the risks and rewards of ownership of the transferred asset an assessment of control is required. If it has retained control the seller continues to recognise the transferred asset to the extent of its continuing involvement in the transferred asset. If it has not retained control the seller derecognises the transferred asset.

IAS 39 provides guidance on how to apply the concepts of risks and rewards and of control.

1.7 The Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 ("Dodd-Frank")

Dodd-Frank establishes, amongst other things, a comprehensive new regulatory framework for "swaps" and "security-based swaps" in the US. The stated aim of Dodd-Frank is to reduce risk, increase transparency and promote market integrity within the US financial system.

The US regulators, in the release accompanying the final definition of "swap" under Dodd-Frank, state that, a loan participation will not be considered a swap or a security-based swap if the loan participation represents "a current or future direct or indirect ownership interest in the loan or commitment that is the subject of the loan participation". The regulatory release sets out the following four characteristics that must be present to distinguish a loan participation from a swap or security-based swap:

1. the Grantor must be a lender of record or a participant or sub-participant;

2. the participation must not exceed the principal amount of the loan and/or commitment held by the Grantor;

3. the entire purchase price for the loan participation must be paid in full at the outset; and

4. the participant must acquire all of the economic benefit and risk of the loan/commitment.

It is clear from the above that funded participations documented on LMA terms would be excluded from the Dodd-Frank definition of "swap" and "security-based swap" and would not therefore fall within the new Dodd-Frank regulatory regime in the US. However, in the case of risk participations the position is unclear and therefore advice should be sought on the effect of Dodd-Frank on risk participations involving US counterparties. For an explanation of the differences between a funded participation and a risk participation, see Section 8 (Funded/Risk Participation Agreements).


2. INTRODUCTION

The purpose of this guide is to assist users in their use of the package of standard form documentation (the "Package") for secondary debt trading which was distributed to users in January 2010.

The Package has been designed for use for documenting both par and distressed trades and replaces the separate set of documentation designed for par trades and the separate set of documentation designed for distressed trades that were previously published by the LMA.

2.1 The Package

The Package consists of the following:

• Confidentiality Letter (Seller)

• Confidentiality Letter (Purchaser)

• Confidentiality Letter (Seller's agent/broker)

• Confidentiality Letter (Purchaser's agent/broker)

• Master Confidentiality Undertaking

• Confidentiality Letter for Administration/Settlement Services Providers

• Trade Confirmation (Bank Debt)

• Trade Confirmation (Risk Participation)

• Trade Confirmation (Claims)

• Standard Terms and Conditions

• Termination Notice

• Early Termination Amount Statement

• Buy-in/Sell-out Notice

• Purchase Price Notice

• Price Dispute Notice

• Funded Participation (par/distressed)

• Funded Participation (Distressed/Claims)

• Risk Participation (par)

• Funded/Risk Participation (par)


• Risk to Funded Participation (par)

• Master Funded Participation (par/distressed)

• Master Risk Participation (par)

• Multilateral Termination and Transfer Agreement (Bank Debt/Novation)

• Bilateral Termination and Transfer Agreement (Bank Debt/Novation)

• Termination Agreement

• Assignment (Bank Debt)

• Assignment (Claims)

• Transfer Agreement

• Multilateral Netting Agreement (Bank Debt/Novation)

• Bilateral Netting Agreement (Bank Debt)

In addition to the Package, the LMA has produced this Users Guide for Secondary Debt Trading Documentation (Par and Distressed). The LMA has also produced a paper discussing the credit risk taken by the participant on the grantor in funded participations, a Pricing Panel Methodology, a checklist of issues to be considered prior to/immediately after a trade, a comparison of LMA and LSTA terms for debt trading, a note on the relevance of the use of so called Proceeds Letters in conjunction with the Package and a Guide to Secondary Loan Market Transactions.

On 30 June 2010 the Multilateral Netting Agreement (Bank Debt/Novation), the Bilateral Netting Agreement (Bank Debt), the Bilateral Termination and Transfer Agreement and the Termination Agreement became available on the LMA Website. At the same time the previously published Termination and Transfer Agreement (Novation) was amended to conform to those documents and was renamed as the Multilateral Termination and Transfer Agreement (Bank Debt/Novation).

On 24 March 2011, revised versions of the LMA forms of confidentiality letter, trade confirmation, standard terms and conditions, assignment agreement and participation agreement were published by the LMA. This followed a review of those documents by the LMA Secondary Documentation Committee. The changes made to those documents were largely to address clarificatory issues that had arisen on the documents since their publication in January 2010.

On 27 June 2011, the Funded Participation (Distressed/Claims) was published on the LMA Website together with revised forms of the Trade Confirmation (Claims), the Standard Terms and Conditions and the Users Guide to take account of the publication of the new form of funded participation for claims trades.

On 3 March 2014, a revised version of the Standard Terms and Conditions was published by the LMA. This followed a project to rewrite the Standard Terms and


Conditions in a plainer English style. The intention of the project was to express concepts more clearly thereby improving the accessibility of the Standard Terms and Conditions particularly for newcomers to the secondary loan market and to those for whom English is not the first language. Importantly, this did not result in any changes of substance to the Standard Terms and Conditions.

On 12 November 2014 a revised version of the Confidentiality Letter for Administration/Settlement Services Providers was published by the LMA to take into account changes made to the LMA's recommended forms of facility documentation.

On 17 February 2015, the Standard Terms and Conditions were republished by the LMA. The definitions of LIBOR and EURIBOR were updated to reflect the changes to the administrators of each of these rates. Mechanics for calculating a benchmark rate for trades which settle in Australian dollars, New Zealand dollars, Canadian dollars, Danish Krone and Swedish Krona (all of which are no longer LIBOR currencies) was also included. Rates for any other currencies are to be agreed by the parties.

On 16 December 2015, a further set of amendments to the Standard Terms and Conditions were published. The main changes made included clarifying the Non-Cash Distribution provisions and adding a new Condition to allow the parties to agree at the time of trade the allocation of responsibility for payment of any notional fees payable in connectin with the transaction. Other clarificatory changes were made to Condition 15.9 (Allocation of Interest and Recurring Fees/Non-Recurring Fees) following the Tael One Case (Tael One Partners Limited (Appellant) v Morgan Stanley & Co International PLC (Respondent [2015] UK SC 12).

2.2 Users Guide

The following sections of the guide are structured so as to follow a trade from its inception to its completion. This will therefore involve dealing in some detail with the confirmation (bank debt, risk participation or claims), the associated terms and conditions (Sections 5 and 6) and the Forms of Purchase (Sections 7 and 8). Examples of Settlement Amount calculations are given in Schedule 1 (Example Settlement Amount Calculations).

It is understood that forms of Confirmation may be formatted by individual users to suit their own particular requirements, systems and procedures and that this formatting may include the addition of non-standard additional terms that a user may require to be negotiated at the time of trade, the choice of typical options and the insertion of contact details into the form of confirmation. However, it is not expected that the Standard Terms and Conditions will themselves be amended. If there are any changes to be made these should be agreed at the time of the trade and subsequently set out in the Confirmation. Users must ensure that any proposed changes made to any of the standard forms are clearly highlighted to their counterparty before the trade is entered into, otherwise they will be bound by the default positions adopted in the standard (i.e. unamended) forms. It is envisaged that individual users may wish to produce checklists of changes that they may seek to the default positions adopted in the standard forms for use within their individual institutions.


It should be stressed that the Package has very much been drafted for use as a package, so that care should be taken if Users wish to use documents in isolation. It should be noted in particular that the various Forms of Purchase incorporate the Standard Terms and Conditions by reference and do not replicate defined terms which are themselves incorporated in the Standard Terms and Conditions. There is no plan to prepare "stand-alone" forms of any of the Participation Agreements, Transfer Agreement and Assignment Agreements.

The Package has been developed with use in the London market in mind. Users should therefore consider taking local advice before using the Package in other jurisdictions.

3. ANATOMY OF A TRADE

3.1 Time-line

Set out below is a suggested "time-line" for a straightforward secondary market trade showing the points at or by which the various documents in the Package would be entered into. To the extent that timings would vary between par and distressed trades, this is indicated in the time-line. Although (as indicated in the time-line) certain of these timings are prescribed by the Standard Terms and Conditions, the time-line is not definitive, as the requirement that a trade be settled "as soon as reasonably practicable" allows for a degree of flexibility. Users should note in particular, however, that to the extent that Delayed Settlement Compensation applies to a trade, it will accrue from T+10 (in the case of a par trade) or from T+20 (in the case of a distressed trade).

T – x KYC requirements satisfied Buyer and Seller exchange Confidentiality Letter (if necessary) Buyer commences due diligence on Credit Documentation (if required)

T Trade Date – oral agreement of the trade (or, as the case may be, written agreement of the trade (e.g. by email))

T+1 Seller sends: • Request to Agent for Borrower consent2

• Credit Documentation to Buyer (unless sent before Trade Date)3

T + 2 Responsible Party sends Confirmation to Other Party4 Agent sends consent request to Borrower

2 Users should note that the Standard Terms and Conditions do not envisage that the trade is conditional on such consent. See paragraph (f) of Section 6.2 (The Conditions) of this Users Guide.

3 Paragraph (b) of Condition 7.2 (Credit Documentation and other information) of the Standard Terms and Conditions envisages that, to the extent that it has not been provided prior to the Trade Date, provision of the Credit Documentation is made as promptly as practicable following the Trade Date and that such provision is subject to confidentiality requirements and any necessary consents.

4 Specified by paragraph (a) of Condition 4 (Confirmation) of the Standard Terms and Conditions.


T + 4 Other Party returns Confirmation to Responsible Party5. T + 5 Responsible Party sends Transaction Documentation to

Other Party.6 T + 7 Borrower's approval of trade7 T + 7 (Par Trade) T + 15 (Distressed Trade)

Both parties sign Transaction Documentation – deliver to the Agent.8

T + as soon as reasonably practicable

Settlement Date9

T + 10 (Par Trade) T + 20 (Distressed Trade)

If applicable, delayed settlement compensation starts to accrue.10

T + 60 (Par Trade only) Buy-in/Sell-out applies if one party fails to perform its Settlement Delivery Obligations.11

N.B.

T = Trade Date

T+/-(number) = Number of Business Days after/before Trade Date.

3.2 Stages of a trade

Assuming that a trade commences, for these purposes, when either a prospective Seller decides that it has an asset which it wants to sell or, conversely, a potential Buyer decides that it wishes to buy a particular loan asset, a trade breaks down into a number of relatively well-defined stages.

(a) Identify the counterparty: Very little need be said in this document about this, obviously fundamental, part of the process. However, restrictions on the type of person to whom loans can be transferred (by novation) or assigned are often found in the underlying credit documentation and any prospective Seller should establish the position in relation to the particular loan asset in question before identifying possible counterparties. This is, of course, less of an issue

5 Specified by paragraph (a) of Condition 4 (Confirmation) of the Standard Terms and Conditions. (Users should note that the requirement is that the Other Party return the confirmation two Business Days from delivery of the Confirmation by the Responsible Party).

6 Condition 8 (Transaction Documentation) of the Standard Terms and Conditions requires the Responsible Party to endeavour to deliver the Transaction Documentation within five Business Days of the Trade Date.

7 This suggested timing assumes that either (i) the Borrower reverts with its consent within 5 Business Days of receiving the request or (ii) if the Borrower has not responded to the request, that the Credit Agreement contains (as per the LMA recommended forms of Primary Document) a clause deeming the Borrower's consent to have been given 5 Business Days after the relevant request and that the Seller relies on such deemed consent.

8 Users should note that Condition 8 (Transaction Documentation) of the Standard Terms and Conditions requires the Transaction Documentation to be signed and delivered to the Agent as soon as reasonably practicable after the Trade Date.

9 Specified by Condition 10.1 (Settlement date) of the Standard Terms and Conditions. 10 Specified by Condition 11 (Delayed settlement) of the Standard Terms and Conditions. 11 Specified by Condition 23.3 (Buy-in/Sell-out) of the Standard Terms and Conditions.


if the 'sale' is to be by way of participation, although occasionally credit documentation does impose restrictions on participations as well as transfers and assignments.

(b) Confidentiality: Once potential counterparties have been identified the question of confidentiality arises. This will almost invariably be an issue as regards the provision of copies of credit documentation and other information received as a lender, but can in certain instances also extend to the very fact of being a lender. In all cases the provisions of the underlying Credit Documentation should be checked. Where English law applies and the Credit Documentation is silent on the subject of disclosure, the Borrower's consent must be obtained before disclosing any information relating to the Borrower, the Group or the financing received, including copies of the Credit Documentation.

The need to obtain consent where the Credit Documentation is silent on the subject of confidentiality applies whether or not a confidentiality agreement is entered into between the prospective Seller and Buyer.

More commonly, credit documentation will permit the disclosure of information, with or without the need to enter into a confidentiality agreement. Needless to say, if the terms of the Credit Documentation require the recipient of confidential information to enter into a confidentiality agreement then this must be complied with and, if a particular form of confidentiality undertaking is specified, this should be followed. Users should note that it will only be in situations where the Credit Documentation either leaves the form of confidentiality agreement up to the lender in question or stipulates that a LMA standard form of confidentiality agreement may be used that the LMA forms of confidentiality letter described in Section 4 (Confidentiality Letter) should be employed.

As regards the position of a Participant vis à vis the passing of information to third parties, the prudent view is that, in the absence of the Borrower's agreement to the contrary, a Participant must regard any information relating to the Borrower received from the Grantor of the Participation as confidential. Grantors of Participations should ensure that the confidentiality provisions agreed with the Participant are not at odds with any duties of confidentiality owed to the underlying Borrower. The LMA forms of Confidentiality Letter require the Participant to keep confidential all information so received to the extent required by the Credit Documentation.

The Standard Terms and Conditions provide that (subject to confidentiality constraints in the Credit Documentation, by operation of law or under regulation) Buyers may disclose the terms of transactions to potential purchasers provided that they do not disclose any of the pricing arrangements or the identity of the counterparty. However Users should be careful not to breach any duty of confidentiality or other confidentiality obligations they may owe to the Borrower.

(c) Due Diligence: A prospective Buyer is expected to have carried out all necessary due diligence prior to the Trade Date. The Confirmation and


Standard Terms and Conditions do not permit the Buyer's legal due diligence to be a condition precedent to the closing of a trade. Due diligence by a prospective Buyer cannot, of course, start until any required confidentiality agreement has been entered into; once this has been done the Seller can provide the Buyer with the necessary information, including copies of the underlying credit documentation and financial information.

If the Confirmation provides for the credit documentation to be provided, then to the extent that it has not already done so prior to the Trade Date, the Buyer is put under a duty to sign up to a confidentiality agreement (if requested by the Seller) and the Seller is then obliged to provide, if it has not already done so prior to the Trade Date, a complete copy of the credit documentation (that the Agent has made generally available to all the Lenders) as promptly as practicable and a copy of all notices and other documents received after the Trade Date as promptly as practicable following receipt (see Condition 7 (Due Diligence) of the Standard Terms and Conditions).

(d) The Trade: Once the Seller and the Buyer are in a position to carry out a trade, this will normally be done over the phone. Whether a binding contract comes into being at that point will depend on the intention of the parties. (Recent case-law has indicated that even if the parties are silent on whether or not a binding contract has come into being then it may be held that there had.)12 If, however, the parties agree to carry out a trade on LMA terms then, unless they explicitly agree that the Trade is "subject to contract", there should be a binding contract at the time of the oral trade (see Condition 2 (Contract Point) of the Standard Terms and Conditions). Alternatively, parties could agree to the trade being subject to a satisfactory form of Confirmation. It is also recognised that trades may not always be carried out orally. If, for example, a trade is not carried out over the telephone but in writing (by e-mail for example) those written terms will constitute a binding contract pursuant to Condition 2 (Contract Point) of the Standard Terms and Conditions.

(e) The Confirmation: It is envisaged that at the time of the oral (or, as the case may be, written (e.g. by e-mail)) trade the Seller and the Buyer will agree which of them is to prepare the Confirmation. The person charged with that responsibility is referred to in the Standard Terms and Conditions as the "Responsible Party". The Confirmation is to be completed by the Responsible Party and sent to the Other Party within two Business Days of the Trade Date. The Other Party is required to either sign and return the Confirmation to the Responsible Party or to raise any disagreement with any of the terms of such Confirmation, in each case, no later than the end of the second Business Day after delivery of the Confirmation. See Condition 4 (Confirmation).

The form of Confirmation is dealt with in Section 5 (Trade Confirmation); the Standard Terms and Conditions to which trades are subject are discussed in Section 6 (Standard Terms and Conditions).

(f) Third party consents: Consents of third parties (most commonly the Borrower) may be required. If this is the case, the Seller should apply (either directly or

12 Bear Stearns Bank Plc v Forum Global Equity Ltd [2007] EWHC 1576 (Comm).


via the Agent, depending on the terms of the Credit Documentation) for the consent on or as soon as practicable after the Trade Date. (The LMA's suggested time-line envisages that the Seller should apply to the Agent on the first Business Day after the Trade Date with the Agent forwarding that request to the Borrower on the second Business Day after the Trade Date and Condition 6 (Mandatory Settlement Obligations) of the Standard Terms and Conditions requires the Seller to use its reasonable endeavours to obtain any required consents in connection with the transaction). The refusal of any necessary consent will not lead to the transaction being terminated without any liability on either party. Instead, the Seller and the Buyer will be required to settle the proposed transaction by a funded participation or, if the Seller and the Buyer have opted not to be required to settle the proposed transaction by funded participation (by electing "Legal Transfer only" in the Confirmation), by some mutually acceptable alternative means which provides both Seller and Buyer with the economic equivalent of the agreed-upon trade (see Condition 6 (Mandatory Settlement Obligations) of the Standard Terms and Conditions).

(g) Transaction Documentation: The parties choose who is to prepare the documentation required to complete the transaction. Condition 8 (Transaction Documentation) of the Standard Terms and Conditions stipulates that this party (the "Responsible Party") shall endeavour to send the Transaction Documentation to the other (the "Other Party") within five Business Days after the Trade Date, and that the parties should execute the documentation as soon as reasonably practicable after the Trade Date. (The LMA's suggested timeline envisages this being completed within 7 Business Days of the Trade Date on a Par Trade and within 15 Business Days of the Trade Date on a Distressed Trade.) Where a consent is still awaited, or some other condition remains to be satisfied, the execution will need to be conditional on that condition being satisfied. The timing is, however, designed to allow copies of the Transaction Documentation to be provided to the agent bank, if required, giving sufficient time for the trade to complete on a basis of ten Business Days from the Trade Date (in the case of a Par Trade) or twenty Business Days from the Trade Date (in the case of a Distressed Trade). Some credits may impose their own timing requirements for delivery of transfer documentation. The parties should check the Credit Documentation for such requirements and in such scenarios the parties should ensure that the Transaction Documentation is executed and delivered to the Agent Bank taking account of the time frame provided by the Credit Documentation. It is contemplated that, in addition to the forms of Transaction Documentation, there will also be a pricing letter produced in relation to each trade.

The different forms of Transaction Documentation (or Forms of Purchase) required to implement the trade are discussed in Section 7 (Assignment and Transfer Agreement) and Section 8 (Funded/Risk Participation Agreements).

(h) Settlement Date: On the Settlement Date the trade is legally completed. The asset is transferred to the Buyer and, unless the trade is settling by way of risk participation, the Settlement Amount is required to be paid. Depending on the circumstances and the nature of the asset, the Settlement Amount may be required to be paid by the Buyer to the Seller or by the Seller to the Buyer or,


in some cases, two way payments may be required. The Settlement Amount is adjusted to take account of any Delayed Settlement Compensation.

(i) Post-Settlement Date: Any notices which need to be given (e.g. to the Borrower where the transaction is completed by a notified assignment) or other matters which need to be carried out (e.g. registration of the Buyer as a secured party in certain jurisdictions) should be done as soon as possible after the Settlement Date.


4. CONFIDENTIALITY LETTER

4.1 Confidentiality Generally

Users should read paragraph (b) of Section 3.2 (Stages of a trade) which sets out some of the wider issues related to confidentiality in this context.

4.2 Standard Form Confidentiality Letters

Six forms of confidentiality letter are available. The first is designed to be sent by the Seller to the Purchaser, with the Purchaser returning a signed copy to the Seller. The second is designed to be sent by the Purchaser to the Seller, with the Seller returning a signed copy to the Purchaser. The latter mirrors the terms of the former. In addition, there are two forms designed to be sent by the agent or broker of either the Seller or the Purchaser and which may be addressed to the Seller or Purchaser, as the case may be, or their agent or broker. There is also a master confidentiality undertaking and a confidentiality undertaking for administration/settlement services providers where either the Purchaser or Seller is using an administration and/or settlement service in relation to a transaction and therefore needs to disclose confidential information to it. Some points to note on the Seller and Purchaser forms of confidentiality letter are:

(a) Brief details of the underlying credit agreement should be inserted on the front page of the letter.

(b) The prospective purchaser is permitted to use any information provided only for the purpose of considering and evaluating whether to enter into a trade (or, where the addressee is acting as broker or agent, for the purpose of passing it on to the real purchaser). Once the trade is completed, the permitted purpose restriction ceases to apply because the purchaser may need to use the information it receives for other purposes such as internal audit or regulatory purposes.

(c) The obligations imposed on the prospective purchaser fall away if the trade results in the prospective purchaser becoming a party to the Agreement as a lender of record (the rationale being that the confidentiality provisions of the underlying credit documentation will then apply). In the case of trades that do not result in the prospective purchaser becoming a party to the Agreement as a lender of record (such as a participation), the obligations imposed on the prospective purchaser continue until 12 months after the date on which all of the purchaser's rights and obligations contained in the documentation entered into to implement the trade have terminated (the rationale being that the underlying sale agreement is unlikely to contain confidentiality obligations that directly benefit the Borrower). There is a longstop date of twelve months from the date of final receipt by the prospective purchaser (in whatever manner) of any confidential information in any other case, meaning cases where the trade is not completed (paragraph 5).

(d) If the prospective purchaser does not complete the transaction, the Seller can request that the confidential information be returned or destroyed and that any copies of it be destroyed (save to the extent that the recipient is required to retain any of the information) (paragraph 4).


(e) The recipient of the confidential information is permitted to disclose it to assignees, transferees, sub-participants or those with whom they enter into any other transaction under which payments are or may be made by reference to the Credit Agreement or any Obligor if a confidentiality letter (again in the LMA standard form) is received from that third party. Any disclosure of information within the potential purchaser's organisation, or to its advisers, is only permitted if the recipient is informed in writing of its confidential nature and that some or all of it may be price-sensitive, although no such notification is required where the recipient is either subject to professional obligations to maintain the confidentiality of the information or is otherwise bound by confidentiality requirements. It should also be noted that disclosure to a third party (whether to the potential purchaser where the recipient of the information is the potential purchaser's broker or agent or to a potential assignee, transferee or participant of the potential purchaser) is subject to the requirements of the Credit Documentation which may prohibit such disclosure. In addition, the recipient of the confidential information is permitted to disclose it to the same persons and on the same terms as apply to a lender under the Credit Agreement as if those terms were set out in the letter. This ensures maximum flexibility by allowing disclosure on the equivalent terms to those in the applicable Credit Agreement. In all cases, the terms of the Credit Documentation should always be checked at or prior to any disclosure of confidential information. The confidential information can also be disclosed where required by law or regulation or by the rules of any relevant stock exchange. (paragraph 2).

(f) The signed confidentiality letter and the acknowledgement can be exchanged in counterpart; a hard copy original need only be sent if requested by the other party (see Condition 34 (Counterparts) of the Standard Terms and Conditions).

4.3 The Master Confidentiality Undertaking

The master confidentiality undertaking mirrors the standard form confidentiality letter except that it has been drafted to allow two institutions to sign one master confidentiality undertaking. The master confidentiality undertaking then governs all confidentiality issues which relate to trades carried out between those two institutions (in their respective capacities as both Seller and Purchaser) so long as the underlying loan asset is documented under the LMA Primary Documents. If the underlying Credit Agreement is not in the form of the LMA Primary Document, the terms of the document will need to be reviewed before a master confidentiality undertaking is relied upon. The purpose of the master confidentiality undertaking is to obviate the need for separate confidentiality letters each time two institutions trade. It is however important to note that whilst the master confidentiality undertaking may reduce the amount of paperwork to be signed on any particular trade, it does not obviate the need for the parties to review the disclosure and confidentiality provisions of the underlying Credit Documentation (even if it appears to be in the form of the LMA Primary Document). This is to ensure that, if a form of confidentiality undertaking is required, the use of the master confidentiality undertaking will comply with the terms of the Credit Documentation.


It is also worthy of note that, unlike the LMA forms of Confidentiality Letter, the master confidentiality undertaking does not provide for brokers and agents. It assumes that the signatories will always be acting as principals.

4.4 Which Form to Use?

Users are again reminded that the LMA Standard Forms of Confidentiality Letter will not be appropriate in all circumstances, in particular where another form of confidentiality undertaking is stipulated in the Credit Documentation. In all cases the provisions of the Credit Documentation prevail.

4.5 Master Confidentiality Letter for Administration/Settlement Services Providers

The master confidentiality undertaking for use with administration/settlement services providers mirrors, to the extent relevant, the standard form confidentiality letter.

It is intended to be used by those who have an interest in a credit agreement or any facility thereunder or who wish to acquire some form of interest in a credit agreement or any facility thereunder and wish to appoint a settlement and/or administration services provider in respect of a transaction in relation to such credit agreement or facility thereunder. This would, for example, apply in the case of the seller or the purchaser of a loan who appoints a web based loan settlement services provider or an agent who appoints an administration services provider to take over some of the agent's functions such as in relation to transfer certificates or in relation to primary syndication. The master confidentiality undertaking for use with administration/settlement services providers has been drafted as a master agreement to allow the service provider and the client to sign only one confidentiality undertaking which then governs all transactions for which the service provider provides its services.

The forms of LMA Facility Agreement permit disclosure of confidential information to administration/settlement services providers. In addition, the LMA has published a rider which can be used to amend a credit agreement to include such a permission.

The master confidentiality undertaking for use with administration/settlement services providers applies similar confidentiality restrictions to lenders' funding rates and reference bank quotations. This is because the forms of LMA Facility Agreement restrict the agent's disclosure of these rates. (They permit disclosure to administration and settlement services providers subject to them entering into the master confidentiality agreement for use with administration/settlement services providers.)

Some points to note on the master confidentiality undertaking for use with administration/settlement services providers are as follows:

(a) the Service Provider may only use the information to carry out its administration and/or settlement services and not for any other purpose and, in the case of lenders' funding rates and reference bank quotations, only to the extent that the agent itself is permitted to use the information;


(b) the Client can request the return or destruction of all confidential information and require that all copies are destroyed (save to the extent that the recipient is required to retain any of the information); and

(c) the confidentiality obligations imposed on the Service Provider last for so long as the information remains confidential or, in the case of lenders' funding rates and reference bank quotations, indefinitely.

4.6 Who gets the Benefit?

Due to the potentially large numbers of Confidentiality Letters/Undertakings which are likely to be entered into in relation to any particular Credit Agreement, and the consequential administrative burden and likely delay which would arise if Borrowers were required to sign each letter, Borrowers are not parties to these letters/undertakings. Under the current state of the law of confidentiality, which is continuing to develop, a Borrower may be able to obtain an injunction prohibiting any unauthorised disclosure of confidential information and paragraphs 6(b) and 9 of the standard forms (which provide that damages may not be an adequate remedy for breach of the agreement and that Borrowers are intended to take the benefit of the undertakings given by the prospective Buyer or Seller as the case may be) are designed to assist Borrowers in this regard. The Third Parties Act assists Borrowers in this regard. Paragraph 10 of the Confidentiality Letters and Master Confidentiality Undertaking and paragraph 9 of the Confidentiality Letter for Administration/Settlement Services Providers grants Borrowers and each member of the Group rights to enforce the undertakings given in such Confidentiality Letters and as such they will be entitled to the same rights to obtain damages for breach of undertaking, an injunction prohibiting any unauthorised disclosure of confidential information or an order for specific performance of the undertakings as they would have had if they had been a party to such Confidentiality Letter. Paragraph 9 of the master confidentiality undertaking for use with administration/settlement services providers grants similar rights to the providers of lenders' funding rates and reference bank quotations.


5. TRADE CONFIRMATION

5.1 Introduction

The Confirmation is designed to record the terms of the actual trade which takes place on oral (or, as the case may be, written (e.g. by email)) agreement as to its terms. It is therefore expected that users will agree, at the time of such trade, all of those matters which are required to be decided in order to complete the Confirmation. Having the form of Confirmation (together with any checklist of items to be considered and, if necessary agreed with the other party during the course of the trade) to hand (or on screen) and filling in the form of Confirmation during the course of such trade would therefore appear to be the safest option. The Confirmation is intended solely to evidence the terms that were agreed at the time of the trade and is not intended to be subject to negotiation in its own right.

This section should be read in conjunction with Section 6 (Standard Terms and Conditions), which explains the Standard Terms and Conditions to which the trade is subject.

5.2 Choosing which Confirmation to use

The Package includes three types of Confirmation: Bank Debt, Risk Participation and Claims. Users are recommended to use the Bank Debt Confirmation for all trades unless either the asset is being traded by way of risk participation (in which case the Risk Participation Confirmation should be used) or unless the asset being traded represents an unsecured claim of the Seller against a debtor which has entered into a formal insolvency proceeding (e.g. administration or liquidation (sometimes referred to as winding-up)), where it may be more appropriate to use the Claims Confirmation. In this latter scenario, users are recommended to take legal advice as to which form of Confirmation is most appropriate in the specific circumstances, particularly where the relevant claim has not been admitted in the relevant insolvency proceedings at the time of trade. The Bank Debt, Risk Participation and Claims Confirmations contain many of the same provisions and are governed by the same Standard Terms and Conditions.

5.3 Completing the Confirmation

As noted above, the Confirmation is intended to evidence the terms of the actual trade and in most circumstances the standard form of Confirmation should include all the issues which need to be addressed in relation to a trade. However, this will not always be the case (particularly where the parties agree, at the time of the trade, to incorporate additional terms or to disapply or alter any of the Standard Terms and Conditions), and, to the extent that terms agreed at the time of the trade are not addressed in the standard form of Confirmation, additional terms can be included in the "Other Terms of Trade" paragraph in each of the three forms of Confirmation. It is understood that users may produce their own formatted Confirmation, which would include their own preferred standard options and any additional terms and conditions which they would seek to agree with their counterparty at the time of trade (as explained, the Standard Terms and Conditions should not be amended on their face, but only in the Confirmation).


5.4 Confirmation (Bank Debt)

Looking at the Confirmation paragraph by paragraph.

(a) Introductory paragraph: This provides that the transaction is subject to the standard LMA Terms and Conditions as in effect on the Trade Date, and that these are incorporated by reference. Although there is no need to attach the Standard Terms and Conditions to the form of Confirmation, users should send copies to counterparties who have not seen them.

(b) Type of Transaction (paragraph 1): The parties are required to agree at the time of trade whether the transaction is a Par Trade or a Distressed Trade, and that agreement should be specified here. Although in the main a transaction will be subject to the same terms under the Standard Terms and Conditions whether it is a Par Trade or a Distressed Trade, there are areas in which the terms applying to it will differ depending on whether it is a Par Trade or a Distressed Trade. The key terms which apply uniquely to each type of transaction are set out below:

(i) Par Trade

(A) Delayed Settlement Compensation will apply to the trade and will accrue from ten Business Days after the Trade Date unless expressly excluded.

(B) To the extent that the parties so agree, breakfunding compensation may apply to the trade. (Users should note that in the absence of such express agreement the default position adopted in the Standard Terms and Conditions is that breakfunding compensation will not apply to the trade.)

(C) The Seller will give a representation to the effect that no decision has been taken by the Lenders to accelerate or enforce under the Credit Documentation and that no principal or interest is due and unpaid under the Credit Documentation.

(D) The Buy-in / Sell-out provisions (see paragraph (v) of Section 6.2 (The Conditions)) will apply to the trade unless expressly excluded.

(E) To the extent that the trade settles by way of funded participation the Buyer will receive only very limited voting rights under the funded participation. See Section 8.3 (Funded Participation).

(ii) Distressed Trade

(A) Delayed Settlement Compensation will apply to the trade and will accrue from twenty Business Days after the Trade Date unless expressly excluded.

(B) The Seller will give additional representations covering:


(1) Provision of Credit Documentation;

(2) That it is not "connected" with any Obligor for the purposes of the Insolvency Act 1986;

(3) Absence of conduct resulting in the Buyer being treated less favourably and availability of set-off;

(4) No notice of claim impairment or invalidity in respect of Collateral or Credit Documentation;

(5) No obligation to extend credit other than Purchased Obligations and no other liabilities or obligations; and

(6) No Governmental Authority proceedings.

(C) To the extent that the trade settles by way of funded participation, the parties can opt whether or not to give voting rights under the funded participation to the Buyer. (See Section 8.3 (Funded Participation)).

Additionally, various of the timings set out in the recommended time-line (see Section 3.1 (Time-line)) vary depending on whether the transaction is a Par Trade or a Distressed Trade.

(c) Credit Agreement Details (paragraph 2): Sufficient detail should be included to identify the particular Credit Agreement uniquely; care should be taken where a Borrower has outstanding more than one Credit Agreement. If the Credit Agreement has been allocated an ISIN number, this should be used in the Confirmation to identify that Credit Agreement.

(d) Trade Date (paragraph 3): This will usually be the date of the oral (or, as the case may be, written (e.g. by e-mail)) trade. Its relevance is that:

(i) timings for various matters to do with a trade (e.g. preparation and despatch of the Transaction Documentation) run from this date;

(ii) this is the date upon which the Buyer goes "on risk" in relation to the asset being traded;

(iii) where the asset is being "traded flat", this is the date from which the Buyer will be entitled to all accrued and unpaid interest.

(e) Settlement Date (paragraph 4): The Confirmation and the Standard Terms and Conditions prescribe that the Settlement Date will be "as soon as reasonably practicable". Users should note, however, that, unless the Agreed Terms specify otherwise, Delayed Settlement Compensation will apply to the transaction and will begin to accrue 10 Business Days from the Trade Date (in the case of a Par Trade) or 20 Business Days from the Trade Date (in the case of a Distressed Trade).


(f) Seller (paragraph 5): The Seller's name should be inserted. Where the person contracting to sell the asset is acting as an agent, this should be disclosed.

(g) Buyer (paragraph 6): The Buyer's name should be inserted and, as for the description of the Seller, where the person contracting to buy the asset is acting as agent, this should be disclosed.

(h) Details of Traded Portion (paragraph 7):

(i) name of Tranche/Facility: this should be the description given to the individual tranche or facility within the Credit Agreement, (for example, "Junior Term Facility", "Resettable Facility", "Working Capital Facility"). If the trade involves more than one tranche or facility within the Credit Agreement they should all be specified. If the facility has been allocated an ISIN number, this should be included as a means of identifying the relevant facility;

(ii) nature: this should be completed as "Revolving", "Term", "Acceptances", "Guarantee", "Letter of Credit" or other description as appropriate;

(iii) Traded Portion of Commitment: the amount, in the base currency of the relevant tranche or facility, to be traded should be given.

(i) Pricing (paragraph 8):

(i) Name of Tranche/Facility: this should follow the description given in paragraph 7.

(ii) Purchase Rate: this is a percentage of the nominal principal amount of the relevant credit;

(iii) Upfront Fee: if any upfront fee applies to the transaction this should be stated (preferably as an absolute amount). Provision is made for the parties to specify the amount of the fee, whether it is to be payable on the Settlement Date or some alternative date and whether it is to be payable by the Buyer or the Seller;

(j) Accrued Interest (other than PIK Interest) (paragraph 9): This links into Condition 15 (Interest Payments and Fees) of the Standard Terms and Conditions.

(i) If "Settled Without Accrued Interest" is chosen, then, unless the terms of the Credit Agreement provide for the Agent to distribute interest on a pro rata basis between the Seller and the Buyer, the Buyer will, upon receipt of any Interest or Recurring Fees (other than PIK Interest) accrued to the Settlement Date, pay an amount equal to the amount of such Interest or Recurring Fees to the Seller. If the Buyer makes any payment of such amounts to the Seller but such amount received is clawed back by the Agent the Buyer is entitled to reclaim such amounts from the Seller.


However, the interest treatment will automatically be altered to a "Trades Flat" basis such that these amounts will instead be for the account of the Buyer if they are paid by the relevant Obligor after:

(A) a payment default in respect of those amounts; or

(B) any payment default generally under the Credit Documentation (regardless of any remedy or waiver).

Where an asset is non-performing as regards payment obligations, the Buyer is thereby relieved from having to account to the Seller for its portion of Interest and Recurring Fees for the Seller's period of ownership if and when paid.

(ii) "If Paid on Settlement Date" is chosen, then unless the terms of the Credit Agreement provide for the Agent to distribute interest on a pro rata basis between the Seller and the Buyer, the Buyer pays the Seller on the Settlement Date an amount equal to Interest or Recurring Fees (other than PIK Interest) accrued to the Settlement Date. It should be noted that the Buyer has no recourse to the Seller if the Buyer does not receive the Interest or Recurring Fees from the Borrower in due course. This option is similar to that applying in the bond markets.

(iii) If "Paid on Settlement Date and Discounted from next payment date" is chosen, then the same treatment as described in paragraph (ii) above applies but Interest or Recurring Fees accrued up to the Settlement Date which are not payable under the Credit Documentation until the next payment date are discounted from that payment date back to the Settlement Date.

(iv) If "Trades Flat" is chosen then all accrued and unpaid Interest, Recurring Fees or other fees paid by any Obligor on or after the Trade Date will be for the account of the Buyer for no additional consideration.

(k) Form of Purchase (paragraph 10):

(i) Legal Transfer: This should be selected if the Seller and Buyer have agreed that the trade will settle by way of Legal Transfer. It envisages that the parties will settle the transaction by using the relevant Credit Agreement's prescribed form of transfer (e.g. a transfer certificate or assignment agreement) but that if the Credit Agreement does not provide a form of transfer that the parties will transfer the asset by using either the LMA's standard form of Transfer Agreement or the LMA's standard form of Assignment Agreement. If Legal Transfer is selected and as at the proposed Settlement Date for the relevant trade, a required third party consent (or any transaction specific condition) remains outstanding the parties agree that the trade will be settled by funded participation and if settlement cannot be effected by funded participation or the parties are unable to agree the form of funded participation, it will settle by some mutually acceptable alternative


means which provides the Seller and the Buyer with the economic equivalent of the agreed-upon trade. See paragraph (f) of Section 6.2 (The Conditions).

(ii) Legal Transfer only: This should be selected in addition to selecting "Legal Transfer" if the Seller and Buyer have agreed that the trade will be settled by way of Legal Transfer as for paragraph (i) above but have agreed that they do not wish to settle the transaction by a funded participation if, as at the proposed Settlement Date for the relevant trade, a required third party consent (or any transaction specific condition) remains outstanding. If "Legal Transfer" and "Legal Transfer only" are selected and such a consent or condition is outstanding as at the proposed Settlement Date, the parties will be required to settle the transaction by some mutually acceptable alternative means which provides the Seller and the Buyer with the economic equivalent of the agreed-upon trade. See paragraph (f) of Section 6.2 (The Conditions).

(iii) Funded Participation: This should be selected if the asset is to be traded by way of funded participation and envisages that the parties will settle the transaction by using the LMA standard form of funded participation. If this form of purchase is selected and as at the proposed Settlement Date for the relevant trade a required third party consent (or any transaction specific condition) remains outstanding, the parties agree that the trade will be settled by some mutually acceptable alternative means which provides the Seller and the Buyer with the economic equivalent of the agreed-upon trade. See paragraph (f) of Section 6.2 (The Conditions).

In the case of a transaction settling by Funded Participation (including when the parties agree that "Legal Transfer" applies such that the trade will settle by funded participation if a legal transfer cannot be effected because a required third party consent (or any transaction specific condition) cannot be obtained), the Confirmation requires the parties to provide whether the form of Funded Participation will specify collateral for undrawn commitment or grant information rights. If the transaction is a Distressed Trade and is settling by Funded Participation the parties are also required to provide whether the form of Funded Participation will grant voting rights under the participation to the Participant from the Settlement Date.

(l) Transaction Documentation (paragraph 11): The options are for this to be prepared by the Seller or the Buyer. In either event, the responsible party must endeavour to prepare and deliver the transaction documentation to the other party within five business days after the Trade Date (see Condition 8 (Transaction Documentation) of the Standard Terms and Conditions).

(m) Credit Documentation to be provided by Seller (paragraph 12): Two alternatives (yes or no) are given. See paragraph (c) of Section 3.2 (Stages of a trade). If the Seller is to provide the Buyer with the Credit Documentation and the transaction is a Distressed Trade, the Seller will give a representation


to the Buyer as to the completeness of the Credit Documentation provided. (See paragraph (u)(ii)(F)(1) of Section 6.2 (The Conditions)).

(n) Process Agents (paragraph 14): A process agent will not be required for a party which is incorporated in the UK. Where there is a non-UK party to the transaction, whether a process agent will be required will depend on the circumstances, but where service on that party within the UK is not possible the potential implications of not appointing a process agent for that party are that permission may need to be obtained from the English Courts to serve process on that party outside the UK and that any service of process made outside the UK may, in practical terms, involve significant delay. Accordingly, best practice would suggest that, in all cases where a counterparty is not UK-incorporated, an English incorporated company (either an associate of the foreign company or some third party company) should be appointed as process agent, or some other means found to allow service to be effected in the UK.

(o) Other Terms of Trade (paragraph 15): If, at the time of the trade, additional terms are agreed or the parties wish to disapply or alter any of the Standard Terms and Conditions, those additional terms or disapplications / alterations should be specified here. Areas included as explicit options are as follows:

(i) Transaction to incorporate additional representations: The Standard Terms and Conditions include a number of representations (see paragraph (u) of Section 6.2 (The Conditions)). If, however, the parties agree at the time of trade that the transaction is to incorporate additional representations, this box should be ticked and those other representations should be annexed to the Confirmation.

(ii) Buy-in/sell-out damages do not apply: If the transaction is a Par Trade the Buy-in / Sell-out provisions (see paragraph (v)(vii) of Section 6.2 (The Conditions)) will apply unless it is agreed at the time of trade that they are to be excluded. If it is agreed that the Buy-in / Sell-out provisions will not apply to a transaction, this box should be ticked.

(iii) Breakfunding compensation: Breakfunding compensation will not apply to a transaction unless it is agreed at the time of trade that it will apply. If it is agreed that breakfunding compensation will apply this box should be ticked and the basis on which such compensation is to be calculated should be specified. Users should note that this option, and the Standard Terms and Conditions, assume that the possibility of agreeing breakfunding compensation as a trade specific term would be relevant only if the transaction is a Par Trade.

(iv) Delayed Settlement Compensation: Delayed Settlement Compensation will apply to a transaction unless it is agreed at the time of trade that it will not apply. The provisions relating to Delayed Settlement Compensation in the Standard Terms and Conditions will apply to the transaction and will begin to accrue 10 Business Days from the Trade Date (in the case of a Par Trade) or 20 Business Days from the Trade Date (in the case of a Distressed Trade). The methodology of the calculation is the same whether the trade is a Par Trade or a Distressed


Trade (see paragraph (j) of Section 6.2 (The Conditions)). If, however, the parties agree at the time of trade that Delayed Settlement Compensation will not apply to the transaction, this box should be ticked and the exclusion expressly noted on the Confirmation.

(v) Transfer Fee: The Standard Terms and Conditions (see Condition 18.1 (Transfer fees)) provide that the Buyer and the Seller each have to pay in equal shares any recordation, processing, transfer or similar fee payable to the Agent under the Credit Documentation in connection with a transaction. If, however, the parties agree at the time of trade that either the Buyer or the Seller will pay the whole of that fee or that payment of transfer fees should be allocated other than on an equal basis, the parties should tick this box and specify which party will be making the payment or, as the case may be, what the allocation between the Seller and the Buyer should be.

(vi) Relevant Benchmark Rate: The Standard Terms and Conditions provide various benchmark rates for the purposes of calculating the Relevant Rate in respect of the cost of carry element of Delayed Settlement Compensation (see paragraph (k) of Section 6.2 (The Conditions)) and the sell-out element of the buy-in/sell-out provisions (see paragraph (w)(vii) of Section 6.2 (The Conditions)). If any sum is denominated in a currency which does not have a Relevant Benchmark Rate, the parties are required to agree the applicable rate at the time of trade. In such a case, this box should be ticked and the applicable rate specified. If the parties do not agree such a rate at the time of trade, the rate for that currency will be as specified by the Seller (acting reasonably).

(vii) Other: The parties are free to include other terms of the transaction. These may include, for example the allocation of interest or fees where the Credit Agreement contains an unusual pricing structure or granting the Participant additional control over the Grantor's voting rights under the Credit Documentation. The details of any such terms should be recorded.

(p) Mechanics: The Confirmation is to be sent (by fax, email or other electronic means agreed between the parties) by the Responsible Party to the Other Party no later than the second Business Day following the Trade Date. The Other Party is obliged to either raise any disagreement with the terms of the Confirmation or return the Confirmation countersigned, no later than the second Business Day following delivery of the Confirmation (where there is any disagreement, best practice is for this to be raised with the Responsible Party as soon as possible by phone). In addition, contact details should be inserted at the foot of the Confirmation. MEI or other identification numbers for the Seller and/or the Buyer should also be included in the contact details.

5.5 Confirmation (Risk Participation)

The structure and content of this Confirmation is very similar to the Bank Debt Confirmation. Where the provisions are the same, no further comment is made.


(a) The Standard Terms and Conditions assume that any transaction evidenced by the Risk Participation Confirmation will be a Par Trade, accordingly, there is no tick-box provided for the parties to evidence whether the transaction was agreed to be a Par Trade or a Distressed Trade.

(b) Details of Traded Portion (paragraph 6):

(i) Final Maturity: The final maturity date for each individual tranche or facility should be given;

(ii) On risk until: This should state the period for which the Buyer will be on risk under the Risk Participation.

(c) Accrued Interest (other than PIK Interest) (paragraph 8): This does not envisage "Trades Flat" as an option.

(d) No tick-box is provided for Transfer Costs as it is assumed that Transfer Costs will not be relevant for a transaction settling by way of risk participation.

(e) Form of Purchase (paragraph 9): The Risk Participation Confirmation should be used for a transaction which is to settle by way of:

(i) Funded / Risk Participation;

(ii) Risk Participation; or

(iii) Risk to Funded Participation.

The parties are required to specify whether the form of participation will specify collateral for undrawn commitment only if the transaction settles by way of Funded / Risk Participation or Risk to Funded Participation because collateral for undrawn commitment is relevant only to the funded aspect of those participations.

(f) Other Terms of Trade (paragraph 13):

(i) Breakfunding compensation: No provision is made to specify breakfunding compensation as this is unlikely to be relevant in the case of a transaction settling by way of risk participation.

(ii) Delayed Settlement Compensation: Unless otherwise agreed by the parties at the time of trade, Delayed Settlement Compensation will apply to a transaction and will begin to accrue 10 Business Days from the Trade Date. If, however, the parties agree at the time of trade that Delayed Settlement Compensation will not apply to the transaction, the parties should tick this box and expressly note the exclusion in the Confirmation.

(iii) Relevant Benchmark Rate: The Standard Terms and Conditions provide various benchmark rates for the purposes of calculating the Relevant Rate in respect of the cost of carry element of Delayed Settlement Compensation (see paragraph (k) of Section 6.2 (The


Conditions)) and the sell-out element of the buy-in/sell-out provision, (see paragraph (w)(vii) of Section 6.2 (The Conditions)). If any sum is denominated in a currency which does not have a Relevant Benchmark Rate, the parties are required to agree the applicable rate at the time of trade. In such a case, this box should be ticked and the applicable rate specified. If the parties do not agree such a rate at the time of trade, the rate for that currency will be as specified by the Seller (acting reasonably).

(iv) Other: The parties are free to include other terms of the transaction. These may include, for example the allocation of interest or fees where the Credit Agreement contains an unusual pricing structure or granting the Participant additional control over the Grantor's voting rights under the Credit Documentation. The details of any such terms should be recorded.

5.6 Confirmation (Claims)

The structure and content of this Confirmation is very similar to the Bank Debt Confirmation. Where the provisions are the same, no further comment is made.

(a) The Standard Terms and Conditions assume that any transaction evidenced by the Claims Confirmation will be a Distressed Trade, accordingly, there is no tick-box provided for the parties to evidence whether the transaction was agreed to be a Par Trade or a Distressed Trade.

(b) Details of Traded Portion (paragraph 6): The traded portion of the Claim Amount is required to be specified.

(c) Pricing (paragraph 7): This is a percentage of the nominal principal amount of the claim.

(d) The Standard Terms and Conditions assume that claims will be traded on a "Trades Flat" basis, accordingly, no tick-box relating to interest treatment is provided in the Confirmation.

(e) Form of Purchase (paragraph 9): The Claims Confirmation envisages that the purchase is completed by way of an assignment or a participation.

(f) Other Terms of Trade (paragraph 12):

(i) Buy-in/sell-out and breakfunding compensation: As the Standard Terms and Conditions assume that any transaction evidenced by the Claims Confirmation is a Distressed Trade, the Claims Confirmation does not provide explicit options to evidence the exclusion of the Buy-in / Sell-out provisions from, or the inclusion of breakfunding compensation to, the transaction.

(ii) Delayed Settlement Compensation: Unless otherwise agreed by the parties at the time of trade, Delayed Settlement Compensation will apply to a transaction and will begin to accrue 20 Business Days from the Trade Date. If, however, the parties agree at the time of trade that


Delayed Settlement Compensation will not apply to the transaction, the parties should tick this box and expressly note the exclusion in the Confirmation.

(iii) Transfer costs: The Standard Terms and Conditions (see Condition 18 (Transfer Costs)) provide that the Buyer and the Seller each have to pay in equal shares any recordation, processing, transfer or similar fee payable to the Agent under the Credit Documentation in connection with a transaction. If, however, the parties agree at the time of trade that either the Buyer or the Seller will pay the whole of that fee or that payment of transfer fees should be allocated other than on an equal basis, the parties should tick this box and specify which party will be making the payment or, as the case may be, what the allocation between the Seller and the Buyer should be.

(iv) Relevant Benchmark Rate: The Standard Terms and Conditions provide various benchmark rates for the purposes of calculating the Relevant Rate in respect of the cost of carry element of Delayed Settlement Compensation (see paragraph (k) of Section 6.2 (The Conditions)) and the sell-out element of the buy-in/sell-out provision, (see paragraph (w)(vii) of Section 6.2 (The Conditions)). If any sum is denominated in a currency which does not have a Relevant Benchmark Rate, the parties are required to agree the applicable rate at the time of trade. In such a case, this box should be ticked and the applicable rate specified. If the parties do not agree the rate at the time of trade, the rate for that currency will be as specified by the Seller (acting reasonably).

(v) Other: The parties are free to include other terms of the transaction. These may include, for example the allocation of interest or fees where the Credit Agreement contains an unusual pricing structure. The details of any such terms should be recorded.


6. STANDARD TERMS AND CONDITIONS

6.1 Introduction

Many of the Conditions are referred to elsewhere in this Guide. Where this is the case, cross-referencing will be used for ease of reference and to avoid duplication.

6.2 The Conditions.

(a) Applicability and Interpretation (Condition 1): The Conditions apply to a transaction where they are incorporated by reference in the applicable Confirmation, oral agreement or otherwise and in respect of which the Trade Date occurs on or after [ ] 2015. The current form of Conditions will be incorporated by reference until such time as they are superseded by revised conditions. The Conditions apply to a transaction whether the parties agree that the transaction is a Par Trade or a Distressed Trade. There are, however, some areas where the Conditions vary in their application between Par Trades and Distressed Trades (see paragraph (b) of Section 5.4 (Confirmation (Bank Debt)).

Some additional points in relation to Condition 1:

(i) Definition of "Agent's Expenses" - This includes fees or expenses payable to steering committee members or co-ordinators of any restructuring of the underlying debtor's indebtedness. Responsibility for the payment of Agent's Expenses is dealt with in Condition 17 (Agent's Expenses);

(ii) Definition of "Agreed Terms" - These are the terms agreed between the Buyer and the Seller at the time of the trade (whether orally or in writing (e.g. by email)). They will (other than to the extent varied by the parties at the time of trade) incorporate the Conditions by reference and are intended to be evidenced by the Confirmation;

(iii) Definition of "Ancillary Rights and Claims" - This definition is included to ensure that the Purchased Assets include all of the Seller's rights relating to a traded asset over and above the Seller's rights that would pass automatically on a legal transfer of the relevant traded asset, namely the right to receive fees, interest and principal and to sue in its own name for the payment and repayment of such amounts. These ancillary rights may include rights against third party professional advisors involved in the origination of the underlying debt and against whom a claim may lie in tort or contract. These rights are often referred to as "litigation rights". However, this is subject to the overriding caveat that such Ancillary Rights and Claims are capable of being or are permitted to be assigned (or being made subject to a funded participation or risk participation, in the case of a transaction settling by funded participation or risk participation) by the Seller, whether in law or contract. The Ancillary Rights and Claims form part of the Purchased Assets.


(iv) Definition of "Binding Amendment and Debt Restructuring" - The Buyer takes the risk of a Binding Amendment and Debt Restructuring from the Trade Date and is not permitted to cancel the trade as a consequence of such an event.

(v) Definition of "Business Day" - this is defined by reference to days on which banks are open for general business in:

(A) London;

(B) the place in which each of the Seller and the Buyer will perform their obligations under the Agreed Terms or the Transaction Documentation; and

(C) in relation to a date for payment in a currency, the principal financial centre of the country of that currency or, if that currency is euro, a day on which the TARGET2 system is open.

For example, in a transfer or participation by a Paris based bank to a financial institution based in Frankfurt of a US dollar loan, Business Days will be the days on which banks are open for general business in London, Paris, Frankfurt and New York;

(vi) Definition of "Claim" - This definition is included to ensure that in the case of a Claims Trade, the Purchased Assets include all of the Seller's rights to prove in the Insolvency Proceedings of any Obligor to the extent of the traded claim together with the Seller's rights in relation to any proof of debt filed in those Insolvency Proceedings and to any distribution of any assets by an Insolvency Officer as part of those Insolvency Proceedings;

(vii) Definition of "Credit Documentation" - Credit Documentation includes the underlying Credit Agreement, together with all schedules and appendices, amendments, supplements, accessions, waivers and variations, and all ancillary guarantee, security, intercreditor and restructuring documentation;

(viii) Definition of "Delay Period" and definition of "Delay Period Commencement Date" - These are used in the Delayed Settlement Compensation provisions (see paragraph (j) below) and operate so that Delayed Settlement Compensation begins to accrue if the transaction has not settled ten Business Days after the Trade Date (in the case of a Par Trade) or twenty Business Days after the Trade Date (in the case of a Distressed Trade);

(ix) Definition of "ERISA" - This, together with the definitions of "Benefit Plan", "Code" and "PTE", are used in the ERISA provisions (see paragraph (u) below);


(x) Definitions of "Early Termination Amount", "Early Termination Date", "Early Termination Payment Amount", "Early Termination Payment Date", "Insolvency Event", "Seller Insolvent Party Amount"; and "Termination Notice" - These are used in Condition 3 (Termination) (see paragraph (c) below);

(xi) Definitions of "LMA Pricing Panel", "Pricing Panel Methodology" and "Specified Persons" - These are used in Condition 23.3 (Buy-in/Sell-out), (see paragraph (v) (vii) below);

(xii) Definition of "Non-Cash Distribution" - In distressed circumstances or where a restructuring of indebtedness is taking place many credits will issue, or have the right to issue, debt or equity securities or other financial instruments in satisfaction of the obligation to make interest payments or fee payments in cash. The treatment of Non-Cash Distributions made on or after the Trade Date is dealt with in Condition 9 (Insolvency Proceedings), Condition 11 (Delayed Settlement) and Condition 15 (Interest Payments and Fees);

(xiii) Definition of "Non-Recurring Fees" - These are defined as fees that are not Recurring Fees, such as amendment, consent or waiver fees. The parties can agree at the time of trade to treat Non-Recurring Fees differently from Recurring Fees. If they choose not to, Condition 15.9 (Allocation of interest and fees) allocates all Non-Recurring Fees paid after the Trade Date to the Buyer;

(xiv) Definition of "Permanent Reductions" - These are defined as any permanent commitment reductions and permanent repayments of principal applicable to the Purchased Assets. Paragraphs (a) and (b) clarify that permanent repayments of principal which are satisfied by the issue of a Non-Cash Distribution and any distribution of an Obligor's assets by an Insolvency Officer as part of the Insolvency Proceedings of that Obligor which discharges (in whole or in part) any Claim are not treated as Permanent Reductions and are also disregarded (i.e. not subtracted from the nominal amount of the Traded Portion) when determining the principal amount of the Purchased Assets for the purposes of calculating the Settlement Amount pursuant to Condition 14 (Settlement Amount Calculation).

(xv) Definition of "PIK Interest" - PIK Interest is treated on a "trades flat" basis regardless of whatever treatment is specified for accrued interest generally. This definition clarifies the point that PIK Interest does not include any interest, fees or other sums which are payable by an Obligor in respect of that PIK Interest which are not also deferred or capitalised. See Condition 15.6 (PIK Interest);

(xvi) Definition of "Predecessor-in-Title: - This is defined to include any person which has held title to the Purchased Assets or Purchased Obligations or any part thereof prior to the Seller. The Seller will give representations as to the conduct of its Predecessors-in-Title (if any) (see paragraph (u) below);


(xvii) Definition of "Predecessor Transfer Agreements: - This definition is expressed to include all transfer agreements under which any of the Seller's Predecessors-in-Title acquired the Purchased Assets or any part thereof and assumed the Purchased Obligations or any part thereof. The Seller's rights under these agreements are excluded from the definition of "Ancillary Rights and Claims" and therefore from the Purchased Assets;

(xviii) Definition of "Purchased Assets" - Purchased Assets are defined to mean (a) the rights included in the traded portion of the relevant asset, but subject to the obligations and liabilities of the Seller attributable to the traded portion (in the case of an assignment, these obligations and liabilities cannot, under English law, be assigned by agreement solely between assignor and assignee; however, the form of Assignment (see Section 7.3 (Assignment)) provides that, as against the other credit providers - but not the Borrower - the assignee agrees to assume these obligations and liabilities); (b) corresponding rights under any ancillary guarantee or security; (c) the Ancillary Rights and Claims; and (d) in the case of a Claims Trade, the Claim. The definition of Purchased Assets expressly excludes any rights the Seller has in any capacity (for example, as issuing bank or facility agent) other than as a lender under the Credit Agreement;

(xix) Definition of "Recurring Fees" - These are defined as fees that are expressed to accrue by reference to time elapsed in connection with the Traded Portion in the Credit Documentation. Only such fees that are expressly referred to in the Credit Documentation come within the definition of Recurring Fees. A ticking fee which is documented in a commitment letter would not therefore fall within this definition. Under Condition 15 (Interest Payments and Fees) the allocation of Recurring Fees will automatically follow the selected interest treatment;

(xx) Definition of "Relevant Benchmark Rate" – This is used in the definition of Relevant Rate. The benchmark rate to be used will depend on the applicable currency. The options for the relevant benchmark rate are EURIBOR for euro, LIBOR for LIBOR currencies, BBSY/(bid) (with a fallback to BBSW) for Australian dollars, CDOR for Canadian dollars, CIBOR for Danish krone, STIBOR for Swedish krone and for all other currencies, as specified in the Agreed Terms or by the Seller (acting reasonably). In each case the relevant benchmark rate is set at local time using a one month screen rate. If the specified page displaying the rate is unavailable, the Seller (acting reasonably) may specify another page or service displaying the relevant rate. If no such rate is available an interpolated rate is calculated on a linear basis.

(xxi) "Definition of Relevant Rate" – This is used in the Delayed Settlement Compensation provisions (see paragraph (j) below) and uses the Relevant Benchmark Rate. This definition is also used in the Buy-in/Sell-out provisions (see paragraph (w)(vii)(I) below) for the purposes of calculating Sell-out Costs of Carry. The Relevant Rate is the mean of the monthly Relevant Benchmark Rates over a period


which is the same length as the Delay Period but which (for ease of performing the relevant calculations) commences two Business Days prior to the Delay Period Commencement Date and ends two Business Days prior to the Settlement Date.

(xxii) Definition of "Retained Obligations" - The Agreed Terms provide that certain existing obligations of the Seller under the Credit Documentation and Predecessor Transfer Agreements are to be retained by the Seller and not assumed by the Buyer, including obligations that arise before the Settlement Date;

(xxiii) If the parties agree to enter into a transaction using an electronic medium (such as a website) then to the extent that the terms relating to that medium are inconsistent with the Conditions, those terms shall prevail. An example of the type of scenario where this Condition may be relevant might be where the terms of a given website envisage the Confirmation and/or Transaction Documentation being delivered in a different manner, or by different parties, than so envisaged by the Conditions.

(xxiv) The Conditions apply to a transaction unless they are varied or disapplied in the Agreed Terms (as evidenced by the relevant Confirmation). The parties to a transaction are free to vary or disapply any part of the Standard Terms and Conditions if they mutually agree to do so. See paragraph (b) of Condition 1.4 (Agreed Terms prevail).

(b) Contract Point (Condition 2): See paragraph (d) of Section 3.2 (Stages of a trade). This Condition also makes it clear that the occurrence before the Settlement Date of an event of default or potential event of default under the Credit Documentation, or an event which affects (either adversely or beneficially) the ability of an Obligor to perform its obligations under the Credit Documentation, does not relieve either party of its obligations under the Agreed Terms.

(c) Termination (Condition 3): Termination on insolvency whether automatic or optional can cause complex legal issues in many jurisdictions. Parties should therefore seek advice as to the legal and practical advantages and disadvantages as well as the ability to rely on and enforce such termination rights in all relevant jurisdictions. This Condition is intended (i) to ensure that trades are not required to be left open and outstanding without any realistic prospect of settlement if one counterparty becomes subject to an insolvency event during the period from (and including) the Trade Date to (and including) the Settlement Date (referred to as the Risk Period) and (ii) to allow the Non-Insolvent Party to crystallise a claim (assuming the Non-Insolvent Party has suffered a loss) which can be proved for in the insolvency of the Insolvent Party. Users should note that this termination right applies only during the Risk Period and not once the Settlement Date has occurred.

Some points to note:


(i) Unless the parties have agreed to vary the position in the Agreed Terms or if (for certain Insolvency Events) automatic termination applies to the insolvent counterparty, the non-insolvent counterparty (defined as the Non-Insolvent Party) has the right (but not the obligation) to terminate the transaction (to which the Agreed Terms apply) for so long as the Insolvency Event is continuing, by delivering a notice (referred to as the Termination Notice) to the insolvent party. The Termination Notice must be delivered in accordance with the delivery requirements of Condition 32 (Notices) and the transaction will be terminated no earlier than the date on which the Termination Notice is deemed to have been delivered in accordance with Condition 32 (Notices) and no later than the date which is 20 Business Days after such date.

(ii) The events and circumstances included within the definition of Insolvency Event largely conform to the ISDA definition of Bankruptcy in Section 5(a)(vii) of the ISDA Master Agreement.

(iii) The LMA has prepared and published a recommended form of Termination Notice. Whilst Condition 32 (Notices) allows for delivery of notices by mail or by fax and, assuming the parties have agreed in accordance with Condition 32.4 (Electronic communication), by email, it is expected that Termination Notices would be delivered in person (e.g. by courier) and a date stamp obtained on receipt by the Insolvent Counterparty. This should then enable the Non-Insolvent Party to verify that the termination date specified in the Termination Date is no earlier than the deemed delivery date or 20 Business Days after that date.

(iv) There may be circumstances where a party may wish to specify that automatic termination should apply to its counterparty during the Risk Period of a trade or more generally to all trades with that counterparty. This would be the case if an optional termination subsequent to an insolvency occurring would breach any automatic stay or moratorium provisions that might apply in a jurisdiction in which insolvency proceedings might apply to the relevant counterparty. Users are therefore advised to take their own legal advice with respect to the counterparties with whom they trade. Users should note that automatic termination can be selected on a case by case basis, for instance through a variation to the Standard Terms and Conditions under the "Other Terms of Trade" paragraph in the relevant Confirmation, or by a subsequent notice (whether before or after the Trade Date and whether applying generally to all trades existing and future or to specific trades).

(v) Once a transaction has been terminated, the Non-Insolvent Party must as soon as reasonably practicable following the termination date (referred to as the Early Termination Date) calculate in good faith its loss. Under Condition 3, loss will be calculated by first determining the applicable purchase rate for a substitute sale or, as the case may be, purchase transaction in the market. The default position is that this


will be obtained by averaging the (indicative or firm) quotations obtained from at least two broker dealers for the purchase or, as the case may be, sale of the Traded Portion (on substantially the same terms as under the Agreed Terms). However, if the Non-Insolvent Party reasonably believes that quotations from at least two broker dealers are not readily available or would not produce a commercially reasonable result, the Non-Insolvent Party may instead calculate the amount representing the purchase rate for the sale, or as the case may be, purchase transaction using commercially reasonable procedures to produce a commercially reasonable result. This again follows the convention established under ISDA for calculating loss when market quotations are not available or can be disregarded for the purpose of the loss calculation.

(vi) Once the purchase rate has been determined, a substitute settlement amount (referred to as the Early Termination Amount) is calculated by the Non-Insolvent Party by applying the new purchase rate determined for the substitute transaction and the Settlement Amount is calculated for the existing transaction by applying the contracted purchase rate in the Confirmation, in each case in accordance with the methodology in Condition 14.2 (Settlement amount calculation) and assuming in each case that the Early Termination Payment Date is the Settlement Date. Thus this will be carried out on a currency by currency basis and include any Deferred Consideration payable in accordance with Condition 11 (Delayed Settlement) as if the Delay Period ended on the Early Termination Payment Date. If the Seller is the Insolvent Party, the Settlement Amount determined for the existing transaction is then subtracted from the Early Termination Amount for each relevant currency. If this results in a positive number, then the Seller must pay the difference (being the Seller Insolvent Party Amount) to the Buyer on the Early Termination Payment Date. If it results in a negative amount, then the Non-Insolvent Party must pay to the Insolvent Party the absolute value of that amount. If the Buyer is the Insolvent Party, the Early Termination Amount is subtracted from the Settlement Amount for the existing transaction for each relevant currency. If this results in a positive number, then the Buyer must pay the difference (being the Buyer Insolvent Party Amount) to the Seller on the Early Termination Payment Date. If it results in a negative amount, then the Non-Insolvent Party must pay to the Insolvent Party the absolute value of that amount. The amount required to be paid by the Insolvent Party or, as the case may be, the Non-Insolvent Party is referred to as the Early Termination Payment Amount.

(vii) The Non-Insolvent Party must provide the Insolvent Party with a statement (referred to as the Early Termination Amount Statement) showing in reasonable detail the loss calculation (including all relevant quotations) and the calculation of the Early Termination Payment Amount promptly following calculation of the Early Termination Amount. The Early Termination Amount Statement must also specify the Early Termination Payment Date, which must be no earlier than the


date on which delivery of the Early Termination Amount Statement becomes effective in accordance with Condition 32 (Notices) and no later than the date which is 20 Business Days from the date of the Early Termination Amount Statement. The LMA has prepared and published a recommended form of Early Termination Amount Statement.

(viii) Interest is expressed to accrue on the Early Termination Payment Amount at the payee's cost of funds.

(ix) Pursuant to an amendment to Condition 30 (Assignment) and as an exception to the general prohibition on assignment, Users should be aware that the Non-Insolvent Party may assign its right to payment of the Early Termination Payment Amount without any need to obtain the prior consent of the Insolvent Counterparty.

(x) Users should also note that in calculating the Early Termination Payment Amount, the Standard Terms and Conditions do not expressly permit the parties to net or set-off against any Early Termination Payment Amount owing by one party (the Paying Party) to another party (the Receiving Party), any other Early Termination Payment Amount that may be owing by the Receiving Party to the Paying Party under other transactions between the parties and which had not settled as at the Early Termination Date.

(d) Confirmation (Condition 4): See paragraph (e) of Section 3.2 (Stages of a trade).

(e) Sale of Ancillary Rights and Claims (Condition 5): As the transfer of Ancillary Rights and Claims will not pass automatically through the entry into the relevant Form of Purchase, these rights need to be separately assigned. This is effected through the inclusion of the assignment language in Condition 5 (though the assignment will not operate if the trade settles as a participation where, instead, the Ancillary Rights and Claims form part of the rights which are the subject of the participation).

(f) Mandatory Settlement Obligations (Condition 6): This Condition provides that the parties must find a way of settling the transaction even if any required third party consent (or any transaction specific condition) is not obtained or met.


(i) The Seller is under an obligation to use its reasonable endeavours to obtain any required consents in connection with the transaction. To the extent that the transaction was, at the time of trade, made subject to a condition which is specified in the Agreed Terms both parties undertake to use their reasonable endeavours to ensure that any such condition is satisfied. Users should note however, that the Conditions do not otherwise envisage that the transaction is made subject to any condition and to the extent that the parties agree that the transaction is


to be conditional it is likely that suitable changes to the Standard Terms and Conditions will need to be agreed.

(ii) If such a required consent has not been obtained by the proposed Settlement Date (or if notice is received at any time prior to the Settlement Date that such a consent has not been granted) or if such a condition remains unfulfilled on the proposed Settlement Date, the parties must still find a means of settling the trade. This is what is known as a "Trade is a Trade". In these circumstances the parties will be required to settle the transaction either by means of:

(A) a funded participation (using the appropriate LMA form of Funded Participation with mutually agreed changes) ("Funded Participation Settlement"); or

(B) on the basis of a mutually acceptable alternative structure or arrangement having the economic equivalent of the agreed trade ("Economic Equivalent Settlement"). The Conditions make it clear that this includes cash settlement.

Whether Funded Participation Settlement or Economic Equivalent Settlement is required is determined by Condition 6.2 (Mandatory settlement) and is summarised below:

(A) if the Agreed Terms provide that the Form of Purchase for the transaction is "Legal Transfer" and the parties have not also specified in the Agreed Terms that "Legal Transfer only" applies: the transaction must be settled by Funded Participation Settlement unless either settlement cannot be effected by funded participation or the parties fail to agree on any proposed change to the LMA form of Funded Participation, in which case the transaction must be settled by Economic Equivalent Settlement.

(B) if the Agreed Terms provide that the Form of Purchase for the transaction is "Legal Transfer" and additionally the parties have specified in the Agreed Terms that "Legal Transfer only" applies: the transaction must be settled by Economic Equivalent Settlement.

(C) if the Agreed Terms provide that the transaction is to be settled by funded participation or risk participation: the transaction must be settled by Economic Equivalent Settlement.

(g) Due Diligence (Condition 7): The assumption is made (unless otherwise specified in the Agreed Terms) that the Buyer has satisfied itself as to the creditworthiness of each obligor and acceptability of the transaction prior to the Trade Date and the transaction is not to be conditional upon this.

As regards other matters of due diligence, see paragraph (c) of Section 3.2 (Stages of a trade).


(h) Transaction Documentation (Condition 8): See paragraph (g) of Section 3.2 (Stages of a trade) and paragraph (l) of Section 5.4 (Confirmation (Bank Debt)).

(i) Insolvency Proceedings (Condition 9): Where Insolvency Proceedings against the underlying debtor have been commenced, the Seller is required to use its reasonable endeavours to provide the Buyer as soon as reasonably practicable after the Trade Date with copies of any existing proofs of debt or other claims which the Seller (or any Predecessor-in-Title) has submitted. If no such proofs of debt or other claims have been submitted the Seller is required to provide such information in its possession reasonably requested by the Buyer necessary to assist the Buyer in submitting a proof of debt or other claim. The Seller is also required (i) to notify the Buyer if it becomes aware that any Insolvency Proceedings have been commenced against an Obligor following the Trade Date and prior to the Settlement Date and (ii) to use its reasonable endeavours to provide the Buyer with any proofs of debt or other claims which the Seller has submitted prior to the Settlement Date. The Seller is permitted to redact information that does not relate to the Traded Portion and which is commercially sensitive. The Seller is obliged, to the extent it does not breach any duty of confidentiality or other obligation including any other obligations of confidentiality, to provide copies to the Buyer of information it receives prior to the Settlement Date as a Lender in respect of Insolvency Proceedings commenced against the underlying debtor.

If the trade is a Claims Trade, any distribution of an Obligor's assets made on or after the Trade Date in respect of the Claim as part of the Insolvency Proceedings of that Obligor are for the account of the Buyer. If the Seller receives an amount in respect of such distribution which is for the account of the Buyer, the Seller is required to promptly and in any event within two Business Days of receipt (but not earlier than the Settlement Date) pay such amount to the Buyer. Where the Seller receives a Non-Cash Distribution in respect of a distribution which is for the account of the Buyer, the Seller is required, as soon as reasonably practicable after receipt (but not earlier than the Settlement Date) and to the extent permitted by the Credit Documentation and in the Insolvency Proceedings procure the transfer of that Non-Cash Distribution to the Buyer and procure the registration of such Non-Cash Distribution in the name of the Buyer (or the name of any nominee reasonably requested by the Buyer). Until such transfer and registration occurs, the Seller is required to account to the Buyer for all income received or other sums yielded in respect of the Non Cash Distribution as soon as reasonably practicable after receipt.

(j) Settlement Date and Payment (Condition 10): See paragraph (h) of Section 3.2 (Stages of a Trade) and paragraph (e) of Section 5.4 (Confirmation (Bank Debt)):

Unless otherwise specified in the Agreed Terms the Seller and the Buyer are each required to use their reasonable endeavours to settle the transaction as soon as reasonably practicable. This Condition makes it clear that completion of the transaction includes making payment on the Settlement Date (unless the transaction is a risk participation). In addition, this Condition states that


payments of principal under a funded participation are by way of limited recourse loan by the Buyer to the Seller.

(k) Delayed Settlement (Condition 11): See paragraph (o)(iv) of Section 5.4 (Confirmation (Bank Debt)):

Unless otherwise specified in the Agreed Terms, the Delayed Settlement Compensation provisions will apply to a transaction. The provisions are designed to put both the Buyer and the Seller in the position they would have been in had the delayed transaction settled 10 Business Days after the Trade Date (in the case of a Par Trade) or 20 Business Days after the Trade Date (in the case of a Distressed Trade). Following the day (defined as the "Delay Period Commencement Date") which is 10 Business Days after the Trade Date (in the case of a Par Trade) or 20 Business Days after the Trade Date (in the case of a Distressed Trade), Delayed Settlement Compensation begins to accrue on a daily basis and is payable on the Settlement Date.

Users who are selling any loans which they are acquiring in primary syndication before they become the legal and beneficial owner of such loans should take care to ensure that they will have access to the cash flows under such loans to meet any Delayed Settlement Compensation that they may be liable for under the Agreed Terms to the purchaser of such loans in the event that the transaction does not settle within 10 Business Days from the Trade Date (in the case of a Par Trade) or 20 Business Days from the Trade Date (in the case of a Distressed Trade).

The Delayed Settlement Compensation payable under paragraph (b) of Condition 11.1 (Delayed Settlement Compensation) is intended to compensate the Seller for its cost of funding the Traded Portion past the Delay Period Commencement Date (often referred to as its "Cost of Carry"). It is important to note that the Cost of Carry provisions are based on the assumption that the Seller funds the Traded Portion in the interbank market. Therefore it provides that Delayed Settlement Compensation from the Buyer to the Seller or the Seller to the Buyer, as applicable, accrues on a daily basis at the average monthly Relevant Benchmark Rate (essentially the inter bank offered rate (IBOR) for the relevant currency but see paragraphs (a)(xx) and (a)(xxi) above) on an amount equal to that which each Settlement Amount (defined as the "Unadjusted Settlement Amount") would have been if it had been calculated on the Delay Period Commencement Date. For these purposes each notional Settlement Amount does not include adjustment for any transfer fees or Agent's Expenses or, to avoid circularity, any Delayed Settlement Compensation. Paragraph (c) of Condition 11.1 (Delayed Settlement Compensation) provides for a daily recalculation of the Unadjusted Settlement Amount for the purposes of the calculation, in the event that the Unadjusted Settlement Amount and the actual Settlement Amount differ by a factor of greater than 25%. This might occur as a result of a prepayment or further drawing made, in each case, between the Delay Period Commencement Date and the Settlement Date. The rationale is that after such a prepayment (or drawing) the Seller would no longer be funding the whole of the Unadjusted Settlement Amount (or, in the case of a drawing, the Seller would be funding an amount greater than the Unadjusted Settlement Amount). The trigger level


of a difference of more than 25% is intended to strike a balance between fairness between the parties and the extra administrative burden and complexity of calculating the Unadjusted Settlement Amount on a daily basis.

In most cases, Cost of Carry payments under paragraph (b) of Condition 11.1 (Delayed Settlement Compensation) would be made from the Buyer to the Seller however, there are circumstances where Cost of Carry payments would be required to be made from the Seller to the Buyer instead.

(i) If the Settlement Amount is negative (because for example a loan is trading below par and the unfunded portion of the loan being sold is greater than the funded portion) and is therefore payable from the Seller to the Buyer, any Delayed Settlement Compensation under paragraph (b) of Condition 11.1 (Delayed Settlement Compensation) would also be payable from the Seller to the Buyer; and

(ii) if the Relevant Benchmark Rate is negative (irrespective of whether the Settlement Amount is a positive or negative figure) any Delayed Settlement Compensation under paragraph (b) of Condition 11.1 (Delayed Settlement Compensation) would be payable from the Seller to the Buyer. This reflects the fact that in such circumstances, the Seller is assumed to have funded the Traded Portion during the Delay Period in the interbank market at a negative Relevant Benchmark Rate. The Seller would therefore have received a financial benefit (and not have incurred a financial cost) from that continued funding during the Delay Period. Had the trade settled at T+10/T+20, the Buyer would have received that benefit. If, in respect of any particular transaction, the parties do not wish Cost of Carry payments under paragraph (b) of Condition 11.1 (Delayed Settlement Compensation) to be made from the Seller to the Buyer when the Relevant Benchmark Rate is negative, they must agree this at the time of trade and document their agreement in the "Other Terms of Trade" section of the Confirmation. An example of the wording to include in the "Other Terms of Trade" section of the Confirmation (known as a zero IBOR floor) is as follows:

"If on any day, the Relevant Benchmark Rate is less than zero, it shall be deemed to be zero on that day."

Condition 11.2 (Interest and Accrued Fees) applies only to a transaction where "Settled Without Accrued Interest", "Paid on Settlement Date" or "Paid on Settlement Date and Discounted from next payment date" interest treatment is specified in the Agreed Terms (see paragraph (j) of Section 5.4 (Confirmation (Bank Debt))). This Condition is intended to compensate the Buyer for the Interest and Recurring Fees that it would have been entitled to from the Obligors under the Credit Documentation if the transaction had settled on the Delay Period Commencement Date. (This is not necessary where "Trades Flat" interest treatment applies as, in such a scenario, the Buyer is automatically entitled to all Interest and Recurring Fees which are paid under the Credit Documentation on or after the Trade Date (see paragraph (j) of Section 5.4 (Confirmation (Bank Debt))). Paragraph (a) provides for Delayed Settlement Compensation from the Seller to the Buyer in an amount


equal to any Interest or Recurring Fees accrued under the Credit Documentation in respect of the Traded Portion (which includes any cash pay interest accrued in respect of PIK Interest capitalised on or after the Trade Date) that is attributable to the time period from (and including) the Delay Period Commencement Date to (but excluding) the actual Settlement Date. This sum represents the Interest or Recurring Fees that the Buyer would have received from the Obligors under the Credit Documentation had the transaction settled on the Delay Period Commencement Date. Users should note that no payment is required to be made under paragraph (a) if the relevant Obligor is in payment default in respect of any such amounts under the Credit Documentation. Amounts payable under paragraph (a) are required to be paid whether or not the Seller has received payment of such amount from an Obligor because the actual Settlement Date may not be a scheduled interest payment date under the Credit Documentation and so, at that time, the Seller may not yet have received payment from an Obligor. To allow for the possibility of an Obligor failing to make payment under the Credit Documentation, paragraph (c) provides for a correction mechanic whereby the Buyer is obliged, on the Seller's demand, to reimburse the Seller for any amount (plus the Relevant Benchmark Rate) that the Seller has earlier paid to the Buyer under paragraph (a) to the extent that the Seller does not receive payment of an equal amount from the Obligor. Paragraph (d) provides an equivalent mechanic to paragraph (a) for Non-Cash Distributions.

(l) Purchase Amount (Condition 12): Unless the Agreed Terms and/or the Credit Documentation provide otherwise, Condition 12 stipulates that the assets/obligations being purchased or participated are to be allocated pro rata to the facilities provided under the Credit Agreement. This provision will (so long as it is permitted under the Credit Agreement) be superseded by any inconsistent provision of the Agreed Terms so, for example, where paragraph 7 (Details of Traded Portion) of the Bank Debt Confirmation is completed in full, then this Condition will no longer apply.

(m) Permanent Reduction (Condition 13): This Condition specifies how permanent commitment reductions and permanent repayments of principal under the relevant tranche or facility occurring between the Trade Date and the Settlement Date impact the Purchased Assets or the Relevant Participation.

(i) Paragraph (a) provides that to the extent that the Seller retains an interest in the tranche or facility which is being sold to the Buyer any such permanent commitment reductions or permanent repayments of principal in respect of that tranche or facility will be allocated pro rata to the Traded Portion and to the Seller's retained interest.

(ii) Paragraph (b) provides that, to the extent that any such permanent commitment reductions or permanent repayments of principal apply to the Purchased Assets, the economic benefit of that Permanent Reduction is allocated as if that Permanent Reduction had occurred after the Settlement Date. This is achieved through an appropriate adjustment in the Settlement Amount calculation. The effect is that the Seller retains that part of the Permanent Reduction at the relevant Purchase Rate only and not at its face amount. The rationale for


treating Permanent Reductions in this way is to give effect to the agreement that was made on the Trade Date regarding the price that was agreed for the Purchased Assets as they were at the Trade Date and to put the parties in the same economic positions as they would have been in had the Permanent Reduction been made after the Settlement Date. This adjustment mechanic will only have a practical effect to the extent that the Purchase Rate is either more than 100% or less than 100%.

(iii) Paragraph (c) provides that, in the case of a risk participation, any permanent commitment reductions relating to the Traded Portion are to reduce the participation accordingly.

(iv) Paragraph (d) clarifies that where a permanent repayment of principal occurs after the Trade Date and on or before the Settlement Date that permanent repayment itself is for the account of the Seller. The adjustment mechanic noted in paragraph (ii) above will operate so that the economic bargain made between the parties on the Trade Date in respect of the amount so repaid is restored.

(n) Settlement Amount Calculation (Condition 14):

A separate Settlement Amount calculation is required to be performed in respect of all amounts denominated in each relevant currency. This means that, depending on the situation, there may be multiple Settlement Amounts and that two-way payments in different currencies may be required.

The relevant currencies are:

(i) Each currency in which the principal amount of the Purchased Assets has been funded;

(ii) The base currency of any portion of the Purchased Assets which is unfunded as of the Settlement Date; and

(iii) The currency of any Non-Recurring Fees received by the Seller on or before the Settlement Date to which the Buyer is entitled pursuant to the Agreed Terms.

It is possible that unfunded amounts of the Purchased Assets and/or any relevant Non-Recurring Fees will not be denominated in the same currency as any funded portion of the Purchased Assets. In this case, a Settlement Amount calculation should be performed in respect of all amounts denominated in the currency of those unfunded amounts or Non-Recurring Fees using the formula specified in Condition 14 (Settlement Amount Calculation). Condition 14 confirms that in these circumstances a zero amount should be used for the principal amount of the Purchased Assets funded in that currency for the purposes of that calculation.

Worked examples of Settlement Amount calculations are set out in Schedule 1 (Example Settlement Amount Calculations).


(o) Interest Payments and Fees (Condition 15):

(i) For an explanation of the four options (Settled without Accrued Interest, Paid on Settlement Date, Paid on Settlement Date and Discounted from next payment date and Trades Flat) see paragraph (j) of Section 5.4 (Confirmation (Bank Debt)). It is important to note that if the Credit Agreement provides for the Agent to distribute interest on a pro rata basis between the Seller and the Buyer Condition 15.2 (Settled without accrued interest) and Condition 15.3 (Paid on Settlement Date) are disapplied to the extent necessary in recognition of the fact that the Seller will be entitled to receive Interest and Recurring Fees up to but excluding the Settlement Date pursuant to the Credit Agreement itself notwithstanding any transfer.

(ii) PIK Interest is dealt with on a "trades flat" basis so that:

(A) PIK Interest that is capitalised prior to the Trade Date is included in the Traded Portion and forms part of the funded principal amount of the Purchased Assets;

(B) PIK Interest that is capitalised on or after the Trade Date is for the account of the Buyer for no additional consideration; and

(C) PIK Interest that has accrued but has not yet been capitalised as at the Settlement Date is for the account of the Buyer upon capitalisation for no additional consideration.

Paragraph (b) of Condition 15.6 confirms that cash pay interest or Recurring Fees (other than PIK Interest) which accrues on Interest is treated in the same way as all other cash pay interest agreed by the parties as specified in the Agreed Terms.

As an example, assume that the loan being sold has a PIK toggle mechanism whereby the cash pay margin is 4%, the PIK margin is 4.5% and the Borrower has the option of capitalising the cash pay margin from time to time and for a minimum of 5 Business Days by increasing the PIK margin to 9% and reducing the cash pay margin to zero. Assume also that "settled without accrued interest" is chosen in the Confirmation for the treatment of the cash pay interest, that the Borrower is not in payment default, that Delayed Settlement Compensation does not apply, that paragraph (f) of Condition 15.2 (Pro rata interest settlement under Credit Documentation) does not apply and that break costs are not payable. All figures have been rounded for the purpose of this example. This would not be the case for an actual calculation.

Funded amount of loan being sold : £30,000,000

Trade Date : 9 November

Settlement Date : 4 December


Current interest period : 1 September to 1 December

The Borrower elects to capitalise the cash pay margin for the period

: 19 November to 1 December

PIK Margin

PIK Interest that has accrued (but has not yet been capitalised) at anytime prior to the Settlement Date is for the account of the Buyer at no extra cost. The Settlement Amount calculation must therefore be calculated on the basis of £30,000,000 being the funded principal amount of the loan.

PIK Margin from 1 September to 19 November

: £30,000,000 x 100

50.4 x

36548

= £177,534

PIK Margin from 19 November to 1 December

: £30,000,000 x 100

00.9 x

36512

= £88,767

From 1 December, the funded principal amount of the loan is £30,266,301. The accrued PIK Interest of £266,301 has been added to the loan at no cost to the Buyer.

PIK Margin from 1 December to 4 December

£30,266,301 x 100

50.4 x

3653

= £11,194

The funded principal amount of the loan as at the Settlement Date is £30,266,301 with £11,194 of PIK Interest having accrued but having not yet been capitalised. The funded principal amount of the loan for the purposes of calculating the Settlement Amount is however £30,000,000 with the Buyer retaining the benefit of the PIK Interest which has been capitalised between the Trade Date and Settlement Date as well as the PIK Interest that has accrued at any time before the Settlement Date.

Cash Pay Margin

Cash pay margin up to the Settlement Date is for the account of the Seller and therefore the Seller is entitled to:


Cash pay margin from 1 September to 19 November

: £30,000,000 x 100

4 x

36548

= £157,808

Cash pay margin from 19 November to 1 December (Settlement Date) is zero.

Cash pay margin between 1 December and 4 December (Settlement Date) is for the account of the Seller and therefore on the last day of the interest period commencing 1 December the Seller will be entitled to the following when paid by the Borrower:

Cash pay margin from 1 December to 4 December

: £30,266.301 x 100

4 x

3653

= £9,950

(iii) Unless otherwise specified in the Credit Agreement, partial payments

of Interest received under this Condition are to be pro-rated to the amounts of interest due on different payment dates.

(iv) Any Upfront Fee must be paid at the time, in the amount and by the party specified in the Agreed Terms. This must therefore be agreed between the parties at the time of trade and evidenced in the Confirmation (see paragraph (i)(iii) of Section 5.4 (Confirmation (Bank Debt))).

(v) Paragraph (a) of Condition 15.9 (Allocation of Interest and Recurring Fees/Non-Recurring Fees) states that unless otherwise provided in the Conditions or the Agreed Terms, any Interest or Recurring Fees (e.g. commitment, ticking, facility and letter of credit fees and commissions) which accrue prior to the Settlement Date are for the account of the Seller. To the extent such Interest and Recurring Fees accrue in respect of a later period, they are for the account of the Buyer. This paragraph (a) of Condition 15.9 (Allocation of Interest and Recurring Fees/Non-Recurring Fees) is intended to be a general sweeper and therefore only applies if the treatment of such Interest or Recurring Fees is not otherwise dealt with in the Conditions or in the Agreed Terms. This Condition would, for example, therefore apply if the parties failed to specify in the Agreed Terms whether "Settled Without Accrued Interest", "Paid on Settlement Date", "Paid on Settlement Date and Discounted from next payment date" or "Trades Flat" applies to the transaction.

Paragraph (b) of Condition 15.9 (Allocation of Interest and Recurring Fees/Non-Recurring Fees) provides that, unless otherwise provided in


the Conditions or in the Agreed Terms, any Non-Recurring Fees shall, to the extent attributable to the Purchased Assets and paid or capitalised on or after the Trade Date be for the account of the Buyer. Users should note that Non-Recurring Fees are likely to include fees such as arrangement fees, underwriting fees and amendment/waiver fees arising under the Credit Documentation to the extent that these are paid or capitalised on or after the Trade Date.

If either party receives payment of Interest, Recurring Fees or Non-Recurring Fees which are for the account of the other, the party who receives that payment must pay such amount to the other party promptly and within 2 Business Days of receipt. Such amount must however be paid back if it is subsequently clawed back by the Agent.

If the Credit Documentation includes unusual interest, fee or other yield arrangements which do not readily fit within the relevant definitions used in the Standard Terms and Conditions (see paragraphs (xiii) and (xix) of Section 6.2 (The Conditions)) or the parties want to allocate all or any part of the Interest, Recurring Fees or Non-Recurring Fees differently from the allocation provided in the Standard Terms and Conditions (see paragraph (j) of Section 5.4 (Confirmation (Bank Debt)), it is extremely important for the parties to agree at the time of trade how such interest, fees or other yields are to be allocated and to record this in the "Other Terms of Trade" section of the Confirmation. The importance of this was most recently exposed in a case involving a secondary loan trade carried out on LMA terms (as at 14 January 2010) which was appealed to the Supreme Court13. The matter in dispute was the entitlement to a prepayment premium which was paid to the Buyer pursuant to the terms of the Credit Documentation some time after the Settlement Date. On the particular facts of this case it was held that the Seller was not entitled to any of the prepayment premium. For further background, please see Note entitled "Tael One-Construction of LMA Terms and Conditions for Secondary Debt Trading (11 March 2015)" on the Briefings (Legal and Regulatory) page of the LMA website.

It should be noted that the allocation of interest and fees in Condition 15.9 (Allocation of Interest and Recurring Fees/Non-Recurring Fees) does not apply to transactions taking effect as a risk participation only.

(vi) Where either party has received a Non-Cash Distribution (see paragraph (a)(xii) above) in satisfaction of an obligation on the part of the underlying debtor to pay interest or fees in respect of the Traded Portion which, pursuant to Condition 15.2 (Settled without accrued interest), Condition 15.5 (Trades Flat) or Condition 15.9 (Allocation of Interest and Recurring Fees/Non-Recurring Fees), is for the account of the other party, then the party which has received the Non-Cash

13 Tael One Partners Limited (Appellant) v Morgan Stanley & Co International PLC (Respondent) [2015] UKSC 12.


Distribution is required, as soon as reasonably practicable after receipt of the Non-Cash Distribution (but not earlier than the Settlement Date) and to the extent permitted by the Credit Documentation, to procure the transfer of that Non-Cash Distribution to and registration of that Non-Cash Distribution in the name of, the other party (or the name of any nominee reasonably requested by the other party). Until such transfer and registration occurs, the party which has received the Non-Cash Distribution is required to account to the other party for all income received or other sums yielded in respect of that Non-Cash Distribution as soon as reasonably practicable after receipt.

(vii) Paragraph (a) of Condition 15.10 (Payment from obligor to be received first) has two purposes: first, it supports the principle that a Seller is not obliged to make any payment of Interest, Recurring Fees or Non-Recurring Fees or account for any Non-Cash Distribution to the Buyer on a "Trades Flat" or "Settled Without Accrued" trade or under Condition 15.9 (Allocation of Interest and Recurring Fees/Non-Recurring Fees) until it has first received payment from the relevant Obligor or, if the Seller is not a lender of record, its Predecessor-in-Title. To address concerns that a subsequent Buyer is exposed to the credit risk of a Predecessor-in-Title of the Seller whose identity will not be known to the Buyer and against whom due diligence will not have been undertaken, paragraph (b) of Condition 15.10 (Payment from obligor to be received first) provides that in circumstances where an Obligor has paid but a Seller has not received a distribution from its Predecessor-in-Title, then whilst the Seller has no obligation to account for the amount received, it must enforce its rights against its Predecessor-in-Title and take all steps reasonably available to it to recover any sums due from and unpaid by its Predecessor-in-Title as if the Seller had remained the sole and legal beneficial owner of the relevant distribution. However, the Seller will be obliged to make payment of the distribution to the Buyer if the cause of non-receipt is not due to the default of the Predecessor-in-Title but is instead due to any limitation in the terms agreed with its Predecessor-in-Title but which do not form part of the Agreed Terms with the Buyer. For instance, if the Seller had purchased the traded debt on a settled without accrued basis but sold to the Buyer on a trades flat basis, the Seller would be obliged to account for the mismatch even though it will not have received (nor be due) the shortfall from its Predecessor-in-Title.

Paragraphs (c) and (d) of Condition 15.10 (Payment from obligor to be received first) address similar issues which arise on a "settled without accrued" trade or where the provisions of Condition 15.9 (Allocation of Interest and Recurring Fees/Non-Recurring Fees) apply to the trade so that the Buyer is not obliged to make any payment of Interest, Recurring Fees or Non-Recurring fees or account for any Non-Cash Distribution to the Seller until it has first received payment from the relevant Obligor or, if the Buyer is not a lender of record, its Successor-in-Title. Similarly to the position adopted in respect of the


Seller's obligations on a Trades Flat trade, where an Obligor has paid but a Buyer has not received a distribution from its Successor-in-Title, then whilst the Buyer has no obligation to account for the amount received, it must enforce its rights against its Successor-in-Title and take all steps reasonably available to it to recover any sums due from and unpaid by its Successor-in-Title as if the Buyer had remained the sole and legal beneficial owner of that part of the relevant distribution due to the Seller. However, the Buyer will be obliged to make payment of the relevant part of the distribution to the Seller if the cause of non-receipt is not due to the default of the Successor-in-Title but is instead due to any limitation in the terms agreed with its Successor-in-Title but which do not form part of the Agreed Terms with the Seller. For instance, if the Buyer had purchased the traded debt on a settled without accrued basis but sold to its Successor-in-Title on a trades flat basis, the Buyer would be obliged to account for the mismatch even though it will not have received (nor be due) the shortfall from its Successor-in-Title.

(p) Breakfunding (Condition 16): See paragraph (o)(iii) of Section 5.4 (Confirmation (Bank Debt)).

Breakfunding will not apply to a transaction unless it is agreed at the time of trade that it will apply. There is an assumption that breakfunding may only be made a trade specific term in the case of a Par Trade.

If breakfunding applies, this Condition provides a formula for calculating break costs to be paid on the Settlement Date. The calculation is based on the difference between the interbank offered rate (usually by reference to Thomson Reuters) for the period from the Settlement Date to the next payment date and the relevant funding rate for the loan in question during the then current interest period. The formula provides for two-way payments (so that if for example the interbank offered rate for the remainder of the then current interest period is higher than that set for the whole period, there will be a balancing payment to be made by the Seller to the Buyer). No discount is made for early receipt or payment. To take an example:

Amount of loan being sold : US$10,000,000

Settlement Date : 9 November

Current Interest period : 30 September to 31 December

Original End Date : 30 December

Current Funding Rate : 5.473% p.a. (i.e 3 month US$ LIBOR as at beginning of current interest period)

1 month US$ LIBOR as at 9 November (First Deposit Period –

: 5.46%


ends 9 December)

2 month US$ LIBOR as at 9 November (Second Deposit Period – ends 9 January)

: 5.496%

Relevant Period = 51 days

Using the linear interpolation between the 1 month and 2 month rates, the Interpolated Rate for the Relevant Period is calculated as follows:

Difference between the 1 and 2 month rates

= 5.496% – 5.46%

= 0.036% (1)

Number of days between 1 and 2 months

= 31 (2)

Number of days between Original End Date and end of First Deposit Period

= 21 (3)

Calculation of Interpolated Rate

(1) x (3) = 0.756 (4)

Divide (4) by (2) = 0.02439% (5)

Interpolated Rate is the sum of (5) and First Deposit Period Rate

= 5.46% + 0.02439%

= 5.48439%

Difference between Interpolated Rate and Current Funding Rate

= 5.48439% - 5.473%

= 0.01139% Monetary calculation

Day Count Basis = 360

Relevant Period (number of days between Settlement Date and Original End Date)

= 51

Amount x Difference in Rates x Relevant Period

= 10,000,000 x 0.01139% x 51

Divide by Day Count Basis = US$ 161.36

(q) Agent's Expenses (Condition 17): This Condition provides that the Seller bears responsibility for payment of any Agent's Expenses chargeable for the


period up to the Settlement Date or, if Trades Flat is specified as the agreed interest treatment, the Trade Date. Agent's Expenses chargeable after the relevant date are for the account of the Buyer. Transfer costs are however addressed separately in Condition 18 (Transfer Costs).

(r) Transfer Costs (Condition 18): See paragraph (n) and paragraph (o)(v) of Section 5.4 (Confirmation (Bank Debt)).

(i) Unless otherwise provided in the Agreed Terms, the Buyer and the Seller shall each pay in equal shares any recordation, processing, transfer or similar fee payable to the Agent under the Credit Documentation in connection with a transaction. However, the Buyer or, as the case may be, the Seller shall only pay one Transfer Fee in respect of the transfer of the Traded Portion and all transactions with Seller Related Entities or, as the case may be, Buyer Related Entities, which have the same Trade Date and relate to the same Credit Agreement. Such Transfer Fee shall equal one half of the fee payable to the Agent under the Credit Documentation for a transfer to or from a single entity constituting the Seller or the Buyer (as applicable) pursuant to a single LMA trade confirmation.

(ii) Any stamp duties, stamp duty reserve tax and other applicable transfer taxes (excluding notarial fees) required to be paid in relation to the Purchased Assets and Purchased Obligations and any costs (excluding notarial costs) attributable to the transfer or perfection of security are payable by the Buyer.

(iii) Any notarial fees attributable to the transfer/assignment of the Traded Portion where the notarisation to which such notarial fee relates is undertaken pursuant to an express requirement in the Credit Agreement (including where such express requirement is exercised at the discretion of the Agent or any other party to the Credit Agreement), are to be shared equally between Buyer and Seller. All other notarial fees, including in respect of the transfer of collateral are to be paid by the Buyer. The parties are free to depart from this if agreed at the time of trade.

(s) Costs and Expenses (Condition 19): Each party is responsible for its own costs and expenses (including legal expenses) in relation to a transaction. Costs, fees and expenses that are chargeable under the terms of the Credit Documentation are the Buyer's responsibility from the Settlement Date or, if Trades Flat is the specified interest treatment, from the Trade Date.

(t) Principal/Agency Status (Condition 20):

(i) Each party confirms it is acting as "principal" in the transaction unless it specifies in the Agreed Terms that it acts as agent in the transaction.

(ii) Where a party holds itself out as an agent, it is not itself strictly a party to a transaction. Any party holding itself out as an agent (i) is not liable to the counterparty for the successful completion of the


transaction and (ii) has no liability or obligation to the counterparty except either where it does not have authority to bind its principal or pursuant to any confidentiality agreement entered into by it.

(iii) A party indicating its status as an agent represents to its counterparty its authority to bind its principal to the transaction and is obliged to provide the counterparty with evidence of that authority, if requested to do so.

(iv) Where a party executes the confirmation as agent, binding its principal, it is the principal who is deemed to have made the acknowledgements and representations set out at Conditions 21 (Non-Reliance and Independent Investigation), 22 (Representations and Undertakings) and 23 (Default, Indemnities and Buy-in/Sell-out) respectively.

(u) Non-Reliance and Independent Investigation (Condition 21):

(i) Various acknowledgements and notifications are made in this provision. These relate to, for example, both parties being sophisticated parties and having all appropriate information to make an informed decision regarding the transaction, and each party agreeing that it has independently made its own analysis and decision to enter into the transaction without reliance on the other party (except for reliance on any express representation).

(ii) Except as otherwise specified, this Condition provides that a Seller makes no representation, and the Seller shall have no liability or responsibility to the Buyer for various matters, including the effectiveness of the Credit Documentation or any other documentation delivered by the Seller to the Buyer, or the financial condition of any obligor under the Credit Documentation.

(iii) Note that Condition 21 contains an additional acknowledgement that the other party may possess material information not known to the first party and that the other party is to have no liability for non-disclosure of any such information except to the extent that the information renders inaccurate an express representation made by that party. Any exclusion of liability will be subject in the UK to the relevant Unfair Contract Terms legislation.

(v) Representations and Undertakings (Condition 22):

Representations are invariably an integral part of any secondary debt trade transaction, particularly where the trade is a Distressed Trade. A strong set of representations and warranties will support or often even substitute a certain amount of due diligence on the part of the Buyer. They provide a level of comfort and protection to the Buyer and provide the Buyer with the right of recourse by way of monetary compensation through an action in damages or through an indemnity if there is breach (see paragraph (v) below). In addition, if a seller of debt can establish that a chain of representations and warranties


can be traced back to the inception of the loan, this will be perceived by the market as improving the quality and liquidity of the asset.

The representations contained in the Conditions cover two main categories:

(i) the parties; and

(ii) the asset - i.e. ownership and impairment of the assets,

and each category will be looked at in turn.

(i) The Parties:

(A) Mutual representations: The following representations set out in Condition 22.1 (Representations) are made by both Buyer and Seller as of the Trade Date and the Settlement Date and are made both on Par Trades and Distressed Trades:

(1) due incorporation;

(2) power to enter into the transaction;

(3) legal, valid, binding and enforceable obligations;

(4) no broker, finder or other person is acting on the instructions of one party for which the other may be responsible for the payment of a broker's fee or commission; and

(5) no approval by any Governmental Authority needed to enter into the transaction.

(B) Buyer's Representation and Undertaking: Additionally the following representation and undertaking set out in paragraph (a) and (b) respectively of Condition 22.5 (Buyer's representation and undertaking) are made by the Buyer to the Seller as of the Trade Date and the Settlement Date on both Par Trades and Distressed Trades:

(1) no use of any information for any unlawful purpose or in breach of any confidentiality agreement; and

(2) US ERISA status.

(C) Seller's Representation: The Seller makes a US ERISA status representation to the Buyer in paragraph (f) of Condition 22.2 (Seller's Representations – all trades) as of the Trade Date and the Settlement Date on both Par Trades and Distressed Trades.


(ii) The Asset:

(A) Introduction:

Representations as to ownership and impairment of the asset relate strictly to the Seller and can further be divided into two subcategories. The first sub-category relates specifically to the period of ownership of the asset by the Seller and its actions in relation to the asset. A Buyer would expect a Seller to be able to give these representations in relation to its period of ownership as the truth of such representations should largely be a question of fact as to the conduct of the Seller whilst owning the asset.

The second sub-category relates to the period of ownership of the asset where an entity other than the Seller has owned or controlled the asset since the inception of the loan. These entities are commonly referred to (and defined in the Conditions) as the Seller's Predecessors-in-Title.

By requiring a seller to make representations as to the conduct of its predecessors-in-title, a chain of contingent claims is established pursuant to which recourse can be made by each buyer in the chain against its respective seller (see diagram below). The advantages this provides for the owner of the asset at any given time, is that if the owner needs to bring a claim due to a defect in the asset. it need only concern itself with the counterparty from which it acquired the asset, regardless as to which period of ownership in the chain the defect in the asset was referable to. If the defect was not attributable to the period of ownership of that counterparty, then that counterparty would be able to pursue a back-to-back claim against the party it acquired the asset from. Each claim has full recourse to each seller and a buyer's recovery is not in any way conditional upon recovery by the relevant seller against its immediate predecessor-in-title. The chain of representations and warranties will be stronger and the asset perceived as having greater liquidity if the representations and warranties given are matched exactly to those received on the acquisition of the asset and are not limited or qualified in any respect. Invariably, a well advised seller will only be prepared to make representations regarding the conduct of its predecessors-in-title during their respective period of ownership if it has itself received matching representations and warranties at the time of the seller's purchase of the asset in question. It is hoped that over time a number of assets will trade on the basis of identical representations so that the making of Predecessor-in-Title representations by a seller will not prove problematic as the seller will have received equivalent matching representations at the time it acquired the asset that it now wishes to sell. This will be particularly so given that the Standard Terms and


Conditions require Predecessor-in-Title representations to be given whether the transaction is a Par Trade or a Distressed Trade.

Predecessor-in-Title Representations

Buyer 3OriginalLender Buyer 1 Buyer 2

Original Lender representationsand warranties

Representations and warrantiesby Buyers and Predecessor-in-Titlerepresentations and warranties in respect of Original Lender

Sale of loan asset Sale of loan assetSale of loan asset

Representations and warrantiesby Buyer 2 and the Predecessor-in-Titlerepresentations and warranties in respect of Original Lender and Buyer 1

Buyer 1 Recourse to Original Lender Buyer 2 Recourse to Buyer Buyer 3 Recourse to Buyer

(B) Introduction to the representations given by the Seller in respect of the asset being traded:

The representations contained in Condition 22.2 (Seller's representations – all trades) are given by the Seller in relation to the asset being traded and are intended to be comprehensive in terms of coverage in order to promote the liquidity of the asset being traded whilst at the same time being fair from the perspective of the Seller. They are not intended to be viewed as exhaustive, nor are they intended to be a total substitute for due diligence by the Buyer on the legal and credit structure of the asset. Buyers should therefore consider carefully whether it would be appropriate to seek any additional representations from the Seller at the time of trade. Any additional representations should be agreed at the time of trade and evidenced by being included as an additional term of trade in the confirmation (see paragraph (o)(i) of Section 5.4 (Confirmation (Bank Debt) and paragraph (iii) below). This may be of particular relevance to credits which, for example, have newly become distressed especially where there are foreign obligors or where local security has been granted, and users are recommended to take separate legal advice at the relevant time. Nevertheless, it is expected that the representations in Condition 22.2 (Seller's representations – all trades) should be sufficient for a number of the more commonly traded credits. Users should note that more comprehensive warranties are given by the Seller if the transaction is a Distressed Trade, reflecting the need for higher levels of coverage in the context of the sale of distressed assets.

(C) Definitions: Some of the definitions contained in Condition 1 (Applicability and Interpretation) are used in the representations given by the Seller in Condition 22.2 (Seller's representations – all trades) and are discussed further below:


(1) Claim Impairment: this is defined to mean any right of any person or authority, the effect of which is or would be to reduce, impair or otherwise materially and prejudicially affect the Purchased Assets, any part thereof or any guarantee or Collateral thereto or, any claim or action of any person or authority the effect of which if determined adversely, is or would be to reduce, impair or otherwise materially and prejudicially affect the Purchased Assets, any part thereof or any guarantee or Collateral thereto or any right of set-off of any person in respect of the Purchased Assets. Matters which would constitute a Claim Impairment therefore include the right of any liquidator or administrator to challenge any rights of the Seller (e.g. under a guarantee or security interest) as a preference or transaction at an undervalue or, in the case of a floating charge, as an invalid floating charge. This definition is used in the "no bad acts" and "impairment" representations (see paragraph (F) below).

(2) Collateral: this is defined to include all forms of security interests which have been or are purported to have been granted to or for the benefit of the lenders under the Credit Documentation. This definition is used in the definition of Claim Impairment and therefore is relevant to the "no bad acts" and "impairment" representations (see paragraph (F) below).

(3) Encumbrance: A market standard definition of encumbrance has been incorporated and the definition is used in the "unencumbered title" representation as well as in the definition of "Collateral".

(4) Governmental Authority: this definition is used in the "no litigation representation" and is expressed to include all federal, state or other governmental agencies, bodies, authorities, administrative or regulatory bodies arbitrators, courts or other tribunals both foreign or domestic.

(D) Representations given by the Seller on Par Trades and on Distressed Trades: The following representations in Condition 22.2 (Seller's Representations – all trades) are given by the Seller to the Buyer as of the Trade Date and the Settlement Date in all cases (except in the case of paragraph (a) (Unencumbered Title) and (e) (Pricing Letter and PIK Interest) of Condition 22.2 (Seller's Representations – all trades) which are given as of the Settlement Date) whether the transaction is a Par Trade or a Distressed Trade.


(1) Unencumbered title: in paragraph (a) the Seller represents that it is the sole legal and beneficial owner of, and has good title to, the Purchased Assets and the Purchased Obligations free and clear of any encumbrances, that the Seller conveys the Purchased Assets and Purchased Obligations with full title guarantee and has not made any prior sale or transfer or sub participation of its interest in, the Purchased Assets or the Purchased Obligations which is subsisting. The representation regarding encumbrances is qualified to exclude any encumbrance contained in any of the Credit Documentation, as a number of assets will themselves be encumbered (within the definition of "Encumbrance") if they are subject to option or subordination arrangements. It is clearly fundamental to the Buyer that it obtains good title to the Purchased Assets free and clear of any third party interests. The effect of the inclusion of the words "full title guarantee" is to incorporate the covenants for title set out in the Law of Property (Miscellaneous Provisions) Act 1994. A disposition expressed to be made with full title guarantee has the covenants implied that the Seller has the right to dispose of the asset which is the subject of the disposition and that it is disposing of the asset free from all charges, encumbrances and other rights exercisable by third parties other than charges, encumbrances or rights which the Seller does not and could not reasonably be expect to know about.

(2) No other documents: in paragraph (b) the Seller represents that there are no other documents executed by it or to which it is bound which would materially and adversely affect the Purchased Assets or the Purchased Obligations. It is clearly imperative that all material documents are disclosed to the Buyer prior to settlement. The Seller also represents that it has not executed any documentation relating to the Credit Documentation which has not also been executed by the Lenders of the Seller's class. These representations extend to documents executed by the Seller's Predecessors-in-Title (if any) or by which the Seller's Predecessors-in-Title (if any) are bound.

(3) No default: in paragraph (c) the Seller represents that it is not in default of any of its obligations in relation to the Purchased Assets or the Purchased Obligations. This representation extends to the Seller's Predecessors-in-Title (if any) not being in default of their obligations under the Purchased Assets. This representation provides the Buyer with comfort that it will not be


called upon for unexpected payments under the underlying credit documentation. It will also protect the Buyer if there is a provision in the underlying credit documentation which prevents a lender from receiving payments from the Agent if payments are outstanding from it.

(4) Alienability: in paragraph (d) the Seller represents that the assets are capable of being transferred as specified in the Agreed Terms.

(5) Pricing Letter and PIK Interest: in paragraph (e) the Seller represents that the amounts utilised in calculating the Settlement Amount for the Purchased Assets and the Purchased Obligations in the Pricing Letter are true and correct as of the date of the Pricing Letter. The Seller also represents that any PIK Interest that was capitalised to the principal amount of the Purchased Assets on or after the Trade Date but on or prior to the Settlement Date is specified in the Pricing Letter and is a proportionate share of the PIK Interest that was capitalised to the Seller's participation under or in respect of the tranche or facility from which the relevant Traded Portion derives.

(6) Ancillary Rights and Claims: in paragraph (g), the Seller is required to step-up for its Predecessors-in-Title (if any) in relation to the nature and scope of Ancillary Rights and Claims sold under the transfer agreements under which the Seller or any of its Predecessors-in-Title acquired the Purchased Assets and the Purchased Obligations under any Distressed Trade having a trade date on or after 1 February 2008 or any Par Trade having a trade date of on or after 25 January 2010. Without this "step up" and in the absence of a review of each such transfer agreement, the Buyer would not be able to satisfy itself that the nature and scope of the Ancillary Rights and Claims assigned from the original Seller to the Buyer substantially match the nature and scope of the Ancillary Rights and Claims as defined in Condition 1 (Applicability and Interpretation).

(E) Representation given by the Seller on Par Trades only: In paragraph (a) of Condition 22.3 (Seller's representations – Par Trades) the Seller represents, as of the Trade Date, that there has been no acceleration or enforcement of rights and no amount of principal or interest is outstanding under the Credit Documentation (so far as it is aware). In addition, the Seller represents in paragraph (b) of Condition 22.3 (Seller's representations – Par Trades) as at the Trade Date and the


Settlement Date that the Purchased Assets are free from any set-off in favour of any Obligor.

(F) Representations given by Seller on Distressed Trades only: The following representations in Condition 22.4 (Seller's representations – Distressed Trades) are given by the Seller to the Buyer, as of the Trade Date and the Settlement Date (except in the case of paragraphs (e) (No Impairment) and (g) (No Litigation) of Condition 22.2 (Seller's Representations – Distressed Trades) which are given as of the Trade Date), only where the transaction is a Distressed Trade.

(1) Provision of Credit Documentation: unless the Seller and the Buyer have agreed that the Buyer should not be provided with the Credit Documentation, the Seller represents in paragraph (a) that it has provided to the Buyer, the Credit Agreement, all intercreditor and subordination agreements and material waivers and amendment documentation that are then in effect. If the Buyer has requested any further documentation and these are delivered, then the representation will extend to those documents.

(2) No connected Parties: in paragraph (b) the Seller represents that it is not and has not at any time been "connected" with any Obligor as such term is used in the Insolvency Act 1986 as amended (or similar provision in any relevant jurisdiction). This representation is expressed to extend to each of the Seller's Predecessor's-in-Title (if any). The term "connected" is defined by Section 249 of the Insolvency Act 1986 and by Section 435 to which Section 249 refers. A person is "connected" with a company if that person is either (a) a director or shadow director of the company in question or an associate of such a director or shadow director or (b) an associate of the company. For both limbs of the definition of connected person "associate" is defined in section 435 of the 1986 Act. A shadow director is a person who is not a de jure (properly appointed) director but on whose directions or instructions the board of directors of the company in question is accustomed to act. Broadly speaking, the circumstances in which a person would be an associate of a company include if it were able to exercise, either by itself or with a group of two or more persons, control of more than one-third of the issued share capital of that company. In the circumstance where a person is connected with a company, the period during which transactions between that person and the company may be challenged in any subsequent liquidation or


administration of that company is generally extended and, in certain cases, there will be a presumption that certain precautions for a successful challenge have been fulfilled. For instance, the risk period during which a liquidator or administrator may challenge transactions between connected parties as a preference is two years from the date of the preference compared to six months before the onset of insolvency where the parties are not connected. There is also a statutory presumption that the entering into of a transaction between a company and a connected party was influenced by a desire for the former to prefer the latter for the purposes of determining whether it was a preference. Similarly, a transaction entered into between two connected companies is presumed to have been entered into at a time when the company subsequently placed into liquidation or administration was insolvent or became insolvent in consequence of that transaction for the purposes of determining whether the transaction was at an undervalue.

(3) No bad acts: in paragraph (c) the Seller represents that it has not engaged in any acts or conduct or made any omission independently of other lenders (or similar creditors, in the case of a Claims Trade) that would result in the Buyer receiving proportionately less payments or distributions or less favourable treatment in respect of the Purchased Assets or Purchased Obligations than any other lender holding advances or a participation (of a similar nature to the Traded Portion) or similar claims under the Credit Documentation (or than any other similar creditor, in the case of a Claims Trade). The Seller also represents that such act, conduct or omission would not result in any Purchased Assets or any part thereof being subject to a Claim Impairment and that the Seller has not set-off any amount against the Purchased Assets and no rights of set off of, or against the Seller, exist which would permit any set-off of, or against the Seller, or counterclaim against the Purchased Assets. This is one of the most important representations in the Conditions. In short, this is a catch-all representation intended to protect the Buyer against the Seller having done or omitted to do anything which puts it, and thus the asset it is selling, at a disadvantage vis à vis other members of the syndicate (or vis à vis creditors holding similar claims). This representation would, for instance, cover the situation where the other lenders have started legal proceedings against the borrower or against a professional adviser which the Seller has not joined in,


with the result that it will not share in the proceeds. Where, however, a right of set-off or counterclaim does exist, then the representation will need to be excluded or amended accordingly by the parties so agreeing at the time of trade and evidencing that agreement in the confirmation. This representation will extend to acts, conduct or omissions of each of the Seller's Predecessors-in-Title (if any) and extend additionally to rights of set-off of, or against, each of the Seller's Predecessors-in-Title (if any).

(4) No rights of set-off: in paragraph (d) the Seller represents that no rights of set-off exist (including to the best of its knowledge in relation to its Predecessors-in-Title) against the Purchased Assets.

(5) No impairment: in paragraph (e) the Seller represents that it has not received any notice and is not otherwise, to the best of its knowledge, aware that the Purchased Assets or Purchased Obligations or any portion thereof or any security, guarantees or collateral or any of the Credit Documentation are subject to any Claim Impairment or are invalid or void. The representation regarding receipt of notice is expressed to extend to each of the Seller's Predecessors-in-Title (if any). Note that this representation is not an absolute warranty regarding impairment. By qualifying the representation by reference to notice or knowledge, the representation is purely factual and should not prove contentious.

(6) No funding obligations: in paragraph (f) the Seller represents that it has no obligation to make any further loans or advances or other extensions of credit under the Credit Agreement for which the Buyer will assume responsibility except for the Purchased Obligations (which are expressed to exclude obligations which relate to facts, events or circumstances arising or occurring before the Settlement Date) and that the Seller has no other liabilities or obligations in respect of the Purchased Assets or Purchased Obligations other than Agent’s Expenses.

(7) No litigation: in paragraph (g) the Seller represents that no proceedings of or before any Governmental Authority have been commenced or, to the best of the Seller's knowledge, are threatened against the Seller which would adversely affect the Purchased Assets, the Purchased Obligations or any rights of the Buyer under any of the Transaction Documentation. The purpose of this representation is to protect the Buyer against a third party having challenged the validity of the debt or the


Seller's claim to it by legal action. The representation is expressed to extend to proceedings commenced or threatened against each of the Seller's Predecessors-in-Title (if any).

(G) Representations given by Seller in the Assignment (Distressed/Claims) and Funded Participation (Distressed/Claims): Users should note that if the transaction is a Claims Trade, the Seller will represent to the Buyer as to the status of the relevant claim. This representation is contained in the Assignment (Distressed/Claims) (see paragraph (a) (viii) of Section 7.3 (Assignment)) and the Funded Participation (Distressed/Claims) (see paragraph (l) of Section 8.3 (Funded Participation):

(iii) Additional representations and warranties:

Condition 22.6 (Additional representations and warranties) envisages that the parties may agree that the trade should incorporate other additional representations and warranties. If this is to be the case it should be agreed at the time of trade, evidenced in the Confirmation and those other representations should be annexed to the Confirmation (see paragraph (o)(i) of Section 5.4 (Confirmation (Bank Debt)).

(iv) Survival of representations:

Users should note that pursuant to Condition 22.7 (Survival of representations) liability for any breach of representation by the Seller or the Buyer is intended to survive the completion of the transaction.

(w) Default, Indemnities and Buy-in/Sell-out (Condition 23):

(i) This Condition provides for a number of indemnities to be given by both the Seller and the Buyer.

(ii) Each party agrees to indemnify the other for loss suffered by it as a consequence of the other party breaching any provisions of the Agreed Terms or the Transaction Documentation (other than where compensated under the Buy-in/Sell-out provisions (see paragraph (vii) below)) or as a consequence of the breach of any representation or warranty by the other party.

(iii) The Seller agrees to indemnify the Buyer for any loss suffered by the Buyer as a result of any failure by the Seller to perform any of its obligations under the Credit Documentation during the period to the Settlement Date. Conversely, the Buyer agrees to indemnify the Seller for any loss suffered by the Seller as a result of any failure by the Buyer to perform any of its obligations under the Credit Documentation from the Settlement Date.


(iv) The Seller also agrees to indemnify the Buyer in the event that the Buyer is subsequently required to reimburse any party or disgorge in respect of payments previously received or applied by the Buyer or the Seller for the account of the Seller or, as the case may be, such Seller's Predecessor-in Title. In other words, the risk of reimbursement or disgorgement in respect of payments or property received or applied for the account of the Seller or any of its Predecessors-in-Title will be borne by the Seller. An obligation to reimburse a third party in respect of a payment previously applied to the account of the Seller or its Predecessor-in-Title may arise in the event that the Buyer is subsequently required under the terms of any sharing provisions contained in the Credit Documentation to redistribute all or part of such payment to one or more other lenders. A "disgorgement" indemnity addresses the circumstance where a payment made in respect of the Traded Portion is subsequently successfully avoided by a liquidator in the insolvency of the underlying debtor (e.g. as a preference under s.239 Insolvency Act 1986). If the Buyer were required to reimburse a third party or disgorge to the liquidator in respect of a payment which was previously received and applied for the account of the Seller or any of its Predecessors-in-Title, the Buyer will have suffered a loss in respect of a payment for which it received no benefit or reward. In this circumstance, it is appropriate for the Buyer to be compensated by the Seller. The rationale is that whichever party is entitled to the rewards for a given period should also bear the risk for such period.

(v) Similarly, if the Seller is required to reimburse a third party or disgorge in respect of payments received by the Seller or the Buyer and applied for the account of the Buyer, the Buyer is required to indemnify the Seller against any such reimbursement requirement.

(vi) The indemnities are expressed to be continuing, separate and independent obligations intended to survive implementation of the trade. The obligation to indemnify a party will not however extend to loss occasioned by the negligence or wilful misconduct of such party.

(vii) Condition 23.3 (Buy-in/Sell-out) provides for Buy-in/Sell-out damages which are applicable to all Par Trades unless the parties agree that it shall not apply to their Par Trade. There is a tick box in the "Other Terms of Trade" section of the Confirmation which allows the parties to record their agreement to disapply the Buy-in/Sell-out provisions. Buy-in/Sell-out damages do not apply to Distressed Trades.


(A) The Buy-in/Sell-out provisions of the Standard Terms and Conditions apply if a Par Trade has not settled on or before the date 60 Business Days after the Trade Date (referred to as the Trigger Date) because a party (referred to as the defaulting party) has failed to execute and deliver to the other party


(referred to as the non-defaulting party) and, in the case of (ii) below, if applicable, to the agent under the Credit Agreement:-

(1) the Confirmation; and/or

(2) the Form of Purchase for the purpose of settling the transaction (referred to as the Settlement Delivery Obligations).

(B) At any time after the Trigger Date, the non-defaulting party may give notice to the defaulting party of its intention to terminate its obligations in respect of the transaction and to enter into a substitute transaction. Such notice must be substantially in the LMA form of Buy-in/Sell-out Notice. The non-defaulting party is not obliged to exercise its buy-in/sell-out rights and is not excluded from using any other rights or remedies it may have as a matter of law or under the Agreed Terms.

(C) If the non-defaulting party delivers a Buy-in/Sell-out Notice to the defaulting party, the defaulting party must promptly acknowledge receipt of such Notice and has 15 Business Days (referred to as the Cure Period) from the date on which such notice becomes effective in accordance with Condition 31 (Notices), to perform its Settlement Delivery Obligations. If the defaulting party performs its Settlement Delivery Obligations within the Cure Period by signing and delivering to the other party the Confirmation and/or Form of Purchase, the Buy-in/Sell-out Notice is cancelled and the transaction continues.

(D) In addition, if the Seller is the defaulting party and at the time the Buy-in/Sell-out Notice becomes effective the Seller does not own beneficially all of the Purchased Assets it has agreed to sell to the Buyer, such Buy-in/Sell-out Notice will cease to be of any effect if the Seller can satisfy the following conditions within the Cure Period:-

(1) delivery to the Buyer of a confirmation or other evidence of an upstream trade for the equivalent of the Purchased Assets;

(2) certify to the Buyer that:

a. the evidence in (1) above has not been used as evidence of an upsteam trade for any other transaction;

b. it has performed or will perform the equivalent of its Settlement Delivery Obligations under its upstream trade;


c. it has delivered or will deliver a notice analogous to the Buy-in/Sell-out Notice under its upstream trade.

(3) uses its reasonable endeavours to exercise its rights as a non-defaulting party promptly within the Cure Period under the upstream trade; and

(4) promptly after a written request from the Buyer, provide written certification or other evidence that it has performed the above obligations and fully enforced its rights analogous to those contained in Condition 23.3 (Buy-in/Sell-out) as a non-defaulting party in respect of the upstream trade.

The term "permanent shield" has been used by loan market participants to describe the protection afforded to a Seller in the circumstances described above. The purpose of the "permanent shield" is to protect the Seller from a buy-in transaction in circumstances where the Seller is caught in an open trade which is preventing the Seller from carrying out its sale to the Buyer. If however the Seller does not have an upstream trade but has nevertheless entered into the transaction with the Buyer to sell the Purchased Assets (a short seller), the permanent shield will not be available to it and the Seller could be made subject to a buy-in transaction.

(E) If the defaulting party fails to perform its Settlement Delivery Obligations on or before the last day of the Cure Period or the Seller as defaulting party is not entitled to invoke the "permanent shield" within the Cure Period, the non-defaulting party must then use its reasonable endeavours to identify a substitute counterparty and enter into a Substitute Transaction. If the non-defaulting party fails to identify a substitute counterparty within 15 Business Days of the end of the Cure Period:

(1) the non-defaulting party must promptly give notice of that fact to the defaulting party;

(2) no further Buy-in/Sell-out Notices may be served by that non-defaulting party or substitute transactions entered into without the defaulting party's prior written consent; and

(3) the parties must consider in good faith whether or not there is a means, acceptable to both parties, of implementing the transaction.

If the non-defaulting party enters into a Substitute Transaction within the 15 Business Day time period, the non-defaulting


party must send notice to the defaulting party of the purchase price for the Substitute Transaction no later than 1 Business Day after the signing of the Substitute Confirmation.

(F) If the defaulting party disputes the reasonableness of the purchase price for the Substitute Transaction, it must send a notice of such dispute substantially in the LMA form (referred to as the Price Dispute Notice) to the non-defaulting party and the LMA Pricing Panel no later than the 2nd Business Day after the date on which the Purchase Price Notice becomes effective. On receipt of the Price Dispute Notice, the LMA Pricing Panel determines the price (referred to as the Indicative Price) for the Substitute Transaction using the LMA Pricing Panel Methodology. It should be noted that the LMA Pricing Panel will not determine such a price unless it is satisfied that the original transaction:

(1) contains provisions which exclude the LMA, each member of the LMA Pricing Panel and the Determination Agent from liability in carrying out its roles and duties under the LMA Pricing Panel Methodology;

(2) contains a waiver of claims against the LMA, each member of the LMA Pricing Panel and the Determination Agent in carrying out its roles and duties under the LMA Pricing Panel Methodology; and

(3) contains suitable third party rights provisions, to ensure the LMA, each member of the LMA Pricing Panel and the Determination Agent is able to take the benefit of and enforce such exclusion and waiver provisions.

Paragraphs (e)(v) and (e)(vi) of Condition 23.3 (Buy-in/Sell-out) and paragraphs (b) and (c) of Condition 31 (Third Party Rights) of the Standard Terms and Conditions contain such provisions.

(G) Once a Substitute Transaction has been entered in to, if the Seller is the defaulting party, the Seller must pay to the Buyer on the settlement date specified in the Substitute Confirmation (referred to as the Substitute Settlement Date) as follows:

(1) if no Price Dispute Notice was issued, the amount by which the price in respect of the Buy-in Transaction exceeds the original price for the Traded Portion; and

(2) if a Price Dispute Notice was issued, the amount by which the Indicative Price in respect of the Buy-in Transaction (determined by the LMA Pricing Panel) exceeds the original price for the Traded Portion.


If the calculation results in a negative amount, the Buyer must pay the Seller the absolute value of that amount.

It is intended that the original price and the substitute price will each be calculated as at the Substitute Settlement Date using the methodology contained in Condition 14 (Settlement amount calculation) applying the appropriate purchase rate figures. If Delayed Settlement Compensation applies to the original transaction, the Seller must also pay Buy-in Compensation to the Buyer for each day from (and including) the date on which the Buy-in/Sell-out Notice becomes effective to (but excluding) the earlier of actual settlement of the Substitute Transaction and 10 Business Days following the Substitute Trade Date. If PIK Interest applies to all or any part of the Purchased Assets during the period referred to above and the Sell-out Costs of Carry results in a negative amount, the Seller must also pay the Buyer the absolute value of that amount.

(H) If the Buyer is the defaulting party, the Buyer must pay to the Seller on the Substitute Settlement Date as follows:

(1) if no Price Dispute Notice was issued, the amount by which the price in respect of the Sell-out Transaction is less than the original price for the Traded Portion; and

(2) if a Price Dispute Notice was issued, the amount by which the Indicative Price in respect of the Sell-out Transaction (determined by the LMA Pricing Panel) is less than the original price for the Traded Portion.

If the calculation results in a negative amount, the Seller must pay the Buyer the absolute value of that amount.

It is again intended that the original price and the substitute price will each be calculated as at the Substitute Settlement Date using the methodology contained in Condition 14 (Settlement amount calculation) applying the appropriate purchase rate figures. If Delayed Settlement Compensation applies to the original transaction and PIK Interest applies to all or any part of the Purchased Assets during the period referred to below, the Buyer shall in addition pay Sell-out Costs of Carry for each day during the period from (and including) the date on which the Buy-in/Sell-Out Notice becomes effective to (but excluding) the earlier of:

(1) actual settlement of the Buy-in Transaction; and

(2) 10 Business Days following the Substitute Trade Date.

(I) Users should note that compensation for delayed settlement is treated differently when calculated in respect of a Substitute


Transaction and reflects the equivalent calculation contained in the LSTA Buy-in/Sell-out provisions and the former LMA par trading documents. Sell-out Costs of Carry and Buy-in Compensation are payable in respect of the period from (and including) the effective date of the Buy-in/Sell-out Notice to (but excluding) the earlier of the date of actual settlement of the substitute transaction and 10 Business Days after the Substitute Trade Date. Sell-out Costs of Carry (based on the average of the Relevant Benchmark Rates) only apply if PIK interest accrues on the Purchased Assets during the period referred to above to compensate the Seller for funding a loan in respect of which all or part of the interest is being capitalised. Buy-in Compensation is intended to compensate the Buyer for the margin and Recurring Fees it would have been entitled to receive had it not been compelled to enter into a substitute transaction.

(J) Other points for users to note in relation to the buy-in/sell-out provisions are as follows:-

(1) Neither party is entitled to exercise buy-in/sell-out rights if the transaction settles on the basis of an alternative structure or arrangement mutually acceptable to both parties.

(2) If the party responsible for preparing the Form of Purchase has not done so on or before the date 2 Business Days before the Trigger Date and the other party has confirmed after that date but before the Trigger Date that it is ready, willing and able to sign the Form of Purchase, then that party shall be deemed to be a non-defaulting party, to have satisfied its Settlement Delivery Obligations and entitled to exercise its buy-in/sell-out rights as a non-defaulting party. The purpose of this provision is to avoid disputes over who is the non-defaulting party.

(3) The Seller is not permitted to exercise its buy-in/sell-out rights as a non-defaulting party unless on the date its Buy-in/Sell-out Notice is effective, it owns beneficially all of the Purchased Assets. This provision prevents a Seller from exercising buy-in/sell-out rights when it is not itself in a position to settle the transaction.

(K) To assist users, the following flow charts illustrate the five scenarios provided for in the buy-in/sell-out provisions.


Scenario 1 – Failure to settle/BISO applies

The transaction has failed to settle within 60 Business Days of the Trade Date (the “Trigger Date”) because either party has failed to perform its Settlement Delivery Obligations.

The non defaulting party can serve a Buy-in/Sell-out Notice in LMA form (the “BISO Notice”) on the defaulting party at any time after the Trigger Date (unless the non defaulting party is the Seller and does not own beneficially the Purchased Assets on the date of the BISO Notice).

The defaulting party must promptly acknowledge receipt of the BISO Notice.

The defaulting party has 15 Business Days from the effective date of the BISO Notice (the “ Cure Period”) to perform its Settlement Delivery Obligations.

If the defaulting party does not perform its Settlement Delivery Obligations within the Cure Period, the non defaulting party shall use reasonable endeavours to identify a substitute counterparty and enter into a substitute trade confirmation within 15 Business Days of the end of the Cure Period.

The non defaulting party to send defaulting party, no later than the 1st Business Day after the substitute trade confirmation is signed by both parties to it, notice of the purchase price for the substitute transaction.

If the Seller is the defaulting party, Seller pays Buyer on Substitute Settlement Date the amount by which the price for the Buy-in Transaction exceeds the original price for the Traded Portion (plus Buy-in Compensation and, if applicable, Sell-out Costs of Carry).

If the Buyer is the defaulting party, Buyer pays Seller on Substitute Settlement Date the amount by which the price for the Sell-out Transaction is less than the original price for the Traded Portion (plus, if applicable, Sell-out Costs of Carry).


Scenario 2 – Failure to settle/BISO applies but defaulting party disputes price of substitute transaction

The transaction has failed to settle within 60 Business Days of the Trigger Date because either party has failed to perform its Settlement Delivery Obligations.

The non defaulting party can serve a BISO Notice on the defaulting party any time after Trigger Date (unless the non defaulting party is the Seller and does not own beneficially the Purchased Assets on the date of the BISO Notice).


The defaulting party has 15 Business Days from the effective date of the BISO Notice (the “Cure Period”) to perform its Settlement Delivery Obligations.

If the defaulting party does not perform its Settlement Delivery Obligations within the Cure Period, the non defaulting party shall use reasonable endeavours to identify a substitute counterparty and enter into a substitute trade confirmation within 15 Business Days of the end of the Cure Period.

The non defaulting party to send defaulting party, no later than the 1st Business Day after the substitute trade confirmation is signed by both parties to it, notice of the purchase price for the substitute transaction in LMA form (the “Purchase Price Notice”).

If the defaulting party disputes the reasonableness of the price for the substitute transaction, the defaulting party to send a price dispute notice (in LMA form) to the non defaulting party and the LMA Pricing Panel not later than the 2nd Business Day after the Purchase Price Notice becomes effective.

The LMA Pricing Panel determines the price for the Substitute Transaction in accordance with the Pricing Panel Rules provided the equivalent of Conditions 23.3(e)(v) and (vi) and 30 are incorporated in the original trade.

If the Seller is the defaulting party, Seller pays Buyer on Substitute Settlement Date the amount by which the price for the Buy-in Transaction (as determined by the LMA Pricing Panel) exceeds the original price for the Traded Portion (plus Buy-in Compensation and, if applicable, Sell-out Costs of Carry).

If the Buyer is the defaulting party, Buyer pays Seller on Substitute Settlement Date the amount by which the price for the Sell-out Transaction (as determined by the LMA Pricing Panel) is less than the original price for the Traded Portion (plus, if applicable, Sell-out Costs of Carry).


Scenario 3 – Failure to settle/BISO applies but non defaulting party fails to enter into a Substitute Transaction

The transaction has failed to settle within 60 Business Days of Trigger Date because either party has failed to perform its Settlement Delivery Obligations.

The non defaulting party can serve a BISO Notice on the defaulting party any time after the Trigger Date (unless the non defaulting party is the Seller and does not own beneficially the Purchased Assets on the date of the BISO Notice).


The defaulting party has 15 Business Days from effective date of the BISO Notice (the “Cure Period”) to perform its Settlement Delivery Obligations.

If the defaulting party does not perform its Settlement Delivery Obligations within the Cure Period, the non defaulting party shall use reasonable endeavours to identify a substitute counterparty and enter into a substitute trade confirmation within 15 Business Days of the Cure Period.

If the non defaulting party fails to sign a substitute confirmation on or before the 15th Business Day following the end of the Cure Period, no further BISO Notices may be served on the defaulting party without the defaulting party’s prior written consent. The non defaulting party must give notice promptly of such failure and the parties must consider in good faith an alternative means acceptable to both parties, of implementing the transaction.


Scenario 4 – Failure to settle/BISO applies but default is cured


The non defaulting party can serve a BISO Notice on the defaulting party any time after the Trigger Date (unless the Seller is the non defaulting party and does not own beneficially all of the Purchased Assets on the date of the BISO Notice).


The defaulting party has 15 Business Days from the effective date of the BISO Notice (the “Cure Period”) to perform its Settlement Delivery Obligations.

If the defaulting party performs its Settlement Delivery Obligations within the Cure Period, the BISO Notice ceases to be of any effect and the trade can continue to settlement.


Scenario 5 – Failure to settle/BISO applies but defaulting party is Seller with Upstream Obligations


The non defaulting party can serve a BISO Notice on the defaulting party any time after the Trigger Date (unless the non defaulting party is the Seller and does not own beneficially the Purchased Assets on the date of the BISO Notice).


If Buyer is the non defaulting party and serves a BISO Notice on a Seller who does not own beneficially all of the Purchased Assets on the date the BISO Notice becomes effective, the Buyer as non-defaulting party may not exercise any further BISO rights if:(a) Seller delivers within the Cure Period, a copy of a

trade confirmation or other evidence dated not later than 5 Business Days after the Trade Date showing Seller has agreed to purchase equivalent of the Purchased Assets from a third party;

(b) Seller certifies in writing that:(i) such evidence has not been delivered for

this purpose previously;(ii) it has or will perform its settlement delivery

obligations under that upstream trade;(iii) it has or will deliver a buy-in/sell-out notice

to its counterparty within the Cure Period;(c) the Seller uses its reasonable endeavours to exercise its

rights as a non defaulting party prior to the end of the Cure Period applicable to such transaction;

(d) it certifies to the Buyer when requested so to do that it has carried out its obligations as specified above.

No further BISO rights may be exercised against the defaulting party but terms and conditions (excluding BISO) continue to apply.


(x) Confidentiality (Condition 25): This Condition imposes a duty on both parties to maintain the confidentiality of the terms of the transaction and the Transaction Documentation unless required by law. The Seller and the Buyer are however permitted to make any necessary disclosures to members of their respective Group, to their professional advisers and auditors regarding the terms of the transaction, in connection with the perfection or enforcement of their rights in relation to the transaction and to any person appointed to provide administration or settlement services in relation to the transaction. Furthermore, the Buyer is permitted to make any necessary disclosures to prospective purchasers from the Buyer (except for the identity of the counterparty and the pricing arrangements). It should be noted that this Condition is subject to any confidentiality agreement entered into between the parties.

(y) Binding Amendment and Debt Restructuring (Condition 26): Following the Trade Date, the Buyer bears the risk of any amendment or waiver of the Credit Documentation, of any refinancing of the indebtedness under the Credit Documentation and of any restructuring of the indebtedness approved by more than 50% of the relevant creditors. The Seller is permitted to enter into such amendments, refinancing or restructurings and to apply for or accept Non-Cash Distributions in connection with such amendments, refinancing or restructuring.

(z) Set-Off (Condition 27): A conventional form set-off provision is included in relation to amounts which are due and payable by either party to the other party under a given transaction.

(aa) Further Assurance (Condition 28): Each of the parties agrees, at its own expense, to take any further action and to execute any further documents as the other may reasonably request to give effect to the transaction.

(bb) Tax and Withholding (Condition 29): The Buyer acknowledges in this Condition that it is responsible for making its own independent tax analysis of the Credit Documentation and the transaction. For a discussion of certain tax issues see Section 10 (Taxation). Unless otherwise provided in any Transaction Document, if any withholding is required to be made from any payments made (other than in respect of interest or fees received under the Credit Documentation, in respect of which no gross-up will be made) under the Conditions and the Transaction Documentation, the payer will be obliged to increase the amount paid to the payee to ensure that the payee receives and retains a sum equal to the sum it would have received had no such withholding been required to be made. Users should note that the LMA forms of Participation Agreement alter this position by providing that all payments made by the Grantor (Seller) under the Participation Agreement are made net of any deduction or withholding and that no such gross-up by the Grantor is required (see paragraph (f) of Section 8.3 (Funded Participation)).

(cc) Assignment (Condition 30): This Condition prohibits the Seller or the Buyer from assigning all or any part of its rights against the other under the Agreed Terms or Transaction Documentation without the consent of the other (not to be unreasonably withheld or delayed). However, a Non-Insolvent Party is


permitted to assign its right to payment of any Early Termination Payment Amount (see paragraph (c)(ix) above). The prohibition on assignment is expressed not to apply where the Agreed Terms provide for these rights to be freely assignable. Note also that this prohibition does not prevent the Buyer freely selling all or part of the Purchased Assets.

(dd) Third Party Rights (Condition 31): This Condition generally excludes the operation of the Third Parties Act to ensure that a person who is not a party to the Agreed Terms or other Transaction Document cannot enforce the terms or enjoy the benefit of all or any term of the Confirmation or other Transaction Document. However, the condition expressly permits the LMA, the LMA Pricing Panel and the Determination Agent to enforce the exclusions of liability contained in the Buy-in/Sell-out provisions (see paragraph (v)(vii)(F) above).

(ee) Notices (Condition 32): Notices may be made by fax, letter or, if agreed by the parties, by email or other electronic means. Any communication or document which becomes effective, in accordance with paragraph (a) of Condition 32, after 5.00pm in the place of receipt is deemed only to become effective on the following day.

(ff) Governing Law and Jurisdiction (Condition 33):

(i) English law applies, and the parties submit to the non-exclusive jurisdiction of the English courts. Note that this choice of law and jurisdiction will not necessarily be the same as those applying under the Credit Documentation, although if they are different advice should be sought as to the potential consequences.

(ii) This Condition also provides for the appointment of any process agent specified in the Agreed Terms (see paragraph (o) of Section 5.4 (Confirmation (Bank Debt)).

(gg) Counterparts (Condition 34):

(i) This Condition provides for execution of Confirmations, Confidentiality Agreements or other Transaction Documents in counterparts.

(ii) After delivery by fax, email or other electronic means of a copy counterpart of the Transaction Documents the Buyer and the Seller are obliged to deliver to the other party an original counterpart of any Confirmation, Confidentiality Agreement or other document provided such request is made within 5 Business Days of the Settlement Date.

(hh) Electronic Signatures (Condition 35):

This Condition expressly permits any Confirmation, Confidentiality Agreement or other Transaction Document to be signed by electronic signature.


7. ASSIGNMENT AND TRANSFER AGREEMENT

7.1 Introduction

Each of these documents is designed to effect a clean sale of the asset from Seller to Buyer. Issues can arise in relation to assignments, but the intention is not under any of these documents for Seller and Buyer to have a continuing relationship.

The Transfer Agreement is designed for use for trades of bank debt (as opposed to insolvent claims) where the underlying Credit Documentation does not contain any transfer provisions at all but a novation is required (this will often be the case in bilateral facility agreements). Note that often in these circumstances the Credit Documentation may not contain the type of provisions commonly associated with a syndicated facility (e.g. agency, voting and amendment mechanisms) and care should therefore be taken if the Transfer Agreement is intended to effect the transfer of part of a Seller's commitment under a bilateral facility.

The Transfer Agreement results in a novation to the Buyer of the Seller's rights and obligations in relation to the asset being sold; this results (as between all parties to the Credit Documentation) in the Seller being released from its obligations to, and releasing its rights against, the Obligors, and the Buyer becoming subject to equivalent obligations to, and acquiring equivalent rights against, the Obligors. In certain circumstances a clean novation may not be advisable or possible (this can be the case, for example, where the Borrower is in insolvency or where certain types of security are given in favour of syndicate members at the outset and, because of the particular structure or legal restrictions, the Seller's rights to this security cannot be novated). In these cases a "hybrid" transfer mechanism is sometimes used, whereby the Seller's obligations are novated but its rights are assigned; where a transfer certificate mechanism is used this will, if required, have been built into the operative provisions contained in the Credit Documentation. However, if the Transfer Agreement were to be used in these circumstances the form of this would need to be amended, and users are advised to consult their legal advisers if the Transfer Agreement is to be used in circumstances other than that of a straightforward unsecured loan. In any event it is not envisaged that users would use the Transfer Agreement where an insolvent claim is being traded.

The Assignment, on the other hand, operates to assign to the Buyer the Seller's rights in relation to the asset being sold. Once notified to the Obligors, the Obligors thereafter owe their corresponding obligations direct to the Buyer. However, so far as the Obligors are concerned, any obligations owed to them relating to the asset in question remain with the Seller (since obligations cannot be assigned). As between the providers of credit however, the Buyer agrees with the other credit providers in the Assignment to assume the Seller's obligations relating to that asset.

The Assignment may be used where, for one reason or another a novation is not appropriate (see above). Two forms of Assignment Agreement are available for use: Assignment (bank debt) and Assignment (distressed/claims). Where the trade was evidenced by an LMA form of trade confirmation (bank debt), the Assignment (bank debt) should be used and, where an LMA form of trade confirmation (claims) has been signed by the parties, the Assignment (distressed/claims) should be used.


7.2 Common Features

Common features of these documents include:

(a) Front Sheet: This identifies the parties (Assignor/Transferor and Transferee/Assignee) and the relevant Agreed Terms, and also acts as the execution page of the document. The document should be signed by the principals, even if the Confirmation was signed by an agent. It will be dated on, or most likely a few days prior to, the Assignment Effective Date/the Transfer Effective Date.

The front sheet is the operative agreement between the parties, and incorporates the terms of the underlying trade (by reference to the Agreed Terms (i.e. the agreement evidenced by the Confirmation) and its terms and conditions), the Schedule to the Assignment/Transfer Agreement and the annexed terms and conditions (see below).

(b) The Schedule: This is drafted in similar terms for each agreement, the structure following that set out in the form of confirmation (see Section 5 (Trade Confirmation)). The main difference is that here the information should be given as of the date of the agreement. The reason for including this information, even though much of it may well be included in the Confirmation, is to avoid having to disclose the Confirmation in any later transactions involving the asset; the Schedule should give all relevant information. In addition, as referred to above, the information in the Schedule is updated to be accurate as at the date of the agreement.

In addition, administration details need to be included at the foot of the Schedule.

(c) The Schedule to the Assignment (distressed/claims) contains a tick-box option in which the status of the claim being assigned should be specified. The following alternatives are provided.

(i) Proof of debt filed;

(ii) No proof of debt filed and no deadline expired for the submission of claims; or

(iii) Claim admitted.

The Seller is required to make a representation (contained in the Terms and Conditions to the Assignment (distressed/claims)) as to the status of the claim. See paragraph (a)(viii) of Section 7.3 (Assignment).

(d) Terms and Conditions: These set out the mechanics of the transfer/assignment, although in each case additional provisions (see below) are required to make the transfer or assignment fully effective.


7.3 Assignment

The following features of the Assignment should be noted (unless otherwise indicated below, the features apply equally to both the bank debt and claims forms of Assignment).

(a) Terms and Conditions: These deal with the following matters:

(i) Interpretation: Users should note that the Assignment does not define terms where those terms are already defined in the Standard Terms and Conditions and relies instead on incorporating terms from the Standard Terms and Conditions by reference. The Assignment uses a definition of "Assignment Effective Date" to specify the date on which the assignment comes into effect and this date should be the same date as the Settlement Date under the Agreed Terms.

(ii) Assignment: This Clause provides:

(A) that the Assignment is conditional upon the obtaining of all necessary consents or other necessary documents;

(B) that the Assignee agrees that it will, on the Assignment Effective Date:

(1) accept the Assignment of the Assigned Assets; and

(2) as against the Assignor, the Agent and other providers of credit (but not vis à vis the Borrower), perform the Assumed Obligations under the Credit Documentation (the Assumed Obligations are all of the Assignor's Obligations corresponding to that portion of the commitment being assigned); and

(C) that each Party agrees to pay the Settlement Amount to the extent so specified in the Pricing Letter.

(iii) Completion: Completion of the Assignment shall take effect on the Assignment Effective Date on receipt by the Assignor (or, as the case may be, the Assignee) of the Settlement Amount.

(iv) Pro Rata Interest Settlement: To the extent that the terms of the Credit Documentation provide for the Agent to distribute interest or fees on a pro rata basis between the Assignor and the Assignee in relation to the transaction, the Assignment will preserve that position and will not assign the Assignor’s rights to receive interest and fees pursuant to that provision of the Credit Documentation.

(v) Excluded Rights: This deals with the following matters:

(A) Allocation of payments under the Credit Agreement are to be dealt with under the Agreed Terms;


(B) Payments by the Assignor to the Assignee of amounts received by the Assignor to which the Assignee is entitled; and

(C) Payments by the Assignee to the Assignor of amounts received by the Assignee to which the Assignor is entitled.

(vi) Ancillary Rights and Claims: This Clause confirms that the Assignment does not prejudice the assignment of the Ancillary Rights and Claims under the Standard Terms and Conditions (see paragraph (e) of Section 6.2 (The Conditions)).

(vii) Payments: Payments are to be made to the account of the relevant party stipulated in the Schedule, are to be made in the currency in which the amount is denominated and for value on the due date.

(viii) In the Assignment (distressed/claims) the Assignor makes a representation (as at the Assignment Effective Date) as to the status of its claim against the Borrower on account of the Traded Portion. The representation made is determined by the option specified in the Schedule (see paragraph (c) of Section 7.2 (Common Features)):

(A) if "proof of debt filed" is specified, the Assignor is required to represent that its claim against the Borrower on account of the Traded Portion has been duly filed in the Insolvency Proceedings of the Borrower and the copies of the proofs of debt provided pursuant to conditions 9.1 or 9.3 of the terms and conditions incorporated into the Agreed Terms are true, correct and complete;

(B) if "No proof of debt filed and no deadline expired for the submission of claims" is specified, the Assignor is required to represent that no deadline has passed for the submission of claims in respect of the Insolvency Proceedings of the Borrower and that its claim has not yet been filed thereunder; or

(C) if "Claim is admitted" is specified, the Assignor is required to represent that the Assignor's claim against the Borrower on account of the Traded Portion has been validly admitted in the Insolvency Proceedings of the Borrower.

Given the potential for changes in the status of a given claim, this representation is contained in the Assignment (distressed/claims) to allow the most suitable option to be specified as close as possible to the Assignment Effective Date. Users should note that the representation described in paragraph (A) above assumes that the Standard Terms and Conditions have been incorporated into the transaction without amendment. If amendments were agreed to the Standard Terms and Conditions users should check that these references are still appropriate.


(ix) Notice: This provides for giving of certain notices upon completion of the Assignment:

(A) Notice to the Agent, given by both the Assignor and Assignee: notifying the Agent of the Assignment; giving a confirmation by the Assignee in favour of the Agent and the various credit providers that the Assignee will be under the same obligations towards each of them as it would have been had it been an original party to the Credit Documentation; and notifying the Agent that all payments in respect of the Assigned Assets be made to the Assignee's specified account. The Assignee's administrative details are also given.

(B) A notice to the Obligors (and, in the case of the Assignment (distressed/claims), to the Insolvency Officer of each Obligor) notifying them of the Assignment and providing the same administrative details as are given in the notice to the Agent. Again, this notice is given by both Assignor and Assignee.

The form of notice to the Obligors provides an option to notify the Obligors that all payments in respect of the Assigned Assets be made to the Assignor's specified account. It is envisaged that this will only be included where there is no Agent bank structure under the Credit Documentation (most likely where the Credit Documentation is bilateral).

The form of notice to the Obligors requests that they or, (in the case of the Assignment (distressed/claims)) the relevant Insolvency Officer of the Obligors, acknowledge the notice by signing and returning to the Assignee a form of acknowledgement. The form of proposed acknowledgement is attached to the form of notice. Two things should be noted:

(1) receipt of an acknowledgement is not legally necessary in order to perfect the assignment and, unless the Credit Documentation otherwise provides, the Obligors or, as the case may be, the Insolvency Officers cannot be forced to provide an acknowledgement; and

(2) the acknowledgement goes beyond being purely an acknowledgement of receipt of the notice - it goes on to constitute a confirmation that the relevant Obligor or, as the case may be, the relevant Insolvency Officer has not received notice of the interest of any third party in the Assigned Assets and it has not claimed or exercised and has no outstanding right to claim or exercise any security interest, right of set-off, counterclaim or any other right relating to the Assigned Assets or the debts represented thereby. This is of value to an Assignee, since any assets which are assigned can be subject to the rights of third parties where the Assignor has previously


assigned or given security over the Assigned Assets, and Assigned Assets are subject to certain rights of the relevant Obligor which have accrued up to the time that notice is given to that Obligor.

(b) Tax Issues: In certain circumstances stamp duty and/or stamp duty reserve tax may be payable on an assignment - see Section 10 (Taxation).

7.4 Transfer Agreement

This has the following additional feature:

(a) Form of Consent: Since the Transfer Agreement is to be used in circumstances where there is no transfer mechanism contained in the underlying Credit Documentation, in order for a valid novation to take place each party to the Credit Agreement must consent to the transfer. The Form of Consent exhibited to the Transfer Agreement is designed to evidence these consents, and will need to be signed by all parties to the Credit Agreement. The form also contains the operative novation language and provides for details of the Transferee's facility office.

See also the comments made in Section 7.1 (Introduction).


8. FUNDED/RISK PARTICIPATION AGREEMENTS

8.1 Introduction

Unlike the Assignment Agreement and the Transfer Agreement, the participation agreements deal with an ongoing relationship between two parties, the Grantor of the participation (which will usually be the lender of record) and the Participant. Potential Grantors which report, or whose groups report, under US accounting principles should be aware of ASC 860 when considering entering into Participations (see Section 1.5 (Financial Accounting Standards Board Statement 140 (Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities)("ASC 860")). Potential Grantors should also be aware of IAS 39 when considering entering into Participations (see Section 1.6 (International Accounting Standard 39 (Financial Instruments: Recognition and Measurement)("IAS 39")).

The forms of Participation Agreement address the following situations:

(a) Funded Participation: Where a commitment or a claim is participated on a funded basis, the Participant will fund the Grantor of the participation for the drawn amount of the commitment or, as the case may be, the agreed amount of the claim. When, during the life of the participation, any sum falls due from the Grantor under the Credit Documentation which is attributable in whole or in part to the asset which is the subject of the funded participation, the Participant is required to put the Grantor in funds so that the Grantor can meet its obligations in this regard. On receipt of principal, interest or commitment commission, the Grantor will pass on to the Participant the appropriate amount. A funded participation will usually be chosen where the drawn credit is funded (for example a conventional term or revolving loan facility) or where, in the case of a claim, an assignment of such claim is not appropriate. A funded participation will not necessarily be suitable for all types of facilities (e.g. letter of credit) or for all types of claims. In addition to those described in paragraphs (c) and (d) below, two forms of Funded Participation are available for use: Funded Participation (Par/Distressed) and Funded Participation (Distressed/Claims). The form of Funded Participation (Par/Distressed) envisages that it may be used to implement a Par Trade or a Distressed Trade whereas the Funded Participation (Distressed/Claims) envisages that it may only be used to implement a Distressed Trade.

(b) Risk Participation: In a risk participation, the Participant does not fund advances made by the Grantor at the time that they are made. Instead, the Participant is only called upon to make a payment to the Grantor if the relevant Obligor under the Credit Agreement does not make the payment in question (whether it be a payment of interest or fees, or a repayment of principal). A risk participation is therefore more akin to a guarantee. It is likely to be used where the asset in question, although "drawn" is not actually funded (for example a letter of credit). The form of Risk Participation envisages that it will implement a Par Trade only.

(c) Funded/Risk Participation: This deals with situations where some assets are to be participated on a funded basis whereas others are to be risk participated.


The form of Funded/Risk Participation envisages that it will implement a Par Trade only.

(d) Risk to Funded Participation: This deals with the situation where a loan or a number of loans are to be taken on risk until the end of their current interest period(s) at which time they become funded. The purpose of this is to allow a trade to take place during the interest period of a loan but avoids the issue of break costs. The risk to funded participation agreement only applies to loans. It assumes that there will be no other credits which are subject to the risk participation and that there will be no loans which are subject to the funded participation unless they have first been on risk. With relatively minor amendments, the risk to funded participation agreement can be adapted to cater for the more complex scenarios referred to above. The form of Risk to Funded Participation envisages that it will implement a Par Trade only.

In addition to the forms of Participation Agreement there are also forms of Termination (and Transfer) Agreement which deal with a variety of situations in which the Grantor and the Participant agree to terminate a funded participation and, in some cases, the Grantor transfers the relevant commitment (see Section 9 (Termination and Transfer Agreements)).

8.2 Common Features

Common features of the Participation Agreements include:

(a) Front Sheet: As with the transfer documents, this identifies the parties and the relevant Agreed Terms, and also acts as the execution page of the document.

Again, the front sheet is the operative agreement between the parties, and incorporates the terms of the underlying trade (by reference to the Agreed Terms and its terms and conditions), the Schedule to the Participation Agreement and the annexed terms and conditions (see below).

(b) The Schedule: This is very similar to the form of Schedule for the Transfer Agreement and the Confirmation. The information should be given as at the relevant Participation Effective Dates. Administration details also need to be given.

(c) Terms and conditions: These set out the mechanics of the Participation.

(d) Form of Transfer Certificate: Each of the forms of Participation Agreement contain a novation mechanism to allow the Participant's participation to be transferable (subject to conditions). A form of Transfer Certificate is therefore attached to each form of agreement.

8.3 Funded Participation

The following features of the Funded Participation (Par/Distressed) and the Funded Participation (Distressed/Claims) should be noted (unless otherwise indicated below, the features apply equally to both forms of Funded Participation).


(a) The Schedule: The Schedule specifies certain terms of the transaction. These include:

(i) whether voting rights (in the case of Distressed Trades only) are granted to the Participant under the Funded Participation;

(ii) in the case of the Funded Participation (Par/Distressed) only, whether collateral for undrawn commitment is required; and

(iii) whether information rights are granted to the Participant under the Funded Participation.

The parties should agree at the time of trade the extent to which the Funded Participation will grant/specify these elements and evidence that agreement in the relevant Confirmation, see paragraph (k) of Section 5.4 (Confirmation (Bank Debt).

In the case of a Funded Participation (Par/Distressed), the Schedule also specifies whether the Funded Participation is implementing a Par Trade or a Distressed Trade. This should match the choice of type of transaction made at the time of trade (and as evidenced in the Confirmation) and is repeated here for ease of later reference. Whether the transaction is a Par Trade or a Distressed Trade is relevant both to:

(i) the extent to which voting rights are granted to the Participant; and

(ii) to determine which representations from the Standard Terms and Conditions would, in the absence of any express amendment at the time of trade, have applied to the transaction.

The Funded Participation (Distressed/Claims) assumes that the transaction is a Distressed Trade.

(b) Interpretation (Clause 1): Users should note that the Funded Participation does not define terms where those terms are already defined in the Standard Terms and Conditions and relies instead on incorporating terms from the Standard Terms and Conditions by reference. Some of the terms which are defined in the Funded Participation may be worth a brief mention:

(i) Binding Amendment and Debt Restructuring: This definition includes any amendment or waiver of the Credit Documentation, any refinancing of the indebtedness under the Credit Documentation and any restructuring of that indebtedness that is approved by more than 50% of the relevant creditors.

(ii) Commitment: This definition is used in the Funded Participation (Par/Distressed) to describe the Grantor's drawn and undrawn commitment. It is replaced with a definition of "Claim" in the Funded Participation (Distressed/Claims) which describes the Grantor's claim that is the subject of the Participation.


(iii) Majority Participants: This definition is used in Clause 6.2 (Credit Documentation and voting rights) of the Funded Participation (Par/Distressed) and Clause 6.2 (Credit Documentation, Claims and Voting Rights) of the Funded Participation (Distressed/Claims) and seeks to ensure that in the case of a Distressed Trade where (a) the Grantor has entered into one or more participation (or similar) agreements in relation to the Loan or its Commitment or, as the case may be, the Claim or where the Seller has entered into at least one participation agreement but has not participated all of its Loan and Commitment, or, as the case may be, its Claim and (b) voting rights are granted to more than one participant, voting will be determined by a majority by value of participants having the right to vote and who vote (within any timeframe reasonably requested by the Grantor) and the Grantor is deemed to be a participant for this purpose to the extent of its right to vote in respect of any Loan or Commitment or, as the case may be, Claim which has not been participated by the Grantor or participated by the Grantor but where the participant thereunder does not have the right to vote or does not vote.

(iv) Participant's Global Proportion: In the case of the Funded Participation (Par/Distressed) this proportion is calculated by reference to the aggregate of the drawn and undrawn commitments in respect of which the participation is granted and the aggregate of all of the Grantor's drawn and undrawn commitment. In the case of the Funded Participation (Distressed/Claims) this proportion is calculated by reference to the amount of the claim which has been participated and the aggregate amount of the Grantor's claims in respect of the relevant Credit Document and Insolvency Proceedings of the relevant Obligors. It is used in Clause 13 (Expenses and Indemnity) to calculate the proportion of certain expenses payable by the Grantor for which the Participant is liable to indemnify the Grantor.

(v) Participant's Proportion: this proportion is calculated only by reference to the individual tranche in question. It is therefore not necessarily the same as Participant's Global Proportion (see above). It is used in the following places:

(A) Clause 1.1 (Definitions): in the Funded Participation (Par/Distressed), in the definition of "Participation Commitment" to adjust the Participation Commitment where there is a permanent reduction in commitment under the Credit Agreement;

(B) Clause 2 (Participant's Obligations): to calculate the amount payable by the Participant where the Grantor is liable to make a payment under the Credit Documentation or, as the case may be, in relation to the Participated Claim;

(C) Clause 3.2 (Payments): to calculate the amount payable by the Grantor to the Participant following receipt of monies by the Grantor;


(D) Clause 3.3 (Non-Cash Distributions): to calculate the amount of any Non-Cash Distribution to which the Participant is entitled;

(E) Clause 4.4 (Failure to remit): this limits the amount that the Grantor is liable to pay to the Participant; and

(F) Clause 10.4 (Agreements): to determine the extent to which the Grantor gives to the Participant the benefit of any payments received under any agreement entered into pursuant to a Binding Amendment and Debt Restructuring.

(vi) Participation Commitment: this definition is used in the Funded Participation (Par/Distressed) and is the amount specified in the Schedule adjusted, if necessary, to take account of any cancellation or permanent reduction in commitment under the Credit Agreement. It is replaced with a definition of "Participated Claim" in the Funded Participation (Distressed/Claims) which is the amount specified in the Schedule. The definition of Participation Commitment and the definition of Participated Claim are used in the definition of Participant's Global Proportion and Participant's Proportion (see above).

(vii) Participation Effective Date: This is the date on which the Funded Participation comes into effect and is intended to be the same date as the Settlement Date under the Agreed Terms.

(c) Third Party Rights (Clause 1.3): The operation of the Third Parties Act has been excluded to ensure that a person who is not a party to the Funded Participation cannot enforce the terms or enjoy the benefit of all or any term of the Funded Participation.

(d) Participant's Obligations (Clause 2): This sets out the Participant's obligation to pay the Settlement Amount to the Grantor on the Participation Effective Date and provides for the Participant to make a payment when the Grantor is obliged to make a corresponding payment under the Credit Documentation. Users should note that the Funded Participation is drafted on the assumption of the Participant providing back-to-back funding to the Grantor and that, accordingly, the Participant is required to make this payment by the time that funds are required to be advanced by the Grantor. The Participant's obligation to make this payment is subject to the Grantor giving the Participant two Business Days' notice or such lesser period of notice that the Grantor itself is given of the requirement to make that payment.

(e) Payments (Clause 3): This Clause specifies when the Grantor is obliged to make payments to the Participant, sets out how these amounts are to be calculated and gives effect to the interest treatment agreed at the time of trade and evidenced in the relevant Confirmation. Users should note that the cross-references in this Clause to the terms and conditions incorporated in the Agreed Terms assume that the Standard Terms and Conditions have not been amended at the time of trade. To the extent that they have been so amended users should consider whether that amendment impacts those cross-references.


The calculation takes account of the fact that only a proportion of a particular loan, commitment or claim may have been participated. This Clause also specifies that the Grantor is obliged, as soon as reasonably practicable after receipt, to procure the transfer to the Participant of its relevant proportion of any Non-Cash Distribution received by the Grantor and to procure the registration of the Participant's relevant proportion of any Non-Cash Distribution received by the Grantor in the name of the Participant (or such other person as the Participant may reasonably request). Until such transfer and registration, that Non-Cash Distribution forms part of the Funded Participation and the Grantor is required to account to the Participant for the full economic benefit thereof and, to the extent the Grantor is able to do so without breaching any law or regulation, exercise any voting rights in relation thereto as directed by the Participant. Where the relevant asset has been participated to a number of Participants or where the Grantor has not participated the full amount of its interest in the asset, the Grantor acts in accordance with the directions of the Majority Participants.

(f) Payments Administration (Clause 4): This provides for the place, nature of funds and currency of payments. It also provides that payments made by the Grantor are to be made net of any deduction or withholding and that the Grantor is not required to gross-up any payments and clarifies that Condition 28.2 (Free and clear payments) of the Standard Terms and Conditions does not apply to payments made by the Grantor under the Funded Participation. (Users should note that the cross-reference in this Clause to the terms and conditions incorporated in the Agreed Terms assumes that the Standard Terms and Conditions have not been amended at the time of trade. To the extent that they have been so amended users should consider whether that amendment impacts this cross-reference.) No withholding provision is included in respect of payments made by the Participant because Condition 28.2 (Free and clear payments) of the Standard Terms and Conditions will apply to such payments. It also limits the obligations of the Grantor if, for example, the relevant branch of the Grantor suffers foreign exchange controls (Clause 4.4 Failure to Remit). Clause 4.5 (Default Interest) incorporates a default interest provision where interest is charged on any late payments at a rate of 2 per cent. above the relevant interbank offered rate. Clause 4.6 (Participation Commitment) restricts the Grantor from selling, transferring, disposing or otherwise encumbering the Participation Commitment or, as the case may be, the Participated Claim, other than in favour of the Participant. This provision is included to facilitate derecognition of the Participation Commitment or, as the case may be, the Participated Claim, from the Seller's balance sheet under IAS 39.

(g) Information (Clause 5): If the Funded Participation grants "information rights", the Grantor is obliged to pass on information it receives under the Credit Documentation in its capacity as a lender including in connection with Insolvency Proceedings which have been commenced against any Obligor to the extent that it is able to do so. Otherwise, the Grantor has no responsibility to pass on information to the Participant. Note that the Clause allows the Participant to subsequently opt not to receive such information.


(h) Status of Participation (Clause 6): This confirms, among other things, that the relationship between Grantor and Participant is that of debtor and creditor, and that the Grantor does not transfer or assign any rights under the Credit Documentation or, as the case may be, in respect of the Claim. It also provides that the Grantor is under no obligation to enquire as to the occurrence or otherwise of an event of default under the Credit Documentation or to exercise any rights of set-off it may have against any Obligor or, in the case of a Funded Participation (Distressed/Claims) to monitor or make enquiry in relation to the Participated Claim, and that the Grantor's obligations are subject to its obligations under the Credit Documentation and, in the case of a Funded Participation (Distressed/Claims) in respect of the Claim.

Clause 6.2 (Credit Documentation and voting rights) also sets out the terms for voting during the life of the Funded Participation. The extent to which the Funded Participation grants voting rights to the Participant depends on whether the transaction is a Distressed Trade or a Par Trade. In summary, the Funded Participation envisages that voting rights may be granted on a Distressed Trade but not on a Par Trade.

(i) If the transaction is a Distressed Trade then unless the Funded Participation grants voting rights to the Participant, the Grantor may exercise or refrain from exercising any of its rights under the Credit Documentation or, as the case may be, the Claim, agree to any variation or waiver of the Credit Documentation or, as the case may be, the Claim and perform any acts under the Credit Documentation or, as the case may be, in relation to the Claim as it sees fit. This is the case even in circumstances where the Funded Participation relates to all of the Grantor's interests in the Credit Agreement and, as the case may be, the Claim. Where the Funded Participation grants voting rights to the Participant, the Grantor is not able to exercise or refrain from exercising any of its rights under the Credit Documentation or, as the case may be, the Claim, agree to any variation or waiver of the Credit Documentation or, as the case may be, the Claim or perform any acts thereunder without the consent of the Participant or, if applicable, the Majority Participants. In the event of a deadlock, the Grantor has the casting vote.

(ii) If the transaction is a Par Trade then the Grantor may exercise or refrain from exercising any of its rights under the Credit Documentation, agree to any variation or waiver of the Credit Documentation and perform any acts under the Credit Documentation as it sees fit. This wide discretion is limited in circumstances where the Participation relates to all of the Grantor's commitment and outstandings under the Credit Agreement, in which case the Grantor agrees not to take any action which would result in various matters taking place (specifically, varying the date for payment of, or the amount or currency of any relevant loan, reducing any interest or commission, releasing any security or guarantee, or agreeing to any amendment or waiver where that amendment or waiver requires the


consent of all credit providers) without the prior written consent of the Participant.

To the extent that users, having taken any necessary transaction specific advice, wish to grant voting rights under a Funded Participation where the transaction is a Par Trade, this should be agreed at the time of trade and evidenced as a trade specific term in the "Other Terms of Trade" paragraph of the Confirmation (see paragraph (o) of Section 5.4 (Confirmation Bank Debt)). If this is so agreed this Clause of the Funded Participation will also need to be amended accordingly.

(i) Confirmation of Receipts (Clause 7): The Grantor is not obliged to make a payment to the Participant until it is established that it has actually received that amount. However, if the Grantor does make a payment early, it retains a right of clawback.

(j) Refunds (Clause 8): This Clause protects the Grantor in circumstances where amounts paid to the Grantor and accounted for to the Participant are clawed back in some way. This may apply if, for example, any payment by the Obligor was held to be a preference under insolvency legislation and was successfully claimed back from the Grantor, or under the application of any sharing provisions of the Credit Documentation. In these circumstances, the Participant is obliged to make a corresponding payment to the Grantor or, in relation to any sharing provisions, the Grantor is relieved from making the corresponding payment to the Participant.

(k) Collateral for undrawn commitment (Clause 9): The Funded Participation (Par/Distressed) provides a framework for collateral to be provided by the Participant to the Grantor in respect of the Participant's obligations in respect of an undrawn commitment under the Credit Documentation. It is envisaged that users will specify the details and terms of the collateral in Annex 2 (Details and Terms of Collateral for Undrawn Commitment) to the Funded Participation (Par/Distressed). This provision has not been included in respect of the Funded Participation (Distressed/Claims) as it is unlikely to be required in the context of a participation of a claim. If however, collateral is required, this would need to be added in the Confirmation as an "Other Term of Trade".

(l) Status of Claims (Clause 9): In the Funded Participation (Distressed/Claims) the Grantor makes a representation (as at the Participation Effective Date) as to the status of its claim against the Borrower on account of the Grantor's Claim Amount. The representation made is determined by the option specified in the Schedule to the Funded Participation:

(i) if "proof of debt filed" is specified, the Participant is required to represent that its claim against the Borrower on account of the Grantor's Claim Amount has been duly filed in the Insolvency Proceedings of the Borrower and the copies of the proofs of debt provided pursuant to conditions 9.1 or 9.3 of the terms and conditions incorporated into the Agreed Terms are true, correct and complete;


(ii) if "No proof of debt filed and no deadline expired for the submission of claims" is specified, the Participant is required to represent that no deadline has passed for the submission of claims in respect of the Insolvency Proceedings of the Borrower and that its claim has not yet been filed thereunder; or

(iii) if "Claim is admitted" is specified, the Participant is required to represent that the Participant's claim against the Borrower on account of the Grantor's Claim Amount has been validly admitted in the Insolvency Proceedings of the Borrower.

Given the potential for changes in the status of a given claim, this representation is contained in the Funded Participation (Distressed/Claims) to allow the most suitable option to be specified as close as possible to the Participation Effective Date. Users should note that the representation described in paragraph (i) above assumes that the Standard Terms and Conditions have been incorporated into the transaction without amendment. If amendments were agreed to the Standard Terms and Conditions users should check that these references are still appropriate.

(m) Binding Amendments and Debt Restructuring (Clause 10): This Clause goes into some detail as to the consequences of an amendment, refinancing or debt restructuring. The basic principle is that the Participant will bear the risk of any Binding Amendment and Debt Restructuring in relation to the Participation, although the Participant is not obliged to put up new money. Clause 10 also specifies certain types of blocked payments where the Grantor is not obliged to make any corresponding payment to the Participant, and also permits the Grantor to apply for and accept instruments in connection with any Binding Amendment and Debt Restructuring or participate in any associated agreement.

(n) Set-Off and Counterclaim (Clause 11): This gives either party the right to set-off only amounts due and payable by the other party under the Funded Participation.

(o) Participant's Acknowledgements (Clause 12): This Clause contains the Participant's acknowledgement that the Participant will have no recourse to the Grantor if any Obligor fails to comply with its obligations under the Credit Documentation and the Grantor is not responsible for any losses sustained by the Participant in connection with the Participation but is without prejudice to the indemnities given by the Grantor to the Participant in the Funded Participation or in the Agreed Terms. Users should note that the cross-reference in this Clause to the terms and conditions incorporated in the Agreed Terms assumes that the Standard Terms and Conditions have not been amended at the time of trade. To the extent that they have been so amended users should consider whether that amendment impacts this cross-reference.

(p) Expenses and Indemnity (Clause 13): Where the Grantor incurs Relevant Costs and Expenses, then the Participant is obliged to reimburse the Grantor to the extent of its Global Proportion. The Grantor agrees to repay the Participant if any such expenses are subsequently recovered. Clause 13 also


contains an indemnity in relation to any loss or liability suffered by the other party as a result of any breach of that party's obligations under the Funded Participation.

(q) Assignment and Transfer (Clause 14): No assignment or transfer is permitted without the prior consent of the other party. However, in relation to a proposed assignment or transfer by the Participant, the Grantor's consent is not to be unreasonably withheld. The types of circumstance where it would probably be reasonable to withhold consent would be, for example, where the proposed assignee or transferee is a weaker credit than the Participant, or where the Grantor may suffer adverse tax or regulatory consequences as a result of the assignment or transfer. It is expressly envisaged that such consent may be withheld if the proposed transferee or assignee of the Participant would be unable to make an ERISA Representation. Additionally, an assignment or transfer by the Participant is only effective on the assignee or transferee making an ERISA Representation to the Grantor. A transfer mechanism is included and a form of transfer certificate attached to the agreement. The transfer does not become effective until the later of the date on which the Grantor signs the Transfer Certificate; and the date specified as the Transfer Date in the Transfer Certificate. This transfer mechanism deems the Transferee to make an ERISA representation to the Grantor.

(r) Termination (Clause 15): The Grantor can terminate the agreement either if the Participant breaches any of its material obligations and that breach is not remedied within two Business Days or if any of the Participant's representations were untrue in a material respect when made. The termination is effected by the Grantor selling all or part of the Participation Commitment or, as the case may be, the Participated Claim for fair market value and on arm's length terms and accounting to the Participant for the proceeds, less expenses and amounts owing by the Participant to the Grantor.

(s) Notices (Clause 16): Notices are required to be given in English and are to be given by fax or letter or, to the extent the Grantor and the Participant so agree, by electronic mail or other electronic means. Any communication or document which becomes effective, in accordance with Clause 16, after 5.00pm in the place of receipt is deemed only to become effective on the following day.

The address for notices is set out in the Schedule to the Participation.

(t) Confidentiality (Clause 17): The Participant is put under an obligation to keep confidential all information received from the Grantor to the extent required by the confidentiality agreement entered into by the Grantor and the Participant relating to the transaction or the Credit Agreement.

(u) ERISA Representations (Clause 18): The Funded Participation contains a representation as to US ERISA matters made by the Participant to the Grantor and a corresponding representation by the Grantor to the Participant.

(v) Elevation (Clause 19): The Funded Participation contains the right for either party to require the other to use commercially reasonable efforts to cause the


Participant (or such other person as may be directed by the Participant) to become a Lender under the Credit Documentation with respect to the Participated Tranches (referred to as an "Elevation"). The effect of Clause 19.3 (Request of Grantor) is to ensure that if the Participant is unable to become a Lender it will continue as Participant vis à vis the third party that becomes Lender pursuant to such a request by the Grantor. To the extent that the transaction settled as a Funded Participation because of the effect of the mandatory settlement obligations in the Standard Terms and Conditions (see paragraph (f) of Section 6.2 (The Conditions)) the Grantor is required to use its reasonable endeavours to assist in bringing about an Elevation to the Participation or its nominee. Users should note that the cross-reference in this Clause to the terms and conditions incorporated in the Agreed Terms assumes that the Standard Terms and Conditions have not been amended at the time of trade. To the extent that they have been so amended users should consider whether that amendment impacts this cross-reference. Users should also note that in the Funded Participation (Distressed/Claims), the elevation provisions do not anticipate an elevation (by way of assignment) in relation to the Claim.

(w) Governing Law and Jurisdiction (Clause 20): English law and courts. If the Agreed Terms provide for a process agent to be appointed, this Clause also effects that appointment.

8.4 Risk Participation

The structure and content of this document is very similar to the Funded Participation. Where the provisions are the same, no further comment is made. Looking at the Terms and Conditions:

(a) The Schedule: This only requires the parties to specify the extent to which the Risk Participation will grant information rights to the Participant. Specifications as to voting rights and collateral for undrawn commitment are not relevant in the Risk Participation.

(b) Interpretation (Clause 1): The following key additional definitions are used:

(i) Contractual Margin: this is the rate of interest applicable to the relevant Credit without taking account of the cost of funds element of that interest. It is used in Clause 3 (Risk Participation Fee).

(ii) Fee Period Commencement Date: this is the date from which the Participant is entitled to a participation fee under Clause 3 (Risk Participation Fee). It should be specified in the Schedule and is intended to be the same date as the Settlement Date under the Agreed Terms.

(iii) Majority Participants: the Risk Participation does not envisage voting rights being granted under the Risk Participation. However, voting rights are envisaged in the context of Non-Cash Distributions in the same way as under the Funded Participation and this definition has been tailored for that purpose only.


(iv) Risk Period: this is the period for which the Participant is on risk under the Participation, being the period from the Risk Period Commencement Date (this is specified in the Schedule and is intended to be the same date as the Trade Date under the Agreed Terms) to the relevant Termination Date. However, for the purposes of calculating the participation fee, the period runs from the Fee Period Commencement Date.

(v) Termination Date: this is the date specified in the Schedule unless an event of default has then occurred, in which case the Termination Date is extended to such time when the Obligors are in compliance with the Credit Documentation and no event of default exists. The Termination Date can be earlier than this if the Grantor has received all amounts owing to it and is under no further obligation under the relevant tranche of the Credit Agreement. It is used in the definition of Risk Period (see above).

(c) Participation (Clause 2): This deals with:

(i) the Grantor having to give notice to the Participant when any relevant amounts are not paid by an Obligor;

(ii) what amounts are included within the category of amounts for which the Participant is on risk. These are broadly any amount payable under the Credit Documentation in relation to any loan, credit or tranche which has been specified in the Schedule and which is due but unpaid by the Obligors. It does not include any such amounts payable in respect of periods which fall outside the Risk Period;

(iii) the obligation of the Participant to make payments to the Grantor.

(d) Risk Participation Fee (Clause 3): So long as the Grantor is being kept whole (either by the relevant Obligor under the Credit Documentation or the Participant under the Participation), it is obliged to pay a participation fee to the Participant. The risk participation fee is calculated by reference to the amount of interest or commission received by the Grantor (in an amount equal to the Participant's Proportion of such interest or commission). The amount will not necessarily be identical to the margin element of the interest or commission received, since only a proportion of the relevant loan or commitment may have been participated.

(e) Recoveries (Clause 4): This specifies when the Grantor is obliged to make payments to the Participant and how these are calculated. It envisages that any Non-Cash Distributions are dealt with in a similar manner to that adopted in the Funded Participation.

(f) Payments Administration (Clause 5): See Funded Participation.

(g) Information (Clause 6): See Funded Participation.


(h) Status of Participation (Clause 7): See Funded Participation. Users should note that the Risk Participation envisages Par Trades only and so does not replicate the elements of this Clause from the Funded Participation which are relevant only to Distressed Trades.

(i) Confirmation of Receipts (Clause 8): See Funded Participation.

(j) Refunds (Clause 9): See Funded Participation.

(k) Binding Amendments and Debt Restructuring (Clause 10): See Funded Participation.

(l) Set-off and Counterclaim (Clause 11): See Funded Participation.

(m) Participant's Acknowledgements (Clause 12): See Funded Participation.

(n) Expenses and Indemnity (Clause 13): See Funded Participation.

(o) Assignment and Transfer (Clause 14): This is as per the Funded Participation except that the requirement that the consent of the Grantor to a proposed assignment or transfer by the Participant is not to be unreasonably withheld or delayed does not apply where the Participant is seeking to transfer its obligations under Clauses 2.1 (Notice of Default) to 2.4 (Payment of Unpaid Amount). This is mainly because the nature of a Risk Participation is more akin to a guarantee, and the identity of the Participant is therefore more fundamental to the Grantor than is often the case in a Funded Participation. It should also not be relevant in the context of ASC 860, since with a Risk Participation it is understood that the asset will not be regarded as having been transferred by the Grantor in most circumstances.

(p) Termination (Clause 15): This is as per the Funded Participation except that no sale of the Participation Commitment by the Grantor (or subsequent accounting of proceeds to the Participant) is required and the termination is effected by notice only. Accrued claims and liabilities are, however, retained, and the Participant will therefore remain entitled to, for example, payments by the Grantor on a recovery by the Grantor of Unpaid Amounts where the Participant has funded the Grantor (see Clause 4.1 (Recoveries by Grantor)).

(q) Notices (Clause 16): See Funded Participation.

(r) Confidentiality (Clause 17): See Funded Participation.

(s) ERISA Representations (Clause 18): See Funded Participation.

(t) Governing Law and Jurisdiction (Clause 19): See Funded Participation.

The Risk Participation does not contain provision for the Participant to provide collateral for undrawn commitment nor for elevation rights.


8.5 Funded/Risk Participation

This document is simply a combination of the Funded Participation and the Risk Participation. Users should note that the Funded/Risk Participation envisages Par Trades only and that it uses a definition of "Funded Participation Effective Date" which is identical to the definition of "Participation Effective Date" used in the Funded Participation.

8.6 Risk to Funded Participation

The structure and content of this document is very similar to the Funded Participation and Risk Participation except that it assumes that only loans (and not other forms of credit) will be the subject of the Risk to Funded Participation. In addition, it assumes that there may be a number of loans being participated on a risk to funded basis and that there may therefore be a number of different rollover dates. Different loans would then have different Risk Periods and would be funded on different dates.

There are three definitions in the Risk to Funded Participation which do not appear in either the Risk or Funded Participation:

(a) Funded Settlement Amount: this definition sets out the amount to be paid by the Participant for the loans which are outstanding on the Funded Participation Effective Date. It differs only in that it recognises that if a number of loans are taken on a risk to funded basis, there may be a number of different rollover dates and therefore a number of different Settlement Amounts.

(b) Funded Participation Effective Date: this definition is identical to the definition of Participation Effective Date in the Funded Participation except that, as with the definition of Funded Settlement Amount, it recognises that, if more than one loan is being taken on the basis of a risk to funded participation, there could be a number of rollover dates and therefore a number of corresponding Funded Participation Effective Dates.

(c) Risk Termination Date: this is the last day of the Risk Period for each loan and is equivalent to the definition of Termination Date in the Risk Participation except that, as with the previous definitions, it recognises that there could be more than one Risk Termination Date if more than one loan is participated on this basis.

8.7 The Master Participation Agreements

The Master Funded Participation Agreement mirrors the standard form Funded Participation and the Master Risk Participation Agreement mirrors the standard form Risk Participation, except that each has been drafted to allow two institutions to sign one master participation agreement for funded participations and one for risk participations. Each master participation agreement then governs all funded/risk participations between those two institutions (in their respective capacities as both Grantor and Participant). The purpose of the master participation agreements is to obviate the need for separate participation agreements each time two institutions enter into a participation between them. It is however important to note that whilst the master participation agreements may reduce the amount of paperwork to be signed on


any particular participation, the parties will still need to execute a participation ticket for each individual participation to be governed by a master participation agreement. Users should note in particular that the participation tickets will need, in each case, to specify those matters described in paragraph (a) of Section 8.3 (Funded Participation) and/or paragraph (a) of Section 8.4 (Risk Participation) and that (in the case of the Master Funded Participation Agreement) to the extent that collateral for undrawn commitment is so specified details of the collateral will need to be scheduled to the relevant ticket.


9. TERMINATION AND TRANSFER AGREEMENTS

9.1 Introduction

In addition to the forms of Participation Agreement, there are also forms of Termination and Transfer Agreements and a form of Termination Agreement. They address the following situations:

(a) Multilateral Termination and Transfer Agreement: This deals with the situation where a Grantor and a Participant have entered into a Funded Participation and the Participant agrees (pursuant to a trade incorporating the Standard Terms and Conditions) to sell to a third party Buyer all or part of the Commitment subject to the Funded Participation. The Multilateral Termination and Transfer Agreement (Bank Debt/Novation) is a tri-partite agreement entered into by the Grantor, the Participant and the Buyer. It provides that the Funded Participation shall be terminated to the extent of the Commitment sold by the Participant to the Buyer and at the same time it provides that the Grantor shall transfer the amount of such Commitment to the Buyer by novation in accordance with the procedure specified in the Credit Agreement.

(b) Bilateral Termination and Transfer Agreement: This deals with the situation where a Grantor and a Participant have entered into a Funded Participation and the Grantor and the Participant subsequently agree (whether pursuant to an elevation provision in the relevant funded participation or otherwise) that the Commitment subject to the Funded Participation is to be transferred to the Participant. The Bilateral Termination and Transfer Agreement (Bank Debt/Novation) provides that the Funded Participation shall be terminated to the extent of the Commitment transferred to the Participant and at the same time it provides that the Grantor shall transfer the amount of such Commitment to the Participant by novation in accordance with the procedure specified in the Credit Agreement.

(c) Termination Agreement: This deals with the situation where a Grantor and a Participant have entered into a Funded Participation and the Grantor and the Participant subsequently agree to terminate all or part of the Funded Participation but not to transfer the commitment subject to the Funded Participation. The Termination Agreement envisages that the parties have entered into a prior agreement (which is not envisaged to incorporate the Standard Terms and Conditions) under which they have agreed the terms pursuant to which they will terminate the funded participation. The Termination Agreement effects the termination of the Funded Participation to the extent agreed and requires that at the same time the Grantor pays an agreed amount to the Participant in consideration for that termination.

9.2 Multilateral Termination and Transfer Agreement

The Multilateral Termination and Transfer Agreement (Bank Debt/Novation) contains the following provisions:-


(a) Parties: this is a tri-partite agreement between the Grantor, the Seller (being the Participant under a Funded Participation) and the Buyer. It is only therefore applicable if a funded participation exists between the Grantor and the Seller.

(b) Interpretation (Clause 1.1): Defined terms generally have the meaning given to them in the Standard Terms and Conditions in force as at the date of the Multilateral Termination and Transfer Agreement (as opposed to the meaning given in the Agreed Terms). This avoids the Grantor needing to see the Agreed Terms between the Seller and Buyer in order to interpret terms used in the Multilateral Termination and Transfer Agreement. Parties will need to be sure that in their particular case this is correct and they do not intend a different meaning to apply to any particular term. However, defined terms used in paragraph (a) of Clause 5.2 (Seller's Representations and Warranties) have the meaning given to them in the Agreed Terms because some of the defined terms in that paragraph refer back to the Agreed Terms. As that paragraph only applies as between Seller and Buyer, it is acceptable to reference the Agreed Terms because the Grantor has no interest in that Clause and therefore does not need to see the Agreed Terms to be able to construe its meaning. The definitions worth a particular mention are:

(i) Ancillary Rights and Claims: This is based on the definition of "Ancillary Rights and Claims" in the Standard Terms and Conditions. It is set out in full in the Multilateral Termination and Transfer Agreement because the definition relates to the Debt.

(ii) Debt: this is the amount of the Funded Participation that is to be sold from the Buyer to the Seller and consequently novated from the Grantor to the Buyer. The Debt is detailed in Part III of the Schedule to the Multilateral Termination and Transfer Agreement.

(iii) Funded Participation: the Funded Participation is described in Part II of the Schedule to the Termination and Transfer Agreement.

(iv) Transferred Assets: This is based on paragraph (a) of the definition of "Purchased Assets" in the Standard Terms and Conditions and describes the rights relating to the Debt that the Grantor will transfer to the Seller.

(c) Multilateral Termination and Transfer Agreement Prevails: (Clause 1.3): Unlike the Participation Agreements, this provides that if there is any inconsistency between the terms and conditions of the Multilateral Termination and Transfer Agreement and the Agreed Terms (as evidenced by the Confirmation between the Participant and Buyer along with the Standard Terms and Conditions as amended by the Confirmation) the Multilateral Termination and Transfer Agreement prevails. This is because the Grantor is not a party to the Agreed Terms, and the Multilateral Termination and Transfer Agreement has to be a stand alone document for the Grantor.

(d) Termination and Transfer (Clause 2): This Clause deals with the mechanics of the transfer by novation of the agreed portion of the Debt from the Grantor


to the Buyer and the termination of the Funded Participation to the extent of the Debt. Simultaneously with the signing of the Multilateral Termination and Transfer Agreement, the Grantor and the Buyer are required, under paragraph (a) of Clause 2.1 (Transfer Documentation) to sign the requisite number of Transfer Certificates as prescribed in the relevant Credit Agreement. In addition, the Buyer must deliver the Transfer Certificate to the Agent simultaneously with the signing of the Multilateral Termination and Transfer Agreement and Transfer Certificate. The Buyer and Seller must also sign the Pricing Letter.

On the date on which the transfer of the Debt takes place under the Transfer Certificate, the Funded Participation is terminated to the extent of the Debt transferred (provided that such termination shall not affect the rights and liabilities of the Grantor and the Seller with respect to the Debt in relation to facts, events and circumstances that arose or accrued or are otherwise attributable to the period prior to the Settlement Date), the Transferred Assets are transferred to the Buyer and the Grantor assigns the Ancillary Rights and Claims to the Buyer. Clause 2.3 (Survival of Funded Participation) makes it clear that to the extent that liabilities for obligations under the Funded Participation survive completion of the Multilateral Termination and Transfer Agreement, the Grantor and Seller remain liable in respect of those liabilities and obligations and the Buyer does not assume those liabilities and obligations.

(e) Payments (Clause 3): This Clause provides that once the Multilateral Termination and Transfer Agreement, Transfer Certificate and Pricing Letter have been signed, on the Settlement Date the Buyer must pay the Settlement Amount to the Seller and any transfer fee to the Agent. In addition, the Seller must pay any fees payable to the Grantor under the Funded Participation, (if any). Clause 3.2 (Interest and Fees) specifies that interest and fees in relation to the Debt are apportioned between the Seller and Buyer as provided for in the Agreed Terms. Payments to the Seller and Buyer are required to be made to the bank account of the Seller and Buyer specified in the Pricing Letter or as otherwise notified by the relevant Party to the other.

(f) Withholding: This Clause mirrors the position on withholding set out in the Standard Terms and Conditions by providing that if any withholding is required to be made from any payments made under the Multilateral Termination and Transfer Agreement (other than in respect of interest or fees received under the Credit Documentation, in respect of which no gross-up will be made) the payer will be obliged to increase the amount paid to the payee to ensure that the payee receives and retains a sum equal to the sum it would have received had no such withholding been required to be made.

(g) Performance and Satisfaction (Clause 4): This Clause states that once the transfer of the Debt and the termination of the Funded Participation have completed, the Seller's obligation to transfer the Transferred Assets and the Buyer's obligation to acquire the Transferred Assets and pay the Settlement Amount are deemed performed and satisfied but the Agreed Terms between the Seller and Buyer remain in full force and effect.


(h) Representations and Warranties (Clause 5): The following representations (which mirror those made between the Seller and the Buyer in the Agreed Terms) are made by all three parties to the Multilateral Termination and Transfer Agreement:-

(i) due incorporation;

(ii) power to enter into the transaction;

(iii) legal, valid, binding and enforceable obligations; and

(iv) no authorisations or consents needed.

In addition, in Clause 5.2 (Seller's Representations and Warranties) the Seller and the Buyer agree to substitute the following Seller representations and warranties contained in the Agreed Terms:-

(i) ownership of the Purchased Assets by the Grantor as at the Settlement Date free from any Encumbrances save those under the Credit Agreement;

(ii) the Grantor has not made any prior sale, transfer or sub-participation in relation to the Purchased Assets which is subsisting;

(iii) all other representations and warranties in the Agreed Terms continue in full force and effect as supplemented by these representations and warranties.

The Buyer and Seller also agree that the term "Predecessor-in-Title" as used in condition 21 of the Standard Terms and Conditions shall be deemed to refer to the Grantor and its predecessors-in-title (and not the Seller and its predecessors-in-title).

This Clause also provides that the representations and warranties contained in the Multilateral Termination and Transfer Agreement and the Agreed Terms shall survive the execution of the Multilateral Termination and Transfer Agreement.

(i) Confidentiality (Clause 6): All Parties agree to keep the terms of the Multilateral Termination and Transfer Agreement confidential unless otherwise required by law or regulation. Each Party is however permitted to make any necessary disclosures to members of its respective Group, to its professional advisers and auditors regarding the terms of the transaction, in connection with the enforcement of its rights in relation to the Multilateral Termination and Transfer Agreement and to any person appointed to provide administration or settlement services in respect of the Multilateral Termination and Transfer Agreement. Furthermore, the Buyer is permitted to make any necessary disclosures to prospective purchasers from the Buyer (except for the identity of the other Parties and the pricing arrangements).


(j) Notices (Clause 7): Notices may be made by fax, letter or, if agreed by the relevant Parties, by email or other electronic means. The relevant details for the Parties are as set out in the Schedule.

(k) Counterparts (Clause 8): This Condition provides for execution of the Multilateral Termination and Transfer Agreement in counterparts. It is expected that delivery of an executed counterpart will be by fax, e-mail or other electronic means. However, each Party is obliged to deliver to each other Party an original counterpart of the Multilateral Termination and Transfer Agreement promptly after delivery by fax, e-mail or other electronic means.

(l) Costs and Expenses (Clause 9): This Clause provides that each Party must bear its own costs and expenses in connection with the Multilateral Termination and Transfer Agreement and any other document required in connection with it.

(m) Further Assurance (Clause 10): Each of the Parties agrees at its own expense to take any further action and to execute any further documents as any other Party may reasonably request to give effect to the transaction.

(n) Miscellaneous (Clause 11): Clause 11.1 provides that the Multilateral Termination and Transfer Agreement may not be amended, modified or supplemented except by an instrument in writing signed by all Parties and shall be binding upon and benefit all Parties and their respective successors and assigns. Clause 11.2 excludes the operation of the Contracts (Rights of Third Parties) Act 1999 to ensure that a person who is not a Party to the Multilateral Termination and Transfer Agreement cannot enforce the terms or enjoy the benefit of any term of the Multilateral Termination and Transfer Agreement.

(o) Governing Law and Jurisdiction (Clause 12): English law applies and the Parties submit to the non-exclusive jurisdiction of the English courts. The Clause also provides for the appointment of a process agent.

9.3 Bilateral Termination and Transfer Agreement

The structure and content of this document is very similar to the Multilateral Termination and Transfer Agreement. Where the provision is the same no further comment is made.

(a) Parties: This is a bilateral agreement between the Grantor under a funded participation and the Participant under that funded participation. It is applicable only if a funded participation exists between the two parties.

(b) Interpretation (Clause 1.1): Defined terms generally have the meaning given to them in the Standard Terms and Conditions in force as at the date of the Bilateral Termination and Transfer Agreement. Unlike the Multilateral Termination and Transfer Agreement there is no need for a prevailing terms clause because the Bilateral Termination and Transfer is a bilateral agreement only.


(c) Termination and Transfer (Clause 2): This Clause deals with the mechanics of the transfer by novation of the agreed portion of the Debt and the corresponding termination of the Funded Participation in a similar manner to that adopted by the Multilateral Termination and Transfer Agreement. In the Bilateral Transfer Agreement however, the Transferred Assets are transferred (and the Ancillary Rights and Claims assigned) to the Participant and not to a third party. There is no reference to a Pricing Letter because the Bilateral Termination and Transfer Agreement does not envisage that a Settlement Amount is payable.

(d) Transfer Fee (Clause 3): The only payment envisaged by the Bilateral Termination and Termination Agreement is that in respect of any applicable Transfer Fee. The Parties should specify in Part IV of the Schedule both which Party is responsible for paying the Transfer Fee to the Agent and the details of any payments to be made between the Parties in respect of the Transfer Fee.

(e) Representations and Warranties (Clause 4): the following representations (which mirror those made between the Seller and the Buyer under the LMA Standard Terms and Conditions are made by both parties:





No other representations are made.

(f) Clause 6 (Notices): The Bilateral Termination and Transfer Agreement incorporates by reference the notices provisions from the funded participation. Users should note that the Bilateral Termination and Transfer Agreement assumes that the funded participation in question has been documented using the Funded Participation (Par/Distressed) (see Section 8.3 (Funded Participation)).

9.4 Termination Agreement

The structure and content of this document is very similar to the Bilateral Termination and Transfer Agreement. Where the provision is the same no further comment is made.

(a) Interpretation (Clause 1.1): Definitions worth a particular mention are:

(i) Debt: This is the amount of the Funded Participation that is to be terminated and is specified in the Schedule.

(ii) Settlement Amount: This is specified in the Schedule. It is envisaged that calculations are set out if required. This is the amount that the Grantor must pay the Participant in consideration for the termination.


(iii) Sale Agreement: This is the agreement under which the parties have agreed the terms pursuant to which they will terminate the funded participation. It is not envisaged that such agreement will be evidenced by a Trade Confirmation nor that it will incorporate the Standard Terms and Conditions. It may be that such a prior agreement is not used and the parties rely on the Termination Agreement both to effect the termination and to agree the terms on which the termination is carried out. In this case references to the "Sale Agreement" should be removed and any agreement on the treatment of accrued interest and fees under the Credit Agreement documented in the Termination Agreement itself.

(b) Termination Agreement prevails (Clause 1.3): Unlike the Participation Agreements this provides that if there is any inconsistency between the terms of the Termination Agreement and the terms of the Sale Agreement the Termination Agreement prevails. This is because any Sale Agreement is envisaged to contain only commercial terms and not to contain any provisions operative to the termination which could be inconsistent with the Termination Agreement.

(c) Termination (Clause 2): This clause effects the termination of the Funded Participation to the extent of the Debt. It does not seek to address the transfer of the Debt because this is to be retained by the Grantor.

(d) Payments (Clause 3): This clause provides that on the date of the Termination Agreement the Grantor must pay the Settlement Amount to the Participant and that interest and fees in relation to the Debt are apportioned as specified in the Sale Agreement. Payments are required to be made to the accounts specified in the Funded Participation or as otherwise agreed. The clause mirrors the position on withholding which is adopted in the Funded Participation (Par / Distressed) (see Section 8.3 (Funded Participation)). Payments made by the Grantor are to be made net of any deduction or withholding and the Grantor is not required to gross-up any payments. If any withholding is required to be made from any payments made by the Participant (other than in respect of interest or fees received under the Credit Documentation, in respect of which no gross-up will be made) the Participant is obliged to increase the amount paid to the Grantor to ensure that the Grantor receives and retains a sum equal to the sum it would have received had no such withholding been required to be made.

(e) Representations and warranties (Clause 4): The Participant additionally represents to the Grantor that:

(i) it is the sole legal and beneficial owner of its rights and obligations under the Funded Participation relating to the Debt, has good title to them and is entitled to agree to terminate them; and

(ii) it has not entered into any prior transfer or sub-participation of those rights or entered into any agreement to do so.


10. NETTING AGREEMENTS

10.1 Introduction

The Netting Agreements are designed for use in circumstances where either two or three parties have entered into trades (each evidenced by a Confirmation (Bank Debt) and incorporating the Standard Terms and Conditions) in respect of the same, or overlapping, commitments and wish for reasons of administrative convenience, efficiency or otherwise to cancel these trades off against each other in place of completing each of the transactions envisaged in those trades. There are two forms of Netting Agreement: a Multilateral Netting Agreement (Bank Debt / Novation) and a Bilateral Netting Agreement (Bank Debt), each of which deal with distinct fact patterns:

(a) Multilateral Netting Agreement: This deals with the situation where:

(i) Party A (as seller) and Party B (as buyer) have entered into a trade in respect of a commitment(s); and

(ii) Party B (as seller) and Party C (as buyer) have entered into a separate trade in respect of a commitment(s) which is the same as, or which overlaps with, the commitment(s) which is the subject of the first trade between Party A and Party B.

The Multilateral Netting Agreement is a tri-partite agreement under which all three parties agree that instead of settling the two trades according to their terms they will, to the extent that the two commitments are the same or overlap, instead settle each of the trades by Party A transferring the relevant commitment(s) direct to Party C by novation. At the same time the relevant parties will pay the Settlement Amounts due under each of the trades. If the commitments are not the same, the relevant trade remains in place and to be settled in accordance with its terms to the extent that the two commitments do not match. The Multilateral Netting Agreement is based on, and shares a number of features with, the Multilateral Termination and Transfer Agreement (see Section 9.2 (Multilateral Termination and Transfer Agreement)).

(b) Bilateral Netting Agreement: This deals with the situation where:

(i) Party A (as seller) and Party B (as buyer) have entered into a trade in respect of a commitment(s); and

(ii) Party B (as seller) and Party A (as seller) have also entered into a separate trade in respect of a commitment(s) which overlaps with the commitment(s) which is the subject of the first trade.

The Bilateral Netting Agreement is a bilateral agreement under which the two parties agree that instead of settling the two trades according to their terms they will, to the extent that the commitments overlap, instead settle the trades by calculating the Settlement Amounts under each of those trades and, to the extent that those Settlement Amounts are not the same, the relevant party paying an amount equal to that difference to the other party. There is no


transfer of the relevant commitment(s). If the commitments are not exactly the same the trade remains in place and is required to be settled in accordance with its terms to the extent that the two commitments do not match.

10.2 Multilateral Netting Agreement

The Multilateral Netting Agreement (Bank Debt / Novation) contains the following provisions:

(a) Parties: this is a tri-partite agreement between the Original Seller (being the seller under the first trade), the Seller (being the buyer under the first trade and the seller under the second trade) and the Buyer (being the buyer under the second trade). The Seller is the only party which is a party to both trades.

(b) Interpretation (Clause 1.1): Defined terms generally have the meaning given to them in the Standard Terms and Conditions in force as at the date of the Multilateral Netting Agreement (as opposed to the meaning given in either set of Agreed Terms). The Seller is the only party which is a party to both sets of Agreed Terms and so this avoids both the Buyer needing to see the Agreed Terms between the Original Seller and the Seller, and the Original Seller needing to see the Agreed Terms between the Seller and Buyer, in order to interpret terms used in the Multilateral Netting Agreement. Parties will need to be sure that in their particular case this is correct and they do not intend a different meaning to apply to any particular term. However, defined terms used in paragraph (a) of Clause 5.2 (Seller's Representations and Warranties) have the meaning given to them in the Agreed Terms between the Seller and the Buyer because some of the defined terms in that paragraph refer back to those Agreed Terms. As that paragraph only applies as between Seller and Buyer, it is acceptable to reference those Agreed Terms because the Original Seller has no interest in that Clause and therefore does not need to see those Agreed Terms to be able to construe its meaning. The definitions worth a particular mention are:

(i) Ancillary Rights and Claims: This is based on the definition of "Ancillary Rights and Claims" in the Standard Terms and Conditions. It is set out in full in the Multilateral Netting Agreement because the definition relates to the Debt.

(ii) First Agreed Terms: this is defined in the Recitals and is the agreement between the Original Seller (as seller) and the Seller (as buyer) which relates to the first trade. It is assumed to be evidenced by a Confirmation (Bank Debt) and to incorporate the Standard Terms and Conditions as amended by that Confirmation.

(iii) First Settlement Amount: this is the Settlement Amount (as defined in the First Agreed Terms) that would be payable under the First Agreed Terms if the Purchased Assets under the First Agreed Terms related only to the Relevant Traded Portion. Upfront Fees and breakfunding compensation are not taken into account when determining the Settlement Amount under the Standard Terms and Conditions and so it is adjusted to take account of any Upfront Fee or applicable


breakfunding compensation from the First Agreed Terms. The First Settlement Amount is specified in the First Pricing Letter which is entered into between the Original Seller and the Seller.

(iv) Netted Second Purchased Assets: these are the Purchased Assets (under and as defined in the Second Agreed Terms) to the extent that they relate to the Relevant Traded Portion.

(v) Netting Settlement Date: this is the date on which the Relevant Traded Portion is transferred and the First and Second Settlement Amounts are paid.

(vi) Relevant Traded Portion: this is the extent to which the commitment(s) subject to the second trade is the same as the commitment(s) subject to the first trade and is the amount of commitment(s) which will be transferred to the Buyer by the Original Seller.

(vii) Second Agreed Terms: this is defined in the Recitals and is the agreement between the Seller (as seller) and the Buyer (as buyer) which relates to the second trade. As with the First Agreed Terms it is assumed to be evidenced by a Confirmation (Bank Debt) and to incorporate the Standard Terms and Conditions as amended by that Confirmation.

(viii) Second Settlement Amount: this is the Settlement Amount that would be payable under the Second Agreed Terms if the Purchased Assets under the Second Agreed Terms related only to the Relevant Traded Portion. It is adjusted in the same way as is the definition of "First Settlement Amount". It is specified in the Second Pricing Letter which is entered into between the Seller and the Buyer.

(ix) Transferred Assets: This is based on paragraph (a) of the definition of "Purchased Assets" in the Standard Terms and Conditions and describes the rights relating to the Relevant Traded Portion that the Original Seller will transfer to the Buyer.

(c) Multilateral Netting Agreement Prevails: (Clause 1.3): This provides that if there is any inconsistency between the terms and conditions of the Multilateral Netting Agreement and either the First Agreed Terms or the Second Agreed Terms the Multilateral Netting Agreement prevails. This is because the Buyer is not a party to the First Agreed Terms, and the Original Seller is not party to the Second Agreed Terms and the Multilateral Netting Agreement has to be a stand alone document for both.

(d) Multilateral Netting (Clause 2): This Clause deals with the mechanics of the transfer by novation of the Relevant Traded Portion from the Original Seller to the Buyer. Simultaneously with the signing of the Multilateral Netting Agreement, the Original Seller and the Buyer are required, under paragraph (a) of Clause 2.1 (Transfer Documentation) to sign the requisite number of Transfer Certificates as prescribed in the relevant Credit Agreement. In addition, the Buyer must deliver the Transfer Certificate to the Agent


simultaneously with the signing of the Multilateral Netting Agreement and Transfer Certificate. In addition the Original Seller and the Seller must sign the First Pricing Letter and the Seller and the Buyer must sign the Second Pricing Letter.

On the date on which the transfer of the Relevant Traded Portion takes place under the Transfer Certificate the Transferred Assets are transferred to the Buyer and the Original Seller assigns the Ancillary Rights and Claims to the Buyer.

(e) Payments (Clause 3): This Clause provides that once the Multilateral Netting Agreement, Transfer Certificate and Pricing Letters have been signed, on the Netting Settlement Date the Seller must pay the Original Seller the First Settlement Amount and the Buyer must pay the Seller the Second Settlement Amount. (The Multilateral Netting Agreement envisages that these amounts may be negative, and so be payable by the Original Seller to the Seller and the Seller to the Buyer respectively.) Additionally, the Buyer must pay any transfer fee to the relevant Agent. The parties should specify in Part IV of the schedule the extent to which the Original Seller and / or the Seller are to reimburse the Buyer in respect of that transfer fee. Clause 3.2 (Interest and Fees) specifies that interest and fees in relation to the Debt are apportioned between the Original Seller and Seller as provided for in the First Agreed Terms and between the Seller and the Buyer as provided for in the Second Agreed Terms. Payments to a Party are required to be made to the bank account of the relevant Party specified in the relevant Pricing Letter or as otherwise notified by the relevant Party to the other.

(f) Withholding: This Clause mirrors the position on withholding set out in the Standard Terms and Conditions by providing that if any withholding is required to be made from any payments made under the Multilateral Netting Agreement (other than in respect of interest or fees received under the Credit Documentation, in respect of which no gross-up will be made) the payer will be obliged to increase the amount paid to the payee to ensure that the payee receives and retains a sum equal to the sum it would have received had no such withholding been required to be made.

(g) Performance and Satisfaction (Clause 4): This Clause states that once the transfer of the Relevant Traded Portion has been completed and the two Settlement Amounts and transfer fee have been paid:

(i) the Original Seller's obligation to transfer the Transferred Assets, the Seller's obligation to acquire the Transferred Assets and the relevant Party's obligation to pay the First Settlement Amount are deemed performed and satisfied but that otherwise the First Agreed Terms between the Original Seller and the Seller remain in full force and effect; and

(ii) the Seller's obligation to transfer the Netted Second Purchased Assets and the Buyer's obligation to acquire the Netted Second Purchased Assets and the relevant Party's obligation to pay the Second Settlement Amount are deemed performed and satisfied but that otherwise the


Second Agreed Terms between the Seller and the Buyer remain in full force and effect.

(h) Representations and Warranties (Clause 5): The following representations (which mirror those in the Standard Terms and Conditions) are made by all three parties to the Multilateral Netting Agreement:-





In addition, in Clause 5.2 (Seller's Representations and Warranties) the Seller and the Buyer agree to substitute the following Seller representations and warranties contained in the Second Agreed Terms:-

(i) ownership of the Purchased Assets (to the extent they relate to the Relevant Traded Portion) by the Original Seller as at the Netting Settlement Date free from any Encumbrances save those under the Credit Agreement;

(ii) the Original Seller has not made any prior sale, transfer or sub-participation in relation to the Purchased Assets (to the extent they relate to the Relevant Traded Portion) which is subsisting;

(iii) all other representations and warranties in the Second Agreed Terms continue in full force and effect as supplemented by these representations and warranties.

The Buyer and Seller also agree that the term "Predecessor-in-Title" as used in condition 21 of the Standard Terms and Conditions shall be deemed to refer to the Original Seller and its predecessors-in-title (and not the Seller and its predecessors-in-title).

This Clause also provides that the representations and warranties contained in the Multilateral Netting Agreement and the First Agreed Terms and the Second Agreed Terms shall survive the execution of the Multilateral Netting Agreement.

(i) Confidentiality (Clause 6): All Parties agree to keep the terms of the Multilateral Netting Agreement confidential unless otherwise required by law or regulation. Each Party is however permitted to make any necessary disclosures to members of its respective Group, to its professional advisers and auditors regarding the terms of the transaction, in connection with the enforcement of its rights in relation to the Multilateral Netting Agreement and to any person appointed to provide administration or settlement services in respect of the Multilateral Netting Agreement. Furthermore, the Buyer is permitted to make any necessary disclosures to prospective purchasers from


the Buyer (except for the identity of the other Parties and the pricing arrangements).

(j) Notices (Clause 7): Notices may be made by fax, letter or, if agreed by the relevant Parties, by email or other electronic means. The relevant details for the Parties are as set out in the Schedule.

(k) Counterparts (Clause 8): This Condition provides for execution of the Multilateral Netting Agreement in counterparts. It is expected that delivery of an executed counterpart will be by fax, e-mail or other electronic means. However, each Party is obliged to deliver to each other Party an original counterpart of the Multilateral Netting Agreement promptly after delivery by fax, e-mail or other electronic means.

(l) Costs and Expenses (Clause 9): This Clause provides that each Party must bear its own costs and expenses in connection with the Multilateral Netting Agreement and any other document required in connection with it.

(m) Further Assurance (Clause 10): Each of the Parties agrees at its own expense to take any further action and to execute any further documents as any other Party may reasonably request to give effect to the transaction.

(n) Miscellaneous (Clause 11): Clause 11.1 provides that the Multilateral Netting Agreement may not be amended, modified or supplemented except by an instrument in writing signed by all Parties and shall be binding upon and benefit all Parties and their respective successors and assigns. Clause 11.2 excludes the operation of the Contracts (Rights of Third Parties) Act 1999 to ensure that a person who is not a Party to the Multilateral Netting Agreement cannot enforce the terms or enjoy the benefit of any term of the Multilateral Netting Agreement.

(o) Governing Law and Jurisdiction (Clause 12): English law applies and the Parties submit to the non-exclusive jurisdiction of the English courts. The Clause also provides for the appointment of a process agent.

10.3 Bilateral Netting Agreement

The Bilateral Netting Agreement (Bank Debt) contains the following provisions:

(a) Parties: this is a bilateral agreement between the Original Buyer (being the buyer under the first trade and the seller under the second trade) and the Original Seller (being the seller under the first trade and the buyer under the second trade).

(b) Interpretation (Clause 1): Defined terms generally have the meaning given to them in the Standard Terms and Conditions in force as at the date of the Bilateral Netting Agreement. The definitions worth a particular mention are:

(i) Debt: As in the Multilateral Netting Agreement, this is the extent to which the commitment(s) subject to the second trade is the same as the commitment(s) subject to the first trade.


(ii) First Agreed Terms: this is defined in the Recitals and is the agreement between the Original Seller (as seller) and the Original Buyer (as buyer) which relates to the first trade. It is assumed to be evidenced by a Confirmation (Bank Debt) and to incorporate the Standard Terms and Conditions as amended by that Confirmation.

(iii) First Settlement Amount: this is the Settlement Amount (as defined in the First Agreed Terms) that would be payable under the First Agreed Terms if the Purchased Assets under the First Agreed Terms related only to the Debt. The intention of this definition is to reflect the total amount that would be payable under the First Agreed Terms in respect of the Debt. Upfront Fees and breakfunding compensation are not taken into account when determining the Settlement Amount under the Standard Terms and Conditions and so it is adjusted to take account of any Upfront Fee or applicable breakfunding compensation from the First Agreed Terms. The First Settlement Amount is specified in Schedule 2 (First Settlement Amount).

(iv) Netting Settlement Amount: This is the result of subtracting the Second Settlement Amount from the First Settlement Amount. If the First Settlement Amount and the Second Settlement Amount are denominated in more than one currency this calculation is required to be performed in respect of each relevant currency.

(v) Second Agreed Terms: this is defined in the Recitals and is the agreement between the Original Buyer (as seller) and the Original Seller (as buyer) which relates to the second trade. As with the First Agreed Terms it is assumed to be evidenced by a Confirmation (Bank Debt) and to incorporate the Standard Terms and Conditions as amended by that Confirmation.

(vi) Second Settlement Amount: this is the Settlement Amount that would be payable under the Second Agreed Terms if the Purchased Assets under the Second Agreed Terms related only to the Debt. It is adjusted in the same way as is the definition of "First Settlement Amount". It is specified in Schedule 3 (Second Settlement Amount).

(c) Transaction Document (Clause 2): The Bilateral Netting Agreement is treated as a Transaction Document for the purposes of both the First Agreed Terms and the Second Agreed Terms. This means that a number of the provisions of the Standard Terms and Conditions will apply to the Bilateral Netting Agreement to the extent that those Standard Terms and Conditions form part of the First Agreed Terms and/or the Second Agreed Terms. Among others these include:

(i) Representation relating to power to enter into the transaction (see paragraph (v)(i)(A) of Section 6.2 (The Conditions));

(ii) The Seller's indemnity for breach and the Buyer's indemnity for breach (see paragraph (w)(ii) of Section 6.2 (The Conditions);


(iii) Confidentiality provisions (see paragraph (x) of Section 6.2 (The Conditions);

(iv) Withholding provisions (see paragraph (bb) of Section 6.2 (The Conditions);

(v) Assignment provisions (see paragraph (cc) of Section 6.2 (The Conditions);

(vi) Exclusion of the operation of the Third Parties Act (see paragraph (dd) of Section 6.2 (The Conditions);

(vii) Process agent appointment (see paragraph (ff) of Section 6.2 (The Conditions); and

(viii) Execution in counterpart (see paragraph (gg) of Section 6.2 (The Conditions).

(d) Payment (Clause 3): This Clause requires a Netting Settlement Amount be calculated in respect of each currency in which the First Settlement Amount and the Second Settlement Amount are calculated. If a Netting Settlement Amount is positive it is payable by the Original Buyer to the Original Seller. If it is negative it is payable by the Original Seller to the Buyer. Payments are required to be made on the date of the Bilateral Netting Agreement.

(e) Performance and satisfaction (Clause 4): This Clause states that once the Netting Settlement Amount(s) has been paid the Original Seller's obligations to transfer the First Purchased Assets (to the extent they relate to the Debt) and the Original Buyer's obligations to acquire those First Purchased Assets are deemed fully performed and satisfied as are the relevant Parties' obligations in respect of the First Netting Settlement Amount. In the same way, the Original Buyer's obligations to transfer the Second Purchased Assets (to the extent they relate to the Debt) and the Original Seller's obligations to acquire those Second Purchased Assets are deemed fully performed and satisfied as are the relevant Parties' obligations in respect of the Second Netting Settlement Amount. Otherwise the First Agreed Terms and the Second Agreed Terms remain in full force and effect except that the representations given by a seller in the Standard Terms and Conditions (see paragraph (v)(ii) of Section 6.2 (The Conditions) and the ERISA representation given by a buyer in the Standard Terms and Conditions (see paragraph (v)(i)(B) of Section 6.2 (The Conditions) which are assumed to have been incorporated by reference into the First Agreed Terms and the Second Agreed Terms are disapplied to the extent that they relate to the Debt. This is because those representations assume that there is a transfer of the asset in question. Clause 4.3 (Interest and Fees) clarifies that interest and fees relating to the Debt are apportioned as provided for in the First Agreed Terms and the Second Agreed Terms.

(f) Representations and Warranties (Clause 5): The following representations mirroring those contained in the First Agreed Terms and the Second Agreed Terms are made by the Original Seller and the Original Buyer:


(i) Legal, valid binding and enforceable obligations; and

(ii) No authorisations or consents needed.

Reliance is not placed on the equivalent representations contained in the Standard Terms and Conditions (and assumed to be incorporated by reference into the First Agreed Terms and the Second Agreed Terms) because those representations do not expressly refer to the Transaction Documentation.


11. TAXATION

Note that this guide is not intended to be and should not be taken to represent legal advice. Users should, in every case, take their own legal advice and should note that there are complex additional tax rules (see Section 1.2 (Taxation) which are not referred to below and which may require consideration where arrangements relate to distressed debt.

11.1 Generally

(a) The LMA documentation provides (Condition 29 (Tax and Withholding) of the Standard Terms and Conditions) that the Buyer shall take its own tax advice as to the taxation treatment of loan assets and transactions. The tax treatment will, in each case, depend on the identity of the parties to a trade and the nature of the loan asset which is being traded.

(b) It may also be the case that tax liabilities arise under the laws of jurisdictions other than the UK. The issue most likely to arise where interest is subject to withholding tax in the jurisdiction of the Borrower is whether that tax is eliminated (or reduced) by virtue of a domestic exemption or a tax treaty between that jurisdiction and the jurisdiction of the beneficial owner of the interest. Members resident in different jurisdictions are likely to be subject to different rates of withholding tax and will have to take locally prescribed steps to ensure that the correct rate is applied. On each assignment, novation or participation the withholding tax position of the new owner will have to be reviewed as for example, in the case of the UK, any treaty claim by the previous owner will have no validity (unless, for example, in certain cases, a loan is within the HMRC's Provisional Treaty Relief Scheme).

(c) Withholding tax and stamp duty are likely to be of primary concern in relation to each and every trade. In the following paragraphs we have outlined certain issues relating to UK withholding, UK stamp duty, UK stamp duty reserve tax ("SDRT") and UK value added tax ("VAT"). What follows is a general guide to the taxation treatment of loans or transactions for the trading of loans which we believe may be of general interest to users.

11.2 UK withholding tax on UK source interest (Income Tax Act 2007 ("ITA 2007") s.874)

(a) Where any UK source yearly interest is paid by a company in respect of money which it has borrowed, the person by or through whom the payment is made should, on making the payment, generally (subject to there being an applicable exemption) deduct out of it a sum representing the amount of income tax (currently at the rate of 20%) for the year in which the payment is made. This obligation is imposed by ITA section 874(2). It should be noted that this requirement to withhold applies irrespective of where the person making the payment is resident (e.g.: where interest is paid by a UK branch of a foreign resident company) or where the payment is actually made.

(b) There is no statutory definition of yearly interest, but case law provides guidance as to whether interest is yearly interest. Broadly speaking whether


interest is yearly interest depends on the intention of the parties when a loan is made. If a loan obligation is of a short term nature (i.e.: for under a year) and it is not the intention of the parties to roll it over for more than a year the interest is unlikely to be yearly interest. If, however the parties do not intend a loan to be repaid within a year, or intend to roll it over for more than a year, the interest is likely to be yearly interest.

(c) The test for determining the source of interest is a "basket" test: that is to say that a number of factors need to be taken into account and whilst some factors may be considered to carry greater "weight" than others, no single factor or factors are of themselves conclusive as to determining the source of an interest payment. HMRC have indicated (in the Savings and Investment Manual, at SAIM 9090) that they consider the most important factor to be the residence of the debtor and the location of his/her assets.

Other factors which HMRC have indicated (at SAIM 9090 and SAIM 9095) should be taken into account are:

(i) the place of performance of the contract and the method of payment;

(ii) competent jurisdiction for legal action and the proper law of contract;

(iii) the residence of the guarantor and the location of the security for the debt; and

(iv) the place of payment.

(d) A payment is therefore likely to have a UK source where the Borrower is resident in the UK (note that this could include interest paid by a non-UK resident company through its UK branch). Similarly, for example, a payment of interest by a non-UK resident company with no UK presence, but where payment was secured on land in the UK, or other UK situs property, could also be treated as UK source interest.

(e) There are, however, certain exemptions from the obligation under ITA 2007 section 874(2) to deduct tax on payments of UK source yearly interest. In particular, there will be no obligation to withhold tax where:

(i) a direction not to withhold has been made by HMRC pursuant to an application under an applicable double tax treaty, but it should be noted that such a direction is only applicable for the beneficial owner in respect of which it is made and cannot be carried over on transfer of that beneficial ownership to another party even where that party is resident in the same country as the transferor (unless in certain cases a direction is granted under HMRC's Provisional Treaty Relief Scheme). Directions are generally stated to expire after five years. It should further be noted that a direction is only applicable in respect of the amount of loan stated in the application, so that if a lender makes an additional advance, this will not be covered by the original direction but will need to be the subject of a further application under the applicable double tax treaty;


(ii) interest is payable on an advance from a UK Bank (as defined by ITA 2007 s.991), even where beneficial ownership is assigned or transferred by that bank, if at the time the interest is paid the person beneficially entitled to the interest is within the charge to corporation tax as respects the interest. Historically, there was some doubt as to how this exemption would apply to an assignee or transferee lender. However, the point is now of mostly academic interest since, even if the exemption were to be unavailable following a transfer to a person beneficially entitled to the interest and within the charge to corporation tax with respect to the interest, the exemption outlined in paragraph (iii) below should apply in all but very unusual circumstances;

(iii) a company, certain qualifying partnerships or a local authority making the payment has a reasonable belief that the person beneficially entitled to interest payable under the loan is either (A) a company resident in the UK for UK tax purposes; (B) a company not so resident in the UK which carries on a trade in the UK through a permanent establishment and that interest falls to be brought into account in computing the chargeable profits (within the meaning of s.19 of the Corporation Tax Act 2009) of that company; (C) a partnership whose membership consists entirely of companies falling within either (A) or (B) above; or (D) certain other types of entity specified in ITA 2007 s.936;

(iv) interest is paid by a UK Bank in the ordinary course of its business (the Revenue have set out their views as to what constitutes the "ordinary course" of a bank's business in Statement of Practice 4/96. Broadly speaking, an interest payment will not be made in the ordinary course of a bank's business if it relates to tier 1,2, or 3 capital adopted by the Financial Services Authority, whether or not it actually counts towards such capital for regulatory purposes, or the characteristics of the transaction giving rise to the interest are primarily attributable to an intention to avoid UK tax); or

(v) interest is paid by a person authorised for the purposes of the Financial Services and Markets Act 2000 and whose business consists wholly or mainly of dealing in financial instruments as principal, in the ordinary course of its business. It should be noted, however, that the scope of this exemption is not entirely clear.

11.3 Ratcheting margins

(a) In certain circumstances all, or part, of an interest payment may be treated as a distribution. Where distribution treatment applies, the company making the payment will not be able to deduct the payment when calculating its taxable profits. Where distribution treatment might otherwise apply to interest payments it will not apply if the lender is within the charge to UK corporation tax as respects the interest.

(b) One of the circumstances in which distribution treatment applies is where the amount of interest is to any extent dependant on the results of the company's business or any part of it. Thus, distribution treatment will apply where the


interest increases as a company's profits increase, or decreases as the company's profits decrease. However an exemption is available to prevent distribution treatment applying in certain circumstances where interest is payable by reference to a ratcheting margin under which the interest rate reduces (rather than increases) as the payer's financial position improves (or increases as the payer's financial position deteriorates). Please see the LMA's website for some general guidance which the LMA has obtained from HMRC as to the application of the exemption, and also on ratchets triggered by an EBITDA to Net Debt ratio.

11.4 Participations

(a) The principal taxation concern is likely to be whether the grantor of the participation is obliged to withhold UK tax.

Care should be taken to distinguish a true participation, be it a funded or a risk participation from an assignment under which a lender assigns its equitable interest in the loan to another party. Although the economic effect of such an assignment is similar to that of a funded participation the legal analysis is different. In the case of a participation the relationship between the grantor and the borrower is unaltered whereas an equitable assignment results in the assignee replacing the assignor as the beneficial owner of the interest and principal paid by the borrower (in this second case note that the entitlement of a borrower or its agent to make payments without deducting UK income tax will depend on the status of the assignee and the submission of the correct paperwork to the relevant tax authorities).

(b) Where the participation is funded by the participant placing a deposit with the grantor, the participation agreement entered into between the grantor and the participant is treated as a new loan or deposit between those parties and the UK income withholding tax regime will apply accordingly.

Note that if the grantor is a UK Bank, it should not be under an obligation to withhold UK tax from payments of interest which it makes to a participant provided that such interest is paid in the ordinary course of the bank's business. The Revenue have set out their views as to what constitutes the "ordinary course" of a bank's business in Statement of Practice 4/96 (see paragraph (e)(iv) of Section 10.2 (UK withholding tax on UK source interest (Income Tax Act 2007 ("ITA 2007") s.874))). If, for example, the purpose of the participation is to avoid withholding tax payable if the participator were to lend directly to the borrower, HMRC might argue that the participation is not in the "ordinary course" of the grantor bank's business.

(c) A further point to note is that the grantor's receipts and payments under the participation may be derecognised for accounting purposes (Users are referred to Section 1 for remarks on derecognition generally). However, this derecognition is not respected for UK tax purposes. Accordingly, it is important that the grantor both receives a deduction for its payments under the participation, and that the timing of the deduction matches the timing of its receipts (i.e. to avoid a cash/tax mismatch).


(d) Questions of impairment relief should also be considered. Whilst one would ordinarily expect the position to be straightforward for a market standard arm's length participation over a vanilla loan, difficult questions can arise if the parties are connected, the loan or the participation is unusual or the transaction is motivated in some way by tax avoidance. In such circumstances tax advice should be sought.

(e) Where the participation is a risk participation and the participant does not make a deposit with the grantor the payments made should not constitute interest. However, in certain circumstances payments of fees and indemnity payments could be subject to UK withholding tax as "annual payments". Tax advice should therefore be obtained.

(f) There should, generally, be no stamp duty or stamp duty reserve tax on a participation agreement (see further paragraph (d) of Section 10.5 (Stamp duty and stamp duty reserve tax ("SDRT"))).

11.5 Stamp duty and stamp duty reserve tax ("SDRT")

(a) Where a loan is transferred by assignment (rather than by novation) then there may be a charge to SDRT on the agreement to assign and/or a charge to stamp duty on the assignment document (which would include any transfer certificate or transfer agreement under or pursuant to which rights are assigned instead of being novated) (any SDRT charge is cancelled if a transfer is correctly stamped within 6 years of the date on which the SDRT charge arises). As a practical matter the transferee is the person most likely to have to pay any stamp duty. The transferee is the person liable to account for SDRT, except in some circumstances when the transferor may be liable. There are various exemptions from SDRT and stamp duty (and it may be possible to defer a stamp duty charge). However, a loan which qualifies for the "loan capital exemption" will be exempt from both stamp duty and SDRT.

(b) In order to qualify for the "loan capital exemption" a loan must be "loan capital". "Loan capital" is defined to include any debenture stock or funded debt issued by a body corporate or other body of persons, any capital raised by such a body which has the character of borrowed money and stock issued by a government of any country or territory outside the UK.

(c) "Loan capital" qualifies for the "loan capital exemption" if it does not carry a right:

(i) of conversion into shares or securities, or to the acquisition of shares or other securities including loan capital of the same description;

(ii) to interest the amount of which exceeds a reasonable commercial return on the nominal amount of the capital;

(iii) to interest the amount of which falls or has fallen to be determined to any extent by reference to the results of, or of any part of, a business or to the value of any property (e.g.: this includes the situation where the amount of interest payable is calculated by reference to a ratcheting


margin (but not where the interest rate reduces as the payer's financial position improves or increases as the payer's financial position deteriorates), see Section 10.3 (Ratcheting Margins)); or

(iv) on repayment to an amount which exceeds the nominal amount of the capital and is not reasonably comparable with what is generally repayable (in respect of a similar nominal amount of capital) under the terms of issue of loan capital listed in the Official List of the London Stock Exchange.

(d) There should be no stamp duty on the execution of a participation agreement as there is no charge to duty in respect of a document under which one party agrees to make an advance of money to another party. Similarly, there will be no SDRT charge on a participation as a participation does not involve the transfer of securities. However, stamp duty and/or SDRT may be applicable on the assignment of a participation agreement (as the "loan capital exemption" may not be available).

11.6 VAT

(a) Loans transferred by assignment

(i) The assignment of a loan by one bank to another gives rise to a supply for VAT purposes. The supply is exempt if the assignee belongs in the United Kingdom for VAT purposes, and outside the scope of VAT (with no right to recover VAT on related costs) if the assignee belongs in another member state of the European Union for VAT purposes and:

(A) (in relation to supplies made before 1 January 2010) receives the supply for the purposes of a business carried on by it for VAT purposes; and

(B) (in relation to supplies made from 1 January 2010) carries on a business for VAT purposes and receives the supply otherwise than wholly for private purposes.

The supply is outside the scope of VAT (but with the right to recover VAT on related costs) if the assignee belongs outside the European Union for VAT purposes.

Following the ruling delivered on 22 October 2009 by the European Court of Justice in Swiss Re Germany Holding GmbH v Finanzamt Munchen fur Korperschaften (Case C-242/08), the question has arisen as to whether the supply arising for VAT purposes from the assignment of a loan may now be subject to VAT at the standard rate. Although the impact of the case has yet to be fully worked out, the prevailing view in the United Kingdom is that the principles laid down in the Swiss Re case ought not to apply to such a supply.

(ii) Individual assignors will need to consider the effect of individual assignments of loans on their VAT recovery position in the light of the


particular method of recovery they have agreed with HM Revenue & Customs.

(b) Loans transferred by novation: A novation involves the repayment of the original supply of credit made by the first lender (either by the borrower or, as a short cut, by the novatee) and the granting of a separate supply of credit to the borrower by the novatee. The VAT treatment of payments made between incoming and outgoing syndicate members is under review and has not yet been agreed with HM Revenue & Customs.

(c) Sub-participations: A bank taking a sub-participation in an existing loan does not change the VAT treatment of that loan for the original lender. The latter is still treated as supplying credit to the borrower on the full loan principal, including the amount of the sub-participation. The precise analysis of a sub-participation for VAT purposes will depend on the nature and form of the sub-participation (e.g. whether it takes the form of a funded participation, a risk participation, a combination of the two or some other form). A funded participation, for example, is generally regarded as the grant of credit by the sub-participating bank to the original lender for VAT purposes. The VAT treatment will also depend on where the original lender (i.e. the person to whom the supply by the sub-participating bank is made) belongs for VAT purposes – although the position is yet to be agreed with HMRC, very broadly, sub-participations tend to be: (i) exempt where the supply is made in the UK; (ii) outside the scope of UK VAT (with no right of recovery) where the supply is made in another EU member state; and (iii) outside the scope of VAT (with right of recovery) where the supply is made outside the EU.

(d) Arranging transfers: The service of arranging a transfer in return for a fee or commission may qualify for VAT exemption as an "intermediary service" within Item 5 of Group 5 (Finance) of Schedule 9 to the Value Added Tax Act 1994. To qualify, the arranger should perform work preparatory to the conclusion of contracts for the transfer and not simply perform introductory services.

(e) Syndicate agents: The VAT treatment of the services supplied by syndicate agents who act as intermediaries in the transfer of a participation (i.e. the transfer of an existing syndicate member's participation) has been agreed with HM Revenue & Customs. Such services are exempt if the service recipient belongs in the United Kingdom for VAT purposes, and outside the scope of VAT (with no right to recover VAT on related costs) if the recipient belongs in another member state of the European Union for VAT purposes and:

(i) (in relation to services supplied before 1 January 2010) receives the services for the purposes of a business carried on by it for VAT purposes; and

(ii) (in relation to services supplied from 1 January 2010) carries on a business for VAT purposes and receives the services otherwise than wholly for private purposes.


The services are outside the scope of VAT (but with the right to recover VAT on related costs) if the recipient belongs outside the European Union for VAT purposes.

11.7 FATCA

(a) There are a number of ways in which FATCA withholding could arise in the context of secondary debt trading. It is not possible in this Users Guide to set out an extensive analysis of the legislative regime relating to FATCA and the circumstances in which withholding might arise on account of FATCA. LMA members, accordingly, should take their own tax and legal advice in relation to FATCA.

(b) However, by way of example, from 1 July 2014 FATCA withholding could arise (depending on the view taken as to the US tax characterisation of the arrangement) under a Funded Participation if the underlying Loan has a US borrower and the Participant is a non-compliant foreign financial institution. In such cases, interest payments from the Grantor to that Participant may be subject to withholding on account of FATCA at a rate of 30%.

(c) The LMA previously published a document titled "July 2013 FATCA riders for LMA secondary debt trading documentation" in which riders were included for parties seeking to include express provision for the following rights in relation to FATCA. Language is now included in the LMA template Standard Terms and Conditions for Par & Distressed Trade Transactions (Bank Debt/Claims) and the LMA template Terms and Conditions for Funded Participations (Par/Distressed) and Risk Participations (Par) in order to provide for the following rights:

(i) each Party to provide information relating to its FATCA status to other Parties;

(ii) each Party to have the right to withhold any amounts it is required to withhold on account of FATCA.

(d) In respect of the example set out at (b) above, the FATCA language incorporated in the LMA Terms and Conditions for Funded Participations (Par/Distressed) and Risk Participations (Par) does not, for the avoidance of doubt, incorporate a gross-up in respect of FATCA withholding. As such, the economic loss would be borne by the Participant.

(e) Paragraphs (a) to (d) above do not set out all of the possible circumstances in which FATCA withholding might be required. Two particular additional circumstances in which FATCA withholding might arise are set out below. LMA members should take their own tax and legal advice in relation to FATCA to ensure that transaction documentation provides for an appropriate allocation of the risk of withholding required under FATCA.

(i) Example 1: If a payment is received by the Grantor under a Funded Participation net of FATCA withholding (either because the payment received by the Grantor was itself withheld upon or because FATCA


withholding was applied somewhere in the payment chain before the payment to the Grantor), under the LMA Terms and Conditions there is no obligation on the Grantor to gross-up interest payments to the Participant.

This result may be said to be generally consistent with the approach in relation to withholding risk in relation to sub-participations, which is that the Participant takes certain risks in relation to the Grantor (including certain credit and tax-related risks).

However, in this example it is possible that the reason for the imposition of FATCA withholding is that the Grantor was not itself compliant with FATCA. It is arguably equitable in such circumstances that (in common with, for example, the general approach in relation to stock lending and repos), to the extent that the Participant would have received interest payments free of FATCA withholding if it had received them directly, the Participant should be compensated for the economic loss it suffers as a result of the Grantor's non-compliance with FATCA.

An important point to note is that if the Grantor takes the view that it is an "intermediary" for the purposes of the UK intergovernmental agreement in relation to FATCA (or a relevant other intergovernmental agreement) and there is a US Borrower, then the Grantor would be required to obtain US tax forms from the Participant and pass them on to the Borrower, which in some circumstances could be commercially undesirable.

(ii) Example 2: Funded Participations have been entered into in relation to 35% of the interest in a Loan with Party A and in relation to 20% of the interest in the same Loan with Party B (and the Grantor has retained the remaining 45% interest in the Loan). If the Grantor takes the view that it is an "intermediary" under the UK intergovernmental agreement in relation to FATCA, there is a US Borrower and Party A's FATCA status causes FATCA withholding to arise on payments from the Borrower to the Grantor, under the LMA's Terms and Conditions the amount received by the Grantor would be apportioned by reference to the interest each Party has in the Loan (i.e. 35% / 20% / 45%). The economic cost of the FATCA withholding would, therefore, be borne by Party A, Party B and the Grantor. This may be an undesirable result as in such circumstances it may be argued that the Participant whose status caused the FATCA withholding to arise (Party A) should bear the economic loss. While conceptually this could be the case under any withholding regime triggered by reference to a Participant's status, in practice prior to the enactment of FATCA such withholding regimes were highly unusual.


SCHEDULE 1 EXAMPLE SETTLEMENT AMOUNT CALCULATIONS

Three worked examples of a Settlement Amount calculation are set out below. Users should note that the purpose of these worked examples is to illustrate the workings of Condition 13 (Settlement amount calculation) of the Standard Terms and Conditions in a practical way and that, accordingly, the workings are set out in more detail than might be the case in a Pricing Letter relating to an actual trade where it is likely that Excel applications (with the more mechanical aspects of the calculations pre-loaded) are likely to be used.

EXAMPLE 1

(i) Details of Transaction

The calculation assumes the following in relation to the transaction:

Type of Trade: Distressed Trade (incorporating Delayed Settlement Compensation)

Interest Treatment: Settled without accrued interest

Trade Date: T

Settlement Date: T + 25

Facility: Term Loan

Drawn Commitment being sold: £10 million

Prepayment of Drawn Commitment being sold: (made on T + 23)

£2 million

Purchase Rate: 50%

Non-Recurring Fees for the account of the Buyer:

None

Transfer fees: None

Interest Rate applying to Drawn Commitments from T+20 to T+25 pursuant to Credit Agreement:

1.5% per annum


Relevant Rate applicable to T+20 to T+25 for the purposes of Delayed Settlement Compensation calculation:

0.2% per annum1

(ii) Settlement Amount calculations

(A) Settlement Amount calculation (T+25)

50% x £8,000,000 (Funded portion as at Settlement Date (T+25))

minus (100% - 50%) x £0 (Unfunded portion as at Settlement Date (T+25))

minus (100% - 50%) x £2,000,000

(Prepayment of drawn commitment (T+23))

minus £0 (Non-Recurring Fees)

= £3,000,000 (payable by Buyer to Seller)

(prior to adjustment for Delayed Settlement Compensation)

1 Note that the Relevant Rate used in calculating Delayed Settlement Compensation is required to be calculated by using the individual Relevant Benchmark Rates (in this case LIBOR) for each day from and including the date 2 Business Days before the Delay Period Commencement Date and to but excluding the date that is 2 Business Days before the Settlement Date.


B) Delayed Settlement Compensation under paragraphs (b) and (c) of Condition 11.1 (Delayed Settlement Compensation) (25% Difference From Original Settlement Amount)2

Date Relevant Rate Daily basis Settlement Amount calculated as at that date

T+20 0.2% p.a. x

365

1

x £5,000,000 = £27.39

T+21 0.2% p.a. x

365

1

x £5,000,000 = £27.39

T+22 0.2% p.a. x

365

1

x £5,000,000 = £27.39

T+23 0.2% p.a. x

365

1

x £3,000,000 = £16.43

T+24 0.2% p.a. x

365

1

x £3,000,000 = £16.43

£115.03 This will be payable from the Buyer to the Seller. (C) Delayed Settlement Compensation under Condition 11.2

(Interest and Accrued Fees) Drawn amount From To Interest

Rate Interest/Recurring Fees attributable to Traded Portion from T+20 to T+23

£10,000,000 T+20 T+23 1.5% p.a.

365

3%5.1 x £1,232.87000,000,10£ =x

Drawn amount From To Interest Rate

Interest/Recurring Fees attributable to Traded Portion from T+23 to T+25

£8,000,000 T+23 T+25 1.5% p.a.

365

2%5.1 x £657.53000,000,8£ =x

£1,890.40

These amounts will be payable from the Seller to the Buyer.

2 Because the Settlement Amount as at the Settlement Date (T+25) differs by a factor of greater than 25% from the Settlement Amount as at T+20 (£5,000,000), Delayed Settlement Compensation under paragraphs (a) and (b) of Condition 10.2 (Delayed Settlement) will be calculated separately for each day and in respect of the Settlement Amount as at that day. For illustrative purposes, the Settlement Amount calculation as at T+20 is set out below:

50% x £10,000,000 (Funded portion as at T+20) minus (100% - 50%) x £0 (Unfunded portion as at T+20) minus (100% - 50%) x £0 (Prepayment of drawn commitment as at T+20) minus £0 (Non-Recurring Fees) = £5,000,000


(D) Settlement Amount adjusted to take account of Delayed Settlement Compensation

Settlement Amount: £3,000,000 (payable by Buyer to Seller)

plus total of Delayed Settlement Compensation payable from Buyer to Seller:

£115.03

minus total of Delayed Settlement Compensation payable from Seller to Buyer:

£1,890.40

£2,998,224.63 (payable by Buyer to Seller)

(E) Settlement Amount payable

£2,998,224.63 (payable by Buyer to Seller)


EXAMPLE 2



Type of Trade: Distressed Trade (not incorporating Delayed Settlement Compensation)

Trade Date: T

Settlement Date: T + 20

Facility: Multicurrency Revolving Credit Facility

Commitment being sold: EUR 10 million

Drawn at Settlement Date: £5 million

Undrawn commitment being sold (base currency):

EUR 5 million

Cancellation of undrawn commitment being sold (made on T+15):

EUR 1 million

Purchase Rate: 50%

Non-Recurring Fees for the account of Buyer:

EUR 100k (paid on T+1)

Transfer fees: None


(A) Settlement Amount calculation in respect of sterling denominated amounts (T+20)3

50% x £5,000,000 (Funded portion denominated in sterling as at Settlement Date (T+20))

minus (100% - 50%) x £0 (Unfunded portion denominated in sterling as at Settlement Date (T+20))

minus (100% - 50%) x £0 (Prepayments/reductions denominated in sterling as at Settlement Date (T+20))

minus £0 (Non-Recurring Fees denominated in sterling)

3 Separate Settlement Amount calculations are required to be made in respect of (a) sterling denominated amounts and (b) EUR denominated amounts.


= £2,500,000 (payable by Buyer to Seller)

(B) Settlement Amount calculation in respect of Euro denominated amounts (T+20)

50% x EUR 0 (Funded portion denominated in EUR as at Settlement Date (T+20))4

minus (100% - 50%) x EUR 4,000,000

(Unfunded portion denominated in EUR as at Settlement Date (T+20))

minus (100% - 50%) x EUR 1,000,000

(Cancellation of EUR denominated commitment (T+15))

minus EUR 100,000 (Non-Recurring Fees denominated in EUR)

= - EUR 2,600,000

= EUR 2,600,000 (payable by Seller to Buyer)5

(C) Settlement Amount payable – Two way payment

£2,500,000 (payable by Buyer to Seller)

EUR 2,600,000 (payable by Seller to Buyer)

4 As none of the funded portion as of the Settlement Date is denominated in EUR, a zero amount in EUR is used for this element of the calculation.

5 As this Settlement Amount is negative, the absolute value of the amount is payable by the Seller.


EXAMPLE 3



Type of Trade: Par Trade (incorporating Delayed Settlement Compensation)

Trade Date: T = 19.07.11

T +10 = 02.08.11

Settlement Date: 28.10.11

Facility: Multicurrency Revolving Credit Facility

Commitment being sold: EUR 10 million

Drawn at Settlement Date: EUR 3 million

Undrawn commitment being sold (base currency):

EUR 7 million

Purchase Rate: 90%

Non-Recurring Fees for the account of Buyer:

None

Transfer fees: None Interest Rate applying to Drawn Commitments from T+10 to 28.10.11 pursuant to Credit Agreement: All in rate % per annum Accruing from to Date 3.4000% 2-Aug-11 2-Sep-11 0.000000% 2-Sep-11 11-Oct-11 4.3000% 11-Oct-11 28-Oct-11 Fee Rate applying to undrawn Commitments from T+10 to 28.10.11 pursuant to Credit Agreement: 0.6% per annum.

Relevant Rate applicable from T+10 to 28.10.11 for the purposes of Delayed Settlement Compensation calculation:

1.32% per annum6

6 Note that the Relevant Rate used in calculating Delayed Settlement Compensation is required to be calculated by using the individual Relevant Benchmark Rates (in this case EURIBOR) for each day from and including the date 2 Business Days before the Delay Period Commencement Date and to but excluding the date that is 2 Business Days before the Settlement Date.



(A) Settlement Amount calculation in respect of Euro denominated amounts (Settlement Date (28.10.11))

90% x EUR 3,000,000 (Funded portion denominated in EUR as at Settlement Date (28.10.11))

minus (100% - 90%) x EUR 7,000,000 (Unfunded portion denominated in EUR as at Settlement Date (28.10.11))

= EUR 2,000,000.00 (payable by Buyer to Seller)

(prior to adjustment for Delayed Settlement Compensation)

(B) Delayed Settlement Compensation under Condition 11.2 (Interest and Accrued Fees)

These amounts will be payable from the Seller to the Buyer.

Drawn amount Rate Accruing

from T+10 to Date Days

Interest attributable to Traded Portion

EUR 1.000,000.00 3.400000% 2-Aug-11 2-Sep-11 31 EUR 2,927.78 EUR 0.00 0.000000% 2-Sep-11 11-Oct-11 39 EUR 0.00 EUR 3,000,000.00 4.300000% 11-Oct-11 28-Oct-11 17 EUR 6,091.67

TOTAL EUR 9,019.45

Undrawn amount Rate Accruing

from T+10 to Date Days

Recurring Fees attributable to Traded Portion

EUR 9,000.000.00 0.600% 2-Aug-11 2-Sep-11 31 EUR 4,650.00 EUR 10,000,000.00 0.600% 2-Sep-11 11-Oct-11 39 EUR 6,500.00 EUR 7,000,000.00 0.600% 11-Oct-11 28-Oct-11 17 EUR 1,983.33

TOTAL EUR 13,133.33


(C) Delayed Settlement Compensation under paragraphs (b) and (c) of Condition 11.2 (Delayed Settlement Compensation)

This amount will be payable from the Buyer to the Seller. In the event that the Settlement Amount is negative and is therefore payable from the Seller to the Buyer, any Delayed Settlement Compensation under paragraph (b) of Condition 11.1 (Delayed Settlement Compensation) would be payable from the Seller to the Buyer instead.

Settlement Amount Relevant

Rate

Accruing from T+10 to Date Days Cost of Carry

(EUR 1.000.000.00 (funded portion)x90%)+(-(EUR 9.000.000.00 (unfunded portion)) x (100% -90%))

= 0.00 1.32000% 2-Aug-11 2-Sep-11 31 EUR 0.00 (EUR 0 (funded portion)x90%)+ (-(EUR 10,000,000.00 (unfunded

portion)) x(100% - 90%)) = -1,000,000.00 1.32000% 2-Sep-11 11-Oct-11 39 - EUR 1.430.00

(EUR 3,000,000.00 (funded portion)x90%)+(-(EUR 7,000,000.00 (unfunded portion)) x (100% -90%))

= 2,000,000.00 1.32000% 11-Oct-11 28-Oct-11 17 EUR 1,246.67

TOTAL -EUR 183.33

(D) Settlement Amount adjusted to take account of Delayed Settlement Compensation

Settlement Amount: EUR 2,000,000 (payable by Buyer to Seller)

plus total of Delayed Settlement Compensation payable from Buyer to Seller:

- EUR 183.33

Here, the amount is negative, Delayed Settlement Compensation would therefore be payable from the Seller to the Buyer instead.

minus total of Delayed Settlement Compensation payable from Seller to Buyer:

EUR 9,019.45 + EUR 13,133.33

= EUR 22,152.78 (payable by Seller to Buyer)

(E) Settlement Amount payable

EUR 1,977,663.89 (payable by Buyer to Seller)
