LMA sustainability-linked loan precedent drafting

On 4 May 2023, the Loan Market Association (LMA) published precedent drafting for sustainability-linked loans (SLLs). This has been developed over a substantial period of time and has been subject to considerable market commentary.

The drafting acts as a really valuable starting point for commercial negotiations as it allows parties to a transaction to start from standard drafting. It is hoped that this will ease the barriers to market entry, ensure market continuity and provide SLLs which are easily comparable (which is especially helpful in a syndicated deal).

The LMA has chosen to provide a framework drafting approach (by way of a rider), together with extensive drafting notes rather than an overly prescriptive set of drafting and also deviated from the LSTA approach in a number of locations. The rider includes familiar concepts and helpfully standardises the language used in market practice. The optionality provided in the drafting notes also provides helpful colour to the rider itself.

The substance of the rider includes the following key elements:

1. the benchmarking against applicable ESG standards (GRI, SASB and ISSB to name but a few) has been emphasised;

2. external review and verification is required;

3. declassification of the loan has been included, but only as a consequence of a failure to agree amendments, the LMA specifically note that failure to agree amendments is not meant to be the sum total of declassification events but leaves it to participants to complete the list;

4. sustainability compliance certificates and a suggested form thereof have been included, with a requirement for this at least annually;

5. a margin ratchet (upward and downward) based on the number of SPTs which have been met; and

6. a rendezvous clause to allow for necessary renegotiation of KPIs or SPTs.

Notable by absence are the following:

1. the drafting includes specific language to confirm that a breach of certain sustainability provisions will not result in an Event of Default;

2. specific sustainability CPs have not been included but it is noted that in the vast majority of these loans they will be required; and

3. reference to sleeping SLLs (‘sleeping’ or ‘springing’ SLLs are those loans which are not compliant with all SLL requirements on entry into the loan but are intended to take effect as SLLs in future and include the necessary drafting to transition) are warned against and noted to be very exceptional and require the vast majority of the sustainability provisions to be agreed on day one (in the most recent guidance produced in February 2023 the LMA confirms these must be all lender approved, switch on within 12 months and only be used in exceptional circumstances).

At a recent seminar commenting on sustainable finance, the LMA stressed the need to follow market consensus and to protect the integrity of the SLL product to ensure that all parties involved are able to avoid any potential risk of greenwashing. We welcome this standardised approach as it will allow all parties to spend more time on the substance of the SLL, as opposed to the form.

For any further information on this topic, please do contact the TLT green finance team.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2023. Specific advice should be sought for specific cases. For more information see our terms & conditions.