The African LMA
In this article, we take a look at the South African “African LMA” documentation and give a very basic overview how it differs from the London primary market documents. With huge South African deals in the renewables space set to close imminently, we thought now would be a good time to take a look at the documents, nine months after their launch. Further, detailed advice is of course available from the Trinity finance team.
What is the LMA?
The LMA, or the Loan Market Association was created in 1996 and is based in London. It develops best practice and standard loan documentation in both primary and secondary loan markets.
What is the African LMA?
The African Loan Market Association (ALMA) is a regional, non-profit trade association dedicated to supporting and growing the syndicated loan market in Africa and was launched in late September 2011. It is subscription-based service open to any institution with an interest in syndicated financing in Africa. It is based in Johannesburg. Loan documents for the Kenyan and Nigerian markets are currently in development.
What are the key differences with the English law and South African law documents?
We have broken down the key changes into categories: costs; commercial differences; and South Africa-specific differences.
The African LMA, in its non-negotiated form, takes a firmer stance on costs than typical in English law LMA-based loan agreements. In particular, break costs in the South African market – commonly known as “recovery-type” breakage costs – are drafted wider than typically seen outside of South Africa. We would also note that the concept of “Mandatory Costs” in the English law LMA is of course absent – given the South African Reserve Bank’s stricter liquidity requirements, this is often included in the definition of Margin. Finally, increased costs includes a reduction in the rate of return on capital brought about by more capital being required to be allocated by a Finance Party. Borrowers are likely to resist this but given the Basel III framework is still in progress, this gives Lenders mider protections which they would be unwise to give up.
– Commercial Changes
The ALMA loan agreements hold stricter information requirements (in terms of indemnities, representations and covenants) than under the English LMA documents. In addition, amendments due to change in law are expressly a cost to be borne by the Borrower. The ALMA documents also contain definitions of MAE and “control” – which are usually negotiated on a case-by-case basis, at least in project finance. The non-negotiated definitions are, on the whole, Lender-friendly.
The ALMA document contains drafted representations in respect of insolvency, breach of laws, sovereign immunity and environmental warranties. These are often included in any case in corporate or project financings; however their inclusion in the standard drafts are an indication of the types of things South African lenders are concerned with.
The ALMA document contains stricter provisions in terms of the negative pledge and environmental undertakings. In addition, and something that we at Trinity advise Lenders to consider carefully, is the addition of sanctions language as standard.
– Events of Default
The events of default under ALMA would be familiar to any practitioner in any loan market. Interestingly, cessation of business and any qualification in any audit are also included as Events of Default – which are not necessarily standard in corporate financings under a negotiated English LMA-based loan agreement.
– South Africa-specific changes
Finally, the African LMA contains several South Africa-specific features, including references to JIBAR, amendments to the definitions of Quotation Date/Reference Banks/Screen Rate, South African-law specific governing law and transfer provisions and South African law gross up provisions.
– A new paradigm?
Whilst the ALMA documents are easily recognisable and familiar to practitioners and Lenders outside of the African market, the built-in changes clearly reflect the concerns (e.g. in relation to KYC, costs, Borrower sophistication) of South African lenders in the emerging economies of sub-Saharan Africa.
It would appear that the precedent form is not currently widely used, though our own view is that is likely to change. Clients have noted that many of the provisions (break costs, sanctions etc.) are simply reflective of what they always included in English-law LMA documents.
What will be interesting is to see how the Kenyan and Nigerian models differ. What is not in doubt however, is that moving towards standardised documentation will ultimately lead to lower costs for Lenders and Borrowers alike with negotiation times reduced and legal uncertainties ironed out.
Kaushik Ray, Senior Associate, Trinity International LLP