NOVEMBER 2012

JONES DAY WHITE PAPER

THE UK LOAN MARKET ASSOCIATION’S PRE-EXPORT FINANCE FACILITY AGREEMENT

INTRODUCTIONOn 20 September 2012, the Loan Market Association (the

“LMA”) issued its recommended form of facility agreement

for pre-export finance transactions (the “PXF Document”).

The PXF Document was stated to have been prepared in

response to an increased demand, particularly amongst

lenders, for a form of standardised loan document for use

in English law pre-export finance transactions.

The approach adopted by the LMA when producing

the PXF Document was to base it to the greatest extent

possible on the Leveraged LMA loan document (the

“Leveraged LMA Facility”). As a result, many of the ‘boiler-

plate’ clauses in the Leveraged LMA Facility, for example

the indemnities and increased costs, have been incorpo-

rated into the PXF Document.

The purpose of this guide is to identify and explain some

of the key features of the PXF Document that will be rele-

vant to lenders and borrowers alike when approaching this

document (though this is not, and should not be regarded

as, a definitive guide as to whether those provisions are

appropriate to any particular transaction).

The guide has been broken down into the following

sections:

1. Assumed Structure and Basis of Preparation

2. Clause 1.1: Material Adverse Effect

3. Section 2: The Facility

4. Section 4: Repayment, Prepayment and Cancellation

5. Section 5: Costs of Utilisation

6. Section 6: Additional Payment Obligations

7. Section 8: Representations, Undertakings and Events

of Default

8. Section 9: Changes to the Parties

9. Section 10: The Finance Parties

10. Section 12: Governing Laws and Enforcement

11. Schedule 2: Conditions Precedent

12. Summary

Where relevant , cross-references to the applicable

clauses of the PXF Document have been included to

assist the reader.

In preparing this guide, we have assumed familiarity with the

Leveraged LMA Facility and therefore have not included any

commentary on those provisions that are common to both

the Leveraged LMA Facility and the PXF Document.

Terms defined in the PXF Document, unless they are

defined in this guide or the context otherwise requires,

shall have the same meaning in this guide.

COMMENTIt remains to be seen whether the PXF Document will

be accepted and taken up by lenders and borrowers to

the same extent that the other standard form LMA docu-

ments have been. Established borrowers in particular are

likely to resist some of the more restrictive covenants and

extensive representations that are included in the docu-

ment and may well insist that future deals continue to

be documented using the form that they have become

accustomed to.

The extent to which the PXF Document will be used where

new borrowers enter the market will likely depend upon

how closely the PXF Document reflects the structure of

the deal that is to be documented. In particular, there are

a number of assumptions upon which the PXF Document

is based which, if not true, may well lead to the PXF

Document requiring heavy amendment before consider-

ation of the commercial terms begins:

1. As described more fully below, the PXF Document is

based on one of many structures that are found in

PXF transactions, whereas the PXF market is far from

homogeneous—the borrower can be based anywhere

in the world and the Product itself can differ greatly;

2. The exclusion of hedging counterparties from any

security and from the PXF Document (including vot-

ing rights) itself suggests that the PXF Document is

drafted on the assumption that hedging is unlikely to

be required as part of the deal;

3. The assumption that no security will be taken over the

Product itself (and therefore no concepts of collateral

managers, trust receipts etc); and

4. Although it is not explicitly stated, the PXF Document

appears to have been drafted upon the assumption

that there will be very few Sales Contracts as there is

little materiality embedded within, and very little flex-

ibility with regards to, the representations and under-

takings that pertain to the Sales Contracts.

If new capital providers (other than banks) are to be

attracted to the PXF market, then it could be argued

that the PXF Document may ease that process if it is in

a form (with the same structure and general boilerplate

provisions) that such capital providers have seen in

other sectors. It is interesting to note, however, that the

transfer provision in the PXF Document, although slightly

more permissive than those contained in the Leveraged

LMA Facility, are not as widely drawn as the transfer pro-

vision in the recently launched LMA Real Estate Facility

Agreement (this sector has a similar desire to attract

alternative capital providers) which allows transfers to be

made to “any person”.

1

ASSUMED STRUCTURE AND BASIS OF PREPARATIONThe PXF Document assumes a structure whereby a limited

liability company (the “Parent”) is the 100 per cent share-

holder of a limited liability company which is the producer

of the commodity (referred to in the PXF Document as the

“Product”) and is also the borrower (the “Borrower”). The

Borrower is also assumed to be the seller of the Products

under the various Sales Contracts. It is assumed that the

Parent and various subsidiaries of the Borrower will pro-

vide guarantees (the Parent, the Borrower and each such

subsidiary are each referred to as an “Obligor”).

2

© Loan Market Association

This structure will be appropriate for some pre-export trans-

actions, but by no means all. A wide range of alternative

structures are commonly found in the sector, for example

it is sometimes the case that the borrower group will have

a specific trading entity based in a tax friendly jurisdic-

tion and/or to mitigate any perceived country-risks which

produces a double-decked structure, with a sale from the

producer to the trading entity and then an additional layer

of sales contracts to third party off takers. In such cases, it

may be that the trading entity will be the borrower.

The other general characteristics of the PXF Document

(and assumptions upon which it is based) include the

following:

(a) it provides for a single-currency term loan facility;

(b) it assumes that:

• no equity investment or other layers of debt will

form part of the capital structure;

• each Obligor will provide unlimited guarantees

but not security; and

• where the loans are fully or partially hedged,

the hedge providers will not be party to the PXF

Document, nor will they benefit from the security

package; and

(c) the security package will be provided by the Borrower

only and will comprise security over:

• the Sales Contracts and Sales Contracts L/Cs;

• the Collection Account into which the payments

under the Sales Contracts are to be made; and

• the Debt Service Reserve Account into which the

monies standing to the credit of the Collection

Account are to be swept.

Lenders should note that the PXF Document does

not envisage the taking of other forms of security

which are sometimes encountered if the credit

worthiness of either the Group (or indeed the

Buyers) is deemed not to be sufficiently strong.

Such other security may consist of:

(i) a pledge or other security interest in the

Product itself (including the use of collateral

managers and trust receipts); and/or

(ii) security taken in respect of the insurance

arrangements relating to the Product1.

Further features of the PXF Document:

(a) approach taken with respect to Sales Contracts:

• it is assumed that certain Sales Contracts will

be approved upfront , but there is also flex-

ibility to introduce additional Sales Contracts in

the future (see Clause 25.9 (Additional Buyers

and Additional Sales Contracts) – referred to in

Section 8 below);

• there are two options relating to Additional Sales

Contracts:

• the Majority Lenders will decide at the time

whether any proposed sales contract should

qualify as a Sales Contract; or

• there is a pre-agreed Eligibility Criteria (and if a

proposed sales contract does satisfy such cri-

teria, the Finance Parties have no further right to

approve its terms).

• the Eligibility Criteria is:

“…in relation to any contract for the sale and

delivery of Products entered into by the Borrower

as seller, that:

(a) the counterparty to that contract is a Buyer;

(b) it has or will have, as at the date it becomes

subject to the security constituted by the Sales

Contracts [Pledge/Assignment] Agreement, a

minimum remaining tenor of not less than [•]

months beyond the Termination Date;

(c) it provides for all amounts payable to the

Borrower under it to be:

(i) paid in [insert currency];

(ii) paid directly to the Collection Account;

(iii) paid within no more than [thirty (30)] days

from the date of delivery; and

(iv) made without any withholding, counter-

claim, deduction or set-off whatsoever

(save to the extent expressly permitted

under the terms of that contract as specifi-

cally approved by the Agent on the instruc-

tions of the Majority Lenders);

(d) it complies with any payment or other condi-

tions that were imposed by the Agent when

confirming the designation of the counterparty

to that contract as a Buyer;2

(e) it is capable of being freely assigned by the

Borrower without any further consent of the rel-

evant counterparty or, where such consent is

required, this has been or will be obtained and

presented to the Agent prior to such contract

becoming subject to the Transaction Security

constituted by the Sales Contracts [Pledge/

Assignment] Agreement;

(f) it is expressed to be governed by English law

or the law of another jurisdiction acceptable

to the Agent on the instructions of the Majority

Lenders;

(g) it provides for disputes to be submitted to

arbitration in or to the courts of a jurisdiction

acceptable to the Agent on the instructions of

the Majority Lenders; and

(h) [•];”3

(b) approach taken with respect to Buyers:

• it is assumed that certain Buyers will be pre-

approved and that there is also flexibility to

introduce additional Buyers in the future (see

Clause 25.9 (Additional Buyers and Additional

Sales Contracts)). Note that the Lenders retain

discretion whether to accept any new Buyer and

3

can impose whatever conditions they consider

appropriate;

• Buyers are either approved as:

• ‘Invoice Buyers’– who are considered sufficiently

credit worthy that they are permitted to buy

Products on open account terms; or

• ‘LC Buyers’ – who are only acceptable if a bank

considered sufficiently credit worthy provides

a documentary letter of credit in respect of that

Buyer’s payment obligations; and

• the Major i t y Lenders reta in d iscret ion as

to whether any company can become an

Additional Buyer.

Where the structure for a particular transaction does not

reflect the PXF Document’s assumed structure, lenders

will need to decide whether to use the PXF Document as a

starting point for documentation.

THE PXF DOCUMENT

Clause 1.1: Material Adverse Effect

This is an important term, as it is used as a qualifier for a

number of the representations, undertakings and Events

of Default (as well as to trigger an Event of Default in its

own right) and therefore the parties must carefully con-

sider this definition.

The PXF Document defines a ‘Material Adverse Effect’ as:

“[ in the reasonable opinion of the Majority Lenders] a

material adverse effect on:

(i) the business [including the production and export

capacity], operations, property, condition (financial or

otherwise) or prospects of [any Obligor] [or] [the Group

taken as a whole]; or

(ii) [the ability of an Obligor to perform[ its obligations

under the Transaction Documents]/the ability of the

Obligors (taken as a whole) to perform [their obliga-

tions under the Transaction Documents]; or

(iii) the validity or enforceability of, or the effectiveness or

ranking of any Security granted or purporting to be

granted pursuant to any of, the Finance Documents or

the rights or remedies of any Finance Party under any

of the Finance Documents.

The likely negotiating points include whether:

• the reference in paragraph (i) to “operations, property” is

appropriate, given the focus on the production capabili-

ties of the Borrower;

• the reference in paragraph (i) to “prospects” is appropri-

ate (this may be seen as a metric too subjective to quan-

tify, particularly if paragraph (ii) is included);

• the Borrower is likely to argue that the correct option in

paragraph (ii) should be “the Obligors taken as a whole”,

given that the cross-guarantee means that each Obligor

is liable for the indebtedness of every other Obligor

under the PXF Document but this will depend upon the

composition of the Obligor group;

• paragraph (ii) should be limited to payment or financial

obligations only; and/or

• the second part of paragraph (iii) is appropriate, as this

includes all rights and remedies of a Finance Party, no

matter how immaterial or theoretical.

Section 2: The Facility

(a) Clause 3.1: Purpose

The facility made available under the PXF Document

is a single currency term loan facility, the purpose of

which is not specified (though the accompanying note

recognises that such facilities are often used to fund

production or operating costs associated with the

production of the Products).

(b) Clause 4: Conditions Precedent

The specific documents required to be delivered as

conditions precedent under the PXF Document are

considered below in the section relating to Schedule 2.

Section 4: Repayment, Prepayment and cancellation

(a) Clause 6.1: Repayment of Loans

The PXF Document provides for either bullet repay-

ment or amortising repayment.

(b) Clause 7.3: Right of cancellation and repayment in

relation to a single Lender

The PXF Document retains the general right for the

Borrower to prepay a single Lender that is seeking

to claim amounts under the tax gross-up, tax indem-

nity and/or increased costs provisions. The alterna-

tive right available to borrowers under the Leveraged

LMA Facility to replace a ‘Defaulting Lender’ has been

removed. As a result, a ‘Defaulting Lender’ would still

have voting rights in respect of the PXF Document.

The Lenders and the Borrower may consider if they

wish to reinstate the ‘Defaulting Lender’ concept.

(c) Clause 8: Mandatory Prepayment and Cancellation

As per the Leveraged LMA Facility, the PXF Document

requires mandatory prepayment upon illegality or

change of control. In respect of the latter, however,

mandatory prepayment is not automatic, but rather

at the option of each individual Lender or the Majority

4

Lenders (the Leveraged LMA Facility simply has auto-

matic mandatory prepayment of all Loans in full).

Section 5: Costs of utilisation

(a) Clause 11: Interest Periods

The PXF Document provides optional wording to

ensure that the Interest Period for each Loan would

end at the same date. This is driven by concerns relat-

ing to the ability to perform the calculations for the

Cover Ratios (see Section 8 below for more detail)

and also aids the administration of the Loans.

Section 6: Additional payment obligations

(a) Clause 14: Tax gross-up and indemnities

The PXF Document simply has a requirement that

each Obligor will need to gross-up any payment

where a deduction or withholding applies (though the

footnotes recognise that the clause will need to be

considered on a case-by-case basis).

Borrowers will therefore need to check whether they

would have to deduct tax from interest payments to any

member of the initial syndicate. Assuming that this is

not the case, some Borrowers may try to seek to intro-

duce a concept of ‘Qualifying Lenders’ i.e. Lenders to

whom a Borrower is able to pay without deduction at

the outset (which is reflected in the Leveraged LMA

Facility). If this starting position is agreed, the market

position is generally that Borrowers take change of

law risk (such that if an entity which was a Qualifying

Lender at the outset ceases to be as a result of a

change in law, the Borrower will be required to withhold

and gross up), but that a Borrower should not have to

gross up if a Lender ceases to be a Qualifying Lender

other than as a result of a change in law (e.g. because

of action taken by that Lender) or if a transfer is made

to an entity which is not a Qualifying Lender.

This provision therefore is likely to see significant

amendment and negotiation.

SwissBorrowers

In the situation where there is a double-decked struc-

ture of producer and separate trading company and

the latter is the Borrower, it is the tax situation of the

trading company which is likely to be most relevant.

Often such companies are incorporated in Switzerland

which has:

“20 non-bank rule”: A Swiss Borrower who owes

interest bearing debt to more than 20 “non-banks”

under any agreement (including under certain cir-

cumstances intra-group loans, i .e. not only the

Lenders under the PXF Document will count) will

re-qualify the Swiss Borrower as a bank for Swiss

withholding tax purposes meaning that all interest

payments of such Swiss Borrower will become the

subject of Swiss withholding tax (currently at a rate

of 35%) which must be deducted (i.e. a mere notifica-

tion procedure is not available).

“10 non-bank rule”: If there are more than 10 lend-

ers (and, under certain conditions, sub-participants,

swap counterparties etc.) under the PXF Document

who are not banks, the facility will be re-qualified as

a “bond” for Swiss withholding tax purposes which

again triggers Swiss withholding tax (and possibly

Swiss transfer stamp duty on assignments and trans-

fer with respect to loan tranches). Therefore, the PXF

Document should contain restrictions that prevent that

more than 10 non-banks becoming involved in relation

to a facility agreement with a Swiss Borrower.

The above rules are even more problematic, as pur-

suant to art. 14 of the Swiss Withholding Tax Statute,

grossing-up for Swiss withholding tax is not permit-

ted. Therefore, a PXF Document with a Swiss Borrower

must include appropriate language to reduce the risk

of a breach of these rules.

Many other jurisdictions impose some form of with-

holding tax so the parties should take appropriate

advice for each deal.

Section 8: Representations, Undertakings and Events of

Default

Because the PXF Document uses the Leveraged LMA

Facility (as opposed to the Investment Grade LMA Facility)

as the starting point, the representations, undertakings

and Events of Default are likely to be more extensive than

large trading houses and corporates are used to seeing

in their documentation and therefore may be subject to

extensive negotiation as to both scope and substance.

(a) Clause 20: Representations

The PXF Document contains a typical set of general

representations relating to, amongst other things,

the status of the Obligors, the binding nature of

the various obligations incurred, non-conflict with

other obligations, power and authority, validity and

5

enforceability in evidence, and governing law and

enforcement. These will need to be considered on a

case-by-case basis and amended to suit the actual

transaction and Obligor group structure.

Many representations in the PXF Document refer to

the ‘Transaction Documents’ rather than the Finance

Documents. The term ‘Transaction Documents’ encom-

passes a wider range of documents than just the

Finance Documents and includes all Sales Contracts,

all Sales Contract LCs and [all Material Contracts]4.

Given that any misrepresentation will trigger a draw-

stop and/or result in the occurrence of an Event of

Default , the parties should consider whether it is

appropriate, or even possible, to give such repre-

sentations in respect of all Transaction Documents.

Whether or not this is appropriate is likely to depend

upon the relative importance of such documents

so that, for example, in a structure with only one or

a very small number of Sales Contracts, each one is

likely to be material and therefore the Lenders are

likely to insist that they be covered by the representa-

tions. Conversely, if there were many Sales Contracts,

the Borrower may argue that no one contract is suf-

ficiently material to warrant triggering an Event of

Default. Similar arguments will apply in respect of

Sales Contract LCs.

Below are some further representations to which specific

consideration should be given.

(a) Clause 20.10: Deduction of Tax

The representations relating to payments and deduc-

tion of tax should be carefully reviewed. Specific tax

advice is recommended in this respect.

(b) Clause 20.11: No Default

The PXF Document contains a standard ‘no Event of

Default’ representation but also seeks confirmation

from the Obligors that no Event of Default might rea-

sonably be expected to result from “the entry into,

the performance of, or any transaction contemplated

by, any Transaction Document”. It may not be possi-

ble for the Obligors to provide this confirmation if, for

example, a Sales Contract ‘contemplates’, but does

not necessarily require, a number of possible trans-

actions (for example, the sale of a Product) in circum-

stances where such actions would not necessarily be

permitted by the Finance Documents. Due diligence

should obviously highlight any such issues.

(c) Clause 20.18: Anti-corruption law

A new representation has been added as compared to

the LMA Leveraged Facility that “Each member of the

Group has conducted its businesses in compliance

with applicable anti-corruption laws and has instituted

and maintained policies and procedures designed to

promote and achieve compliance with such laws.”

Borrowers will note the absolute nature of this rep-

resentation (and the fact that it extends to the entire

Group rather than being limited to the Obligors) and

the lack of materiality or thresholds. However, anti-cor-

ruption is an area that lenders are particularly focussed

on and upon which there is sometimes little room for

negotiation given internal compliance policies.

(e) Clause 20.25: Sales Contracts

“(a) Capability: Each Obligor is fully capable of

performing and complying with its obliga-

tions under each Sales Contract to which it is

a party, and possesses all technical and finan-

cial means required for this purpose.

(b) Sales Contracts in effect: each Sales Contract

is in full force and effect and any condition

precedent to its coming into force was satis-

fied (or waived, with the prior written consent

of the Agent on the instructions of the Majority

Lenders) by the date on which such condi-

tion precedent was due to be satisfied under

the terms of that Sales Contract and the pay-

ment obligations of the Buyer under the Sales

Contract are legal, valid, binding and enforce-

able obligations and do not and will not conflict

with any applicable law or regulation.

(c) Sales Contracts meet Eligibility Criteria: each

Sales Contract satisfies the Eligibility Criteria.

(d) Sales Contracts in form provided: Except as

the same may be amended after the date of

this Agreement in accordance with Clause 25.3

(Dealings with counterparties):

(i) each Sa les Contract i s in the fo rm

supplied:

(A) (in the case of the Original Sales

Contracts) to the Agent prior to the

execution of this Agreement; or

(B) (in the case of any Additional Sales

Contract) to the Agent prior to the date

6

on which that contract became an

Additional Sales Contract,

other than, in each case, in respect of

amendments permitted to be made under

this Agreement and notified in writing to

the Agent in accordance with Clause 25.3

(Dealings with counterparties);

(ii) there are no contracts, agreements or

other arrangements in existence (other

than any Finance Document) that amend,

modify, vary or otherwise relate to that

Sales Contract, other than those notified by

the Borrower to the Agent in writing:

(A) (in the case of the Original Sales

Contracts) prior to the execution of this

Agreement; or

(B) (in the case of any Additional Sales

Contract) prior to the date on which

that contract became an Additional

Sales Contract,

or, in each case, any amendments permit-

ted to be made under this Agreement and

notified in writing to the Agent in accor-

dance with Clause 25.3 (Dealings with

counterparties).

(e) No breach or repudiation: No party to a Sales

Contract is in breach of any payment, delivery,

or other material obligation thereunder or has

repudiated or done or caused to be done any

act or thing evidencing an intention to repudi-

ate that Sales Contract.

(f) No notice of inability to perform: No Obligor has

received or given any notification (written or

otherwise) of a failure or inability by any party

to a Sales Contract to comply with its obliga-

tions thereunder.

(g) No force majeure or early termination event: No

event or circumstance has occurred that gives

rise or might reasonably be expected to give

rise to a right to terminate early, suspend per-

formance under, repudiate or cancel any Sales

Contract.

(h) No claims or liabilities: There are no claims, lia-

bilities or obligations in existence between any

Obligor and a Sales Contract counterparty or

any other person that are or might reasonably

be expected to be materially detrimental to the

rights of any Finance Party under that Sales

Contract or the Finance Documents.

(i) Arm’s length terms: It has entered into each

Sales Contract on arm’s length terms.”

The PXF Document envisages that this repre-

sentation will be periodically repeated on an on-

going basis. If that is the position reached after

negotiation, the parties should ensure that there

is consistency between the representation and

the on-going covenants. For example, Clause

20.25(a) is wider in its application (requiring each

Obligor to be “fully capable of performing and

complying with its obligations under each Sales

Contract”) whereas Clause 25.1(a) only requires

the Borrower to “comply in all material respects

with its obligations under each Sales Contract”.

The likely negotiating points include whether:

• is it appropriate to represent that each Obligor

represents to being “fully capable of perform-

ing and complying with its obligations under

each Sales Contract” , or whether this should

be limited to material, payment or delivery

obligations;

• all of the representations should be repeated;

and

• Clause 20.25(f) should also have a reference to

material, payment or delivery obligations rather

than “its obligations”.

Negotiations will be influenced by whether the

representation is required to be repeated and

upon the profile and materiality of the Sales

Contracts as previously noted. Borrowers and

Lenders alike will want to ensure that an Event of

Default is not triggered as a result of a technical

(but in the context of the deal as a whole, immate-

rial) breach under any particular Sales Contract.

Lenders will, however, be keen to ensure that the

mechanism through which their loans will ulti-

mately be repaid is intact. The parties should

note that , if any representation listed in this

clause is not true, in respect of a particular Sales

Contract, that Sales Contract may be excluded

from the calculation of the Cover Ratios.

(g) Clause 20.28: No immunity and Clause 20.29: Private

and commercial acts

[“In any proceedings taken in its jurisdiction of incor-

poration in relation to the Finance Documents to which

it is a party, it will not be entitled to claim for itself or

any of its assets immunity from suit, execution, attach-

ment or other legal process”.]

7

[“Its execution of the Finance Documents to which it is

a party constitutes, and its exercise of its rights and

performance of its obligations thereunder will con-

stitute, private and commercial acts done and per-

formed for private and commercial purposes”.]

Both the above clauses will be required where there

is some doubt as to whether the Obligors are privately

owned and/or benefit from form of sovereign or statu-

tory immunity.

Clause 21: Information Undertakings

The PXF Document contains a set of fairly standard infor-

mation undertakings relating to, amongst other things, pro-

vision of and requirements as to financial statements and

Compliance Certificates, notification of Default, and details

of litigation.

The only PXF-specific addition in this context is the

requirement to provide the Agent with fairly extensive infor-

mation relating to the Sales Contracts as follows:

(a) Clause 21.6: Information: Sales Contracts

“The Borrower shall:

(a) permit each of the Agent and the Security

Agent and any of its officers and agents to

have access to and examine at reasonable

times and on reasonable notice its minute

books and other corporate records, and books

of account and financial records, in relation to

each Sales Contract to which it is a party, [but

no more than once every calendar year unless

a [Default]/[Event of Default is continuing or the

Agent reasonably suspects a [Default]/[Event of

Default] is continuing or may occur;]

(b) promptly supply to the Agent copies of all doc-

uments relevant to its material obligations and

rights under the Sales Contracts (including all

its delivery obligations and the payment obliga-

tions of any Buyer), and notify the Agent of the

price of any delivery under the Sales Contracts

promptly after such price has been determined;

(c) keep the Finance Parties (via the Agent) regu-

larly informed of all material developments and

material progress under the Sales Contracts to

which it is a party;

(d) notify the Agent of any default, breach, termi-

nation or suspension of any Sales Contract or

of any dispute or claim in relation to a Sales

Contract and deliver to the Agent a copy of all

notices received or given by it in connection

with any Sales Contract promptly upon receipt

or dispatch thereof (including without limita-

tion any notice of default, termination, dispute

or claim made against it under any such Sales

Contract together with details of any action it

proposes to take in relation to the same);

(e) (without prejudice to its obligations under

Clause 25.3 (Dealings with counterparties)),

promptly provide the Agent with a copy of any

documents that amend, waive or otherwise

vary the terms of any Sales Contract to which

it is a party;

(f) from time to time on request, promptly provide

the Agent with such other information relat-

ing to the Sales Contracts to which it is a party

(and its ability to perform its obligations there-

under) as the Agent may reasonably require;

(g) promptly on becoming aware of them, provide

the Agent with details of:

(i) any event or circumstance which is or may

be a force majeure event under any Sales

Contract to which it is a party; and

(ii) (without prejudice to its obligations under

Clause 25.3 (Dealings with counterparties)),

the invocation of indemnity provisions by it

or any Buyer;

(h) [promptly on becoming aware of them, provide

the Agent with details of any claim made under:

(i) any cargo insurance policy relating to a

Sales Contract where the claim is for a

sum in excess of [ ] [(before deductibles)];

(ii) any business interruption insurance policy

relating to any Obligor, where:

(A) the claim affects a Sales Contract;

(B) [events giving rise to the claim con-

tinue for more than [ ] days;] and

(C) the amount of the claim is in excess of

[ ] (before deductibles);]

(i) deliver to the Agent, promptly upon receipt or

dispatch thereof, a copy of any notice relating to:

(i) the exercise by a Buyer of any rights it may

have to reduce the quantities of Products

to be delivered to it; and

(ii) the exercise by a Buyer of any rights it may

have to suspend or reject deliveries;

(j) deliver to the Agent, in relation to each delivery

of Products made under a Sales Contract to

which it is a party:

8

(i) no later than [5] Business Days after each

such delivery is made, a copy of the final

commercial invoice issued in respect of

such delivery;

(ii) no later than [5] Business Days after any

such delivery is made, copies of all appli-

cable Delivery Documents (including, but

not limited to, all bills of lading and prelimi-

nary invoices as required under the terms

of that Sales Contract); and

(iii) promptly on request, such other certifi-

cates or documents required in connection

with the sale or delivery of Products under

that Sales Contract as Agent may reason-

ably request; [and]

(k) deliver to the Agent, no later than the first

Business Day of each calendar month a sched-

ule of planned deliveries under the Sales

Contracts for that calendar month[.] / [; and

(l) deliver to the Agent on the first day of each

calendar [quarter]/ [month] (or, if such day is

not a Business Day, on the immediately follow-

ing Business Day), a duly completed Contracts

Report5 for the preceding calendar [quarter]/

[month].]”

The Borrower should ensure that all such information can

actually be provided to the Agent (and that all necessary

internal procedures are implemented to ensure that these

requirements are complied with). Furthermore, depending

on the number of Sales Contracts, the parties may well feel

that it is administratively easier for some of this information

to be swept up with the Contracts Report which is periodi-

cally delivered and for only very material issues to require

on-going notification.

(b) Clause 21.9: Cover Ratios Certificate

“On [the first Business Day of each month]/[each Test

Date]/[other], [the Borrower]/[the Parent] shall supply

to the Agent a Cover Ratios Certificate setting out (in

reasonable detail) computations as to compliance

with 23.2 (Cover Ratios) and Clause 23.4 (Look Back

Test) as at [the Test Date falling in that month]/[that

Test Date]”.

The parties will need to agree what is the appropriate

testing period for the Cover Ratios.

Clause 22: Financial Covenants

The PXF Document includes three general financial cov-

enants, namely:

• a Leverage test – Clause 22.2(a);

• an Interest Cover test – Clause 22.2(b); and

• a Net Worth test – Clause 22.2(c).

The parties should note that the Net Worth covenant is a

‘maintenance covenant’ and therefore must be complied

with at all times rather than only on those dates when it

is tested. These financial covenants aim to measure the

financial health of the whole group rather than just the

Borrower. The appropriateness of these covenants and the

levels at which they are set will need to be considered on

a case-by-case basis.

The PXF Document does not include any cure or remedy

rights in respect of these financial covenants.

Clause 23: Cover Ratios

The PXF Document states that the Cover Ratios are only a

suggested form and that the detail of the Cover Ratios will

be a matter of negotiation between the parties. It is envis-

aged that the Cover Ratios will be tested monthly and on

each Utilisation Date.

(a) Clause 23.2(a): Debt Service Cover Ratio

This is a forward looking ratio which measures, for

each relevant period, the Sales Value under Assigned

Sales Contracts against the amount of Debt Service

Obligations falling due during that period. It effectively

measures whether the Borrower is producing suf-

ficient cash to service its payment obligations under

the PXF Document. Particular points to note are:

CalculationofSalesValue

Sales Value is determined by multiplying the quan-

tity of Products to be delivered under Assigned Sales

Contracts during the relevant period by the applicable

Reference Price.

In order to qualify as an Assigned Sales Contract:

(A) the relevant Sales Contract must continue to be

subject to the Transaction Security; and

(B) the Security Agent must have received:

(I) a copy of the notice of assignment delivered

to the relevant Buyer;

(II) an acknowledgement of notice of assign-

ment signed by the relevant Buyer (sub-

stantially in the form of acknowledgement

required under the relevant security docu-

ment); and

(III) a c o py o f t h e I r r e vo c a b l e P ay m e n t

Instructions, issued to and acknowledged by

the relevant Buyer.

9

The PXF Document does not attempt to define the

Reference Price for the Product as this will vary

depending upon the nature of the commodity,

whether it is traded and the methodology for ascer-

taining the price payable under the Assigned Sales

Contracts themselves. Lenders may also consider

whether it is appropriate to discount the rate used in

the Sales Contracts.

DebtServiceObligations

Debt Service Obligations include any amortisa-

tion of principal, together with interest, fees, costs or

expenses payable to the Finance Parties under the

PXF Document during the relevant period.

(b) Clause 23.2(b): Loan Life Cover Ratio

This is a forward looking ratio which measures the

Sales Value under Assigned Sales Contracts against

the amount of Debt Service Obligations falling due

until the Final Maturity Date. It effectively measures

whether the Borrower is likely to produce sufficient

cash to service its ultimate payment obligations under

the facility. The methodology used is the same as for

the Debt Service Cover Ratio.

(c) Clause 23.3: Top-Up

This clause permits the Borrower to cure any defi-

ciency in the Debt Service Cover Ratio or the Loan

Life Cover Ratio by any of:

(i) prepayment of Loans;

(ii) increasing sales under existing Assigned Sales

Contracts;

(iii) entering into new Assigned Sales Contracts; and/

or

(iv) depositing cash into the Debt Service Reserve

Account (see reference to Clause 26: Bank

Accounts below for details).

The parties will want to carefully consider the ability to

cure the Cover Ratios, in particular the frequency that

any such cure may be used.

(d) Clause 23.4: Look Back Test

In addition to the forward looking tests contained

in Clauses 23.3(a) (Debt Service Cover Ratio) and

23.3(b) (Loan Life Cover Ratio), the PXF Document

also contains a test which measures the amount actu-

ally received under the Assigned Sales Contracts as

against the Debt Service Obligations paid over two

separate periods:

(i) the Look Back Test Period (effectively [three]

months); and

(ii) the previous month.

In order to add any protection to the Lenders beyond

that already contained in the PXF Document, this

ratio would need to be set at a higher level than that

required to merely meet the Debt Service Obligations

for that period. This provision effectively gives the

Lenders additional comfort that , not only did the

Borrower meet its payment obligations, but that there

was additional headroom having done so (i.e. a finan-

cial ‘buffer’ is incorporated). How much headroom (if

any) is appropriate is likely to be heavily negotiated.

Borrowers are likely to argue, that if they have made

all payments as required and are in compliance with

the forward looking cover ratios, they should not be

put into default.

There are no cure rights relating to this test.

Clause 24: General Undertakings

As with the representations, the general corporate

undertakings have, to a large extent, been based on the

Leveraged LMA Facility (though, as with the representa-

tions, certain references in the Leveraged LMA Facility to

‘Finance Documents’ appear in the PXF Document as ref-

erences to ‘Transaction Documents’).

There are a number of additional undertakings that

will need to be particularly considered on a case-by-

case basis.

(a) Clause 24.5: Anti-corruption law

“(a) No Obligor shall (and [the Borrower]/[the Parent]

shall ensure that no other member of the Group

will) directly or indirectly use the proceeds of

the Facility for any purpose which would breach

the Bribery Act 2010, the United States Foreign

Corrupt Practices Act of 1977 or other similar leg-

islation in other jurisdictions.

(b) Each Obligor shall (and [the Borrower]/[the

Parent] shall ensure that each other member of

the Group will):

(i) conduct its businesses in compliance with

applicable anti-corruption laws; and

(ii) maintain policies and procedures designed

to promote and achieve compliance with

such laws.”

10

As with the representation relating to anti-corruption,

this is a widely drafted provision which extends to the

whole Group and Borrowers will need to ensure they

are able to comply.

(b) The PXF Document follows the form of the LMA

Leveraged Facility in carving out activities which will

not be prohibited by the negative covenants such as

Clause 24.9: (Acquisitions), Clause 24.12: (Negative

Pledge) and Clause 24.13: (Disposals). The detail of

these provisions is beyond the scope of this guide

and the parties will therefore need to carefully con-

sider the definitions of:

(i) Permitted Acquisition;

(ii) Permitted Disposal;

(iii) Permitted Financial Indebtedness;

(iv) Permitted Guarantee;

(v) Permitted Loan;

(vi) Permitted Security; and

(vii) Permitted Transaction,

in each case to ensure that the carve-outs accurately

reflect the needs of the Group. Note that many of

these undertakings apply to the whole Group which

a Borrower may argue is not acceptable unless a

breach by a non-Obligor negatively affects an Obligor.

Clause 25: Sales Contract Undertakings

The PXF Document contains a number of undertakings

that are specific to the Sales Contracts. Given the impor-

tance of these agreements in providing the revenue

necessary to repay the facility, it is no surprise that the

Lenders will wish to exert tight control over such contracts.

However, the majority of the undertakings will require

some consideration to ensure that they are applicable and

appropriate for each particular transaction. In particular,

the Lenders will not want to impose such tight constraints

on the Sales Contracts that the Borrower is not able to run

its business efficiently without constantly requiring waivers.

As before, the number of such Sales Contracts will have

an effect on both how operationally difficult this is likely

to be for a Borrower and whether some level of materiality

beyond that envisaged in the current drafting is required.

(a) Clause 25.1: Compliance with Sales Contracts

“The Borrower shall:

(a) comply in all material respects with its obligations

under each Sales Contract in the manner and at

the times provided for therein; and

(b) use its best efforts to procure that each Buyer

duly complies in all material respects with its pay-

ment and other material obligations under that

Sales Contract in the manner and at the times

provided for therein (and in accordance with the

directions of the Agent or the Security Agent from

time to time given pursuant to the terms of the

Finance Documents); and

(c) not take or omit to take any action that might

result in:

(i) any default on any of its payment, delivery

and other material obligations under a Sales

Contract;

(ii) any right to terminate a Sales Contract

becoming exercisable by the Buyer; or

(iii) any counterclaim or right of set off arising

under a Sales Contract other than any set-

off under a Sales Contract that occurs prior

to an Event of Default that is continuing, and

in the ordinary course of trading as part of

the settlement of final invoices for deliveries

made thereunder”.

The likely negotiating points include whether:

• compliance must be to all obligations or just to

material or payment or delivery obligations;

• it is appropriate to require the Borrower to use its

“best efforts to procure that each Buyer duly com-

plies…”. Given the ability of the Borrower embed-

ded in the PXF Document to substitute Buyers and

Sales Contracts, it could be argued that expending

resources chasing a Buyer who has defaulted may,

depending on the importance of the relationship

and the circumstances, be counter-productive; and

• the correct threshold for paragraph (c) is something

that ‘might’ result in any of the listed items.

(b) Clause 25.2: Pursuit of remedies

“Subject to any provision of the Finance Documents to

the contrary, the Borrower shall diligently pursue any

remedies available to it in respect of any breach or

claim arising in relation to each Sales Contract.”

The parties will note the overlap with Clause 25.1(b)

above. The Borrower may also wish to exclude from

this obligation any requirement to take uneconomic

or disproportionate actions in respect of immaterial

breaches.

11

(c) Clause 25.3: Dealings with counterparties

“The Borrower shall not without the prior written con-

sent of the Agent:

(a) in respect of any matter under a Sales Contract

that , pursuant to the terms of that Sales

Contract, falls to be decided by mutual agree-

ment of the parties thereto, negotiate or agree

such matter except in accordance with the

instructions of the Agent or the Security Agent,

other than in respect of any minor administra-

tive or technical matters or matters required

by the parties thereto to improve the practical

performance of their obligations under a Sales

Contract, provided further that:

(i) such matters do not relate to the financial

obligations of the parties under that Sales

Contract or vary or have the effect of varying

any of the Eligibility Criteria; and

(ii) the Agent or the Security Agent is noti-

fied of such matters as soon as reasonably

practicable;

(b) rescind, amend, vary or waive (or agree to or

permit any amendment to, or variation or waiver

of) any term of a Sales Contract except as

required or as expressly allowed by the Finance

Documents, provided that the parties thereto may

agree to immaterial amendments to and waivers

of a Sales Contract where such amendments or

waivers relate to minor administrative or tech-

nical matters or matters required by the parties

to such Sales Contract to improve the practical

performance of their obligations under that Sales

Contract, provided further that:

(i) such matters are not prejudicial to the

interests of the Lenders under the Finance

Documents and do not relate to the payment

obligations of the parties under such Sales

Contracts (other than amendments in relation

to [ ]) or vary or have the effect of varying any

of the Eligibility Criteria; and

(ii) such amendments or waivers are notified to

the Agent or the Security Agent as soon as

reasonably practicable;

(c) consent to the transfer by a counterparty of any

of its rights, title or interest in, or its obligations

under, a Sales Contract;

(d) consent to any act or decision by a counterparty

that might constitute a breach of a Sales Contract

or otherwise adversely affect any rights of the

Finance Parties thereunder or in relation thereto;

(e) make or agree to any claim that a Sales Contract

is frustrated or permit or agree to the cancella-

tion, suspension, rescission, repudiation or other

termination of a Sales Contract or accept any

material breach thereof or default thereunder as

repudiatory; or

(f) seek relief from performance of its payment,

delivery or other material obligations under a

Sales Contract whether under any force majeure,

time limit for claims or any other provision.”

Where there are a large number of Sales Contracts,

the restrictions above (particularly the limit to only

making amendments which relate to ‘minor or tech-

nical’ matters) may ensure a steady stream of waiver

requests being made to the Lenders and lead to an

unnecessary burden (and time delays) on the day-to-

day operation of the Borrower’s business.

(d) Clause 25.4: Payments under Sales Contracts

“The Borrower shall ensure that each payment made

to it under a Sales Contract is made in [insert cur-

rency of Facility] and (unless specifically approved by

the Agent on the instructions of the Majority Lenders)

free and clear of any set off, deduction, counterclaim

or condition.”

The parties will note that, if a payment under any Sales

Contract is subject to any set-off or other deduction, it

would not meet the Eligibility Criteria and may trigger

a recalculation of the Cover Ratios under Clause 25.7

(Sales Contract Failure). In this regard, the whole of

the payments made under that Sales Contract would

be disregarded, not just any amount withheld.

(e) Clause 25.5: Deliveries under Sales Contracts

“The Borrower shall:

(a) make all deliveries under each Sales Contract

directly to the place specified for such deliveries

in that Sales Contract (or in directions given pur-

suant to that Sales Contract), and in accordance

with the delivery schedule set out therein; and

(b) ensure that the aggregate quantities of Products

delivered and scheduled to be delivered under

the Sales Contracts are at all times sufficient to

ensure that the obligations under Clause 23.2

(Cover Ratios) are complied with”.

12

(f) Clause 25.6: Fair market price

“The Borrower shall ensure that the price (includ-

ing any applicable discount) charged and payable

for each delivery of Products under a Sales Contract

pursuant to the terms thereof is on arm’s length terms

and reflects and will reflect the fair market price for

Products”.

Clause 20.25(i) (Sales Contracts) already contains a

repeating representation that all Sales Contracts are

on arm’s length terms. The addition in this clause of

requiring the Products to be sold at a ‘ fair market

price’ is likely to be very difficult to test other than

in respect of flagrant (possibly fraudulent) breach.

Given the alignment of interest of the Borrower and

the Lender in ensuring the best price is paid for the

Products, and, provided that the Cover Ratios are

being complied with, it is likely to be only in such

instances that this clause becomes relevant.

(g) Clause 25.7: Sales Contract failure

“(a) If:

(i) on any date any Sales Contract ceases to

satisfy the Eligibility Criteria;

(ii) the representations set out in Clause 20

(Representations) in relation to a Sales

Contract are not true; or

(iii) the Borrower is in breach of its obliga-

tions in relation to any Sales Contract

under Clause 25.1 (Compliance with Sales

Contracts) to (and including) Clause 25.6

(Fair market price) or otherwise under the

Finance Documents,

[the Borrower]/[the Parent] shall, immedi-

ately upon becoming aware of the same,

notify the Agent.

(b) If the Agent receives notice from the [the Borrower]/

[the Parent] under paragraph (a) above or oth-

erwise becomes aware that any of the matters

referred to in paragraph (a) has occurred in rela-

tion to a Sales Contract, the Agent may and shall,

if so instructed by the Majority Lenders, notify [the

Borrower]/[the Parent] in writing that such contract

has ceased to be a Sales Contract, whereupon:

(i) that contract shall immediately cease to be a

Sales Contract; and

(ii) the Cover Ratios shall be retested on the

date of such notice from the Agent, treating

the date of retesting as a Test Date for the

purposes of testing the Cover Ratios. For the

purpose of such retesting, the Debt Service

Obligations as at the most recent Test Date

shall be used, but the applicable Sales Value

shall be reduced by the Sales Value under

each such contract that has ceased to be a

Sales Contract”.

This clause gives the Majority Lenders the abil-

ity to disregard the value attributed to any Sales

Contract where, amongst other things, a breach

has occurred in relation to such Sales Contract.

Depending upon the nature of the breach, the

Borrower may feel that this is too draconian.

Borrowers should note that if a breach of the

Cover Ratio follows any such recalculation, the

Borrower may still cure any such breach using the

mechanism, set out in Clause 23.3 (Top-Up).

(h) Clause 25.8: Buyer failure

“(a) If in relation to any Buyer:

(i) it defaults on its obligations under a Sales

Contract, its acknowledgement of the Sales

Contracts [Pledge/Assignment] Agreement

or its acceptance of the Irrevocable Payment

Instructions in respect of that Sales Contract[,

unless, in the case only of a Sales Contract,

such default does not relate to a payment

obligation, is otherwise technical in nature

and is remedied within [ ] Business Days];

(ii) an Insolvency Event has occurred and is

continuing;

(iii) it rescinds or repudiates any Sales Contract

to which it is a party or does or causes to be

done any act or thing evidencing its intention

to rescind or to repudiate any Sales Contract

to which it is a party; or

(iv) it otherwise ceases to be sufficiently cred-

i twor thy or capable of per forming i ts

obligations under a Sales Contract , as

determined by the Agent on the instructions

of the Majority Lenders and notified to [the

Borrower]/[the Parent],

[the Borrower]/[the Parent] shall, immediately

upon becoming aware of the same, notify the

Agent.

(b) If the Agent receives notice from [the Buyer]/[the

Parent] under paragraph (a) above or otherwise

becomes aware of the existence or occurrence of

any of the events and circumstances described

in paragraph (a) above in relation to a Buyer,

the Agent may notify [the Borrower]/[the Parent]

13

in writing that such person has ceased to be a

Buyer, whereupon:

(i) such person shall immediately cease to be a

Buyer;

(ii) each Sales Contract to which such person

is a party shall immediately cease to be a

Sales Contract; and

(iii) the Cover Ratios shall be retested on the

date of such notice from the Agent, treating

the date of retesting as a Test Date for the

purposes of testing the Cover Ratios. For the

purpose of such retesting, the Debt Service

Obligations as at the most recent Test Date

shall be used, but the applicable Sales Value

shall be reduced by the Sales Value under

each such contract that has ceased to be a

Sales Contract”.

The effect of any Buyer losing such status is that any

Sales Contract to which it is a party is disregarded for

the purpose of the calculation of the Cover Ratio if

the Agent so decides (not the Majority Lenders as per

Clause 25.7 (Sales Contract Failure)). Given the seri-

ousness of the events listed in sub-paragraphs (i) to

(iii), it would be hard for a Borrower to argue that is

inappropriate, though there may be some discussion

of the ability of the Majority Lenders to subjectively

determine that a Buyer has ceased to be ‘sufficiently

creditworthy’.

(i) Clause 25.9: Additional Buyers and Additional Sales

Contracts

“(a) [The Borrower]/[The Parent] may request in writ-

ing that additional persons [that are not members

of the Group or an Affiliate of the member of the

Group] (a “Proposed Buyer”) be designated as

Buyers in accordance with paragraph (b) below.

(b) A Proposed Buyer may be designated as a Buyer

in accordance with the following procedure:

(i) [the Borrower]/[the Parent] shall deliver to the

Agent a written request providing all relevant

details of the Proposed Buyer and specify-

ing whether such person is to be an Invoice

Buyer or an LC Buyer;

(ii) within [ ] Business Days of receiving such

request (or, if later, within [ ] Business Days of

receiving such additional information as the

Agent may have required), the Agent on the

instructions of the Majority Lenders (and each

Lender may, without limitation, have regard

to whether the Proposed Buyer is incorpo-

rated in or trading from any country subject to

legal sanctions which affect that Lender) will

confirm to [the Borrower]/[the Parent] whether

or not such person is acceptable as a Buyer,

including any conditions applicable to the

designation of that person as an Invoice

Buyer or an LC Buyer; and

(iii) if the Agent has confirmed under sub-para-

graph (ii) above that the Proposed Buyer is

acceptable as a Buyer, with effect from the

date of that confirmation, that Proposed

Buyer shall become a Buyer for the purposes

of this Agreement.

(c) [The Borrower]/[The Parent] may request in writ-

ing that any contract for the sale and delivery

of Products between the Borrower as seller and

a Buyer as buyer (a “Proposed Additional Sales

Contract”) be designated as an Additional Sales

Contract in accordance with paragraph (d) below.

(d) A Proposed Additional Sales Contract may be

designated as an Additional Sales Contract in

accordance with the following procedure:

EITHER

(i) [the Borrower]/[the Parent] shall deliver to the

Agent:

(A) a written request providing a copy of the

Proposed Additional Sales Contract and

confirming that the Proposed Additional

Sales Contract satisfies the Eligibility

Criteria; and

(B) all of the documents and other evidence

listed in Part II of Schedule 2 (Conditions

precedent);

(ii) the Agent shall notify [the Borrower]/[the

Parent] and the Lenders promptly upon

being satisfied that it has received all of

the documents and other evidence listed in

Part II of Schedule 2 (Conditions precedent)

in form and substance satisfactory to it; and

(iii) if the Proposed Additional Sales Contract

satisfies the Eligibility Criteria and the Agent

has received all of the documents and

other evidence listed in Part II of Schedule 2

(Conditions precedent) in form and substance

satisfactory to it, then with effect from the

date of notice by the Agent under paragraph

(ii) above, the Proposed Additional Sales

14

Contract shall become a Sales Contract for

the purposes of this Agreement.

OR

(i) [the Borrower]/[the Parent] shall deliver to the

Agent a written request providing a copy of

the Proposed Additional Sales Contract;

(ii) within [ ] Business Days of receiving such

request (or, if later, within [ ] Business Days of

receiving such additional information as the

Agent may have required) the Agent on the

instructions of the Majority Lenders will con-

firm to [the Borrower]/[the Parent] whether or

not the Proposed Additional Sales Contract is

satisfactory as a Sales Contract;

(iii) if the Agent on the instructions of the Majority

Lenders has confirmed that the Proposed

Additional Sales Contract is satisfactory

to it , the [the Borrower]/[the Parent] shall

deliver to the Agent all of the documents and

other evidence listed in Part II of Schedule 2

(Conditions precedent);

(iv) the Agent shall notify [the Borrower]/[the

Parent] and the Lenders promptly upon

being satisfied that it has received all of

the documents and other evidence listed in

Part II of Schedule 2 (Conditions precedent)

in form and substance satisfactory to it; and

(v) if the Proposed Additional Sales Contract

is satisfactory to the Agent on the instruc-

tions of the Majority Lenders and the Agent

has received all of the documents and

other evidence listed in Part II of Schedule

2 (Conditions precedent) in form and sub-

stance satisfactory to it, then with effect from

the date of notice by the Agent under para-

graph (iv) above, the Proposed Additional

Sales Contract shal l become a Sales

Contract for the purposes of this Agreement”.

As mentioned above, this clause sets out the mech-

anism for the approval of Additional Buyers and

Additional Sales Contracts. Borrowers will obviously

prefer that there is clarity at the outset of the deal as

to the requirements for a new sales contract to qual-

ify as an Additional Sales Contract and so will push

for the first option. If this is agreed, the Lenders will

need to be sure that the “Eligibility Criteria” definition

includes everything that they are concerned about, for

example, it may be that there are certain country limits

or other criteria which the Lenders will want to include.

Clause 26: Bank Accounts

The PXF Document envisages that the Borrower will set

up at least two accounts with the Agent or the Security

Agent, namely a Collection Account and a Debt Service

Reserve Account:

(a) Clause 26.2: Collection Account

The PXF Document leaves open whether the Agent/

Security Agent or the Borrower has signing rights

on the Collection Account but requires that all pro-

ceeds under each Sales Contract are paid into

the Collection Account. The mechanism for this is

that the Borrower must deliver to each Buyer an

Irrevocable Payment Instruction.

The use of Irrevocable Payment Instructions is far from

ubiquitous in PXF transactions. Often, the requirement

to pay into the Collection Account will be contained in

the notification of assignment by way of security of the

Borrower’s rights under the relevant Sales Contract.

Indeed, if there are many Buyers or there is sensitiv-

ity about sending out a separate formal notice, it is

sometimes accepted that the requirement to pay into

the Collection Account is simply added to the invoice

that is sent in relation to that Sales Contract.

It is envisaged that funds will be automatically swept

from the Collection Account to the Debt Service

Reserve Account to meet the minimum level required

in such account ahead of the first Utilisation Date.

Following a Default, monies standing in the Collection

Account may not be withdrawn by the Borrower.

Assuming that the requirements relating to mainte-

nance of the minimum reserve in the Debt Service

Reserve Account have been met, the Borrower may

argue that the trigger should be an Event of Default

(or, indeed, only certain Events of Default).

(b) Clause 26.4: Debt Service Reserve Account

It is envisaged that a minimum amount will be depos-

ited by the Borrower into this account from and includ-

ing the first Utilisation Date. This is intended to act as

a buffer in case there are problems with payments

under the Sales Contracts or indeed problems relat-

ing to the production of the Product itself. If the latter,

experience has shown that such buffers provide only

short protection.

No withdrawals are permitted from the Debt Service

Reserve Account.

15

Clause 27: Events of Default

The PXF Document incorporates the standard Events of

Default from the Leveraged LMA Facility with the following

principal additions:

(a) Clause 27.12: Accounts

“Without the prior written consent of the Agent on the

instructions of the Majority Lenders any Collection

Account or DSRA is closed or requested to be closed

(other than in accordance with the terms of this

Agreement)”.

This Clause should be uncontroversial.

(b) Clause 27.15: Sales Contracts

“(a) Any Sales Contract is amended, varied or waived

in a way that , in the opinion of the Majority

Lenders, is likely to have a material adverse

effect on the ability of any Obligor to perform its

obligations under any Finance Document.

(b) An event or circumstance occurs that gives rise

to, or might reasonably be expected to give rise

to, the termination, frustration, repudiation, rescis-

sion or cancellation of any Sales Contract, or to

a right to effect or make such termination, repu-

diation, rescission or cancellation [in a way that,

in the opinion of the Majority Lenders, is likely to

have a material adverse effect on the ability of

any Obligor to perform its obligations under any

Finance Agreement]”.

Given the wide ambit of the undertakings relating to

the Sales Contracts, it is difficult to see when para-

graph (a) will be required. Paragraph (b) is likely to

cover the same ground as Clause 27.22 (Material

Adverse Change).

(c) Clause 27.16: [Material Licences]

“(a) [Any Material Licence is terminated, cancelled,

suspended or revoked (whether wholly or in part).

(b) Any restrictions or conditions are imposed on any

Material Licence.

(c) Any Material Licence is modified or varied in a

way that is adverse in any material respect to the

interests of the relevant member or members of

the Group.

(d) Any Material Licence expires and is not renewed

on substantially the same terms.]”

Whether this Clause is appropriate will depend upon

if any licences are crucial to the ability of the Borrower

to produce the Product.

(d) Clause 27.18: Expropriation

“The authority or ability of any member of the Group

to conduct its business is limited or wholly or substan-

tially curtailed by any seizure, expropriation, nationali-

sation, compulsory acquisition, intervention, restriction

or other action by or on behalf of any governmental,

regulatory or other authority or other person in relation

to any member of the Group or any of its assets or the

shares in that member of the Group (including without

limitation the displacement of all or part of the man-

agement of any member of the Group)”.

This clause (along with Clauses 27.20 (Moratorium)

and 27.21 (Political and economic risk)) will only be rel-

evant for jurisdictions where such risks are considered

to be material.

(e) Clause 27.19: Convertibility/Transferability

“Any foreign exchange law is amended, enacted or

introduced or is reasonably likely to be amended,

enacted or introduced in [insert relevant jurisdiction(s)]

that (in the opinion of the Majority Lenders):

(a) has or may reasonably be expected to have the

effect of prohibiting, or restricting or delaying in

any material respect any payment or delivery that

any Obligor is required to make pursuant to the

terms of any of the Transaction Documents; or

(b) is materially prejudicial to the interests of the

Finance Parties under or in connection with any of

the Transaction Documents”.

Some jurisdictions often encountered with PXF facili-

ties (e.g. Brazil and Angola) have some form of cur-

rency control so this clause will obviously need to be

considered on a case-by-case basis.

(f) Clause 27.20: Moratorium

“A moratorium is called on payments by borrowers in

relation to, or by third parties under guarantees of,

or pursuant to enforcement of Security for, External

Indebtedness by [insert relevant jurisdiction(s)]

entities generally or a class thereof to which any

Obligor belongs”.

16

(g) Clause 27.21: Political and economic risk

“A deterioration occurs in the political or economic sit-

uation generally in [insert relevant jurisdiction(s)], or an

act of war or hostilities, invasion, armed conflict or act

of foreign enemy, revolution, insurrection, insurgency

or threat thereof occurs in or involving [insert relevant

jurisdiction(s)] [, unless (in any such case) this does not

and will not have a Material Adverse Effect]”.

Section 9: Changes to the Parties

(a) Clause 28: Changes to the Lenders

The Leveraged LMA Facility states that:

• the Lenders can assign or transfer their rights only

to a person that is “another bank or financial institu-

tion or to a trust, fund or other entity which is regu-

larly engaged in or established for the purposes of

making, purchasing or investing in loans, securities

or other financial assets”; and

• the Lender must consult with the Parent before any

assignment or transfer can be effected unless the

assignee/transferee is another Lender or an affiliate

of a Lender or it is made at a time when an Event of

Default is continuing.

However, the PXF Document provides for a more per-

missive approach to Lender transferability (which the

LMA views as reflecting the current state of the PXF

lending market) by allowing a Lender to freely assign

or transfer its rights to any such entity without any

requirement to consult with any Obligor. The Borrower

will therefore need to carefully consider whether this

is acceptable.

The PXF Document retains the provisions in the

Leveraged LMA Facility preventing an assignee/trans-

feree of a Lender from claiming amounts under the

increased costs provisions in circumstances where

the transferor was not claiming amounts under those

provisions but not in respect of claiming amounts

under the tax gross-up (which reflects the current

drafting of that clause as not having a concept of

Qualifying Lender). If a change is made to the Tax

Gross-up clause to include such a concept, it may

also be referred to in the transfer provisions.

(b) Clause 30: Changes to the Obligors

Unlike the Leveraged LMA Facility which permits addi-

tional borrowers and guarantors to accede to the

facility, the PXF Document prohibits any changes to

the Obligors.

Section 10: The Finance Parties

The PXF Document sets out the appointment of the Agent

and the Arranger on terms very similar to those of the

Leveraged LMA Facility and includes the appointment of the

Security Agent (the equivalent wording for the Leveraged

LMA Facility is included in the intercreditor agreement).

Section 12: Governing law and enforcement

Given the potential for an Obligor to have its jurisdiction

of incorporation in a country which does not recognise

English court judgments, there is an option for arbitration

under the Arbitration Rules of the LCIA which will be famil-

iar for lenders in the PXF market.

Schedule 2: Conditions Precedent

The conditions precedent set out in the PXF Document

contain the usual corporate documentation to be pro-

vided by each Obligor, together with the documentation

that relates to the Sales Contracts, Irrevocable Payment

Instructions etc.

SUMMARY

Whether the PXF Document will be used by many Lenders

in the UK market as the basis for their loan documenta-

tion relating to PXF transactions remains to be seen, par-

ticularly for transactions which do not precisely fit the

PXF Document’s assumed structure.

We would expect, in any event, that many borrowers,

depending on their negotiating strength, will seek to

negotiate many of the provisions contained in this docu-

ment. There are clearly a number of areas where the PXF

Document is likely to be regarded by such companies as

unduly restrictive or onerous.

17

18

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our web site at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.

FURTHER INFORMATIONFor further information, please contact your principal Firm

representative or one of the lawyers listed below. General

email messages may be sent using our “Contact Us” form,

which can be found at www.jonesday.com.

LONDON

Edwin BorriniPartner

+44 (0)20 7039 5152

eborrini@jonesday.com

David FrickerAssociate

+44 (0)20 7039 5230

dfricker@jonesday.com

ENDNOTES1 Indeed the PXF Document contains very little of sub-

stance relating to insurance requirements—merely

copying the generic undertaking that is found

in the LMA Leveraged Facility—see Clause 24.18

(Insurances).

2 There is clearly some flexibility in this discretion that

would allow Lenders to impose additional condition-

ality into the Eligibility Criteria and therefore restrict

the ability of the Borrower to introduce new Sales

Contracts.

3 Other relevant criteria may be (a) country limits or (b)

commodity limits.

4 The concept of a Material Contract is not defined,

though the LMA’s User’s Guide simply states “there

may be specific contracts which are of particular

importance in the context of any particular transac-

tion”. These could include, for example, contracts with

applicable third parties relating to the production of

the Products.

5 Note there is no suggested form included in the PXF

Document.

© 2012 Jones Day. All rights reserved. Printed in the U.S.A.

JONES DAY GLOBAL LOCATIONSALKHOBAR

ATLANTA

BEIJING

BOSTON

BRUSSELS

CHICAGO

CLEVELAND

COLUMBUS

DALLAS

DUBAI

DÜSSELDORF

FRANKFURT

HONG KONG

HOUSTON

IRVINE

JEDDAH

LONDON

LOS ANGELES

MADRID

MEXICO CITY

MILAN

MOSCOW

MUNICH

NEW YORK

PARIS

PITTSBURGH

RIYADH

SAN DIEGO

SAN FRANCISCO

SÃO PAULO

SHANGHAI

SILICON VALLEY

SINGAPORE

SYDNEY

TAIPEI

TOKYO

WASHINGTON