LSTA Finalizes Distressed Buy-In/Sell-Out Provisions
On September 9, 2011, the Loan Syndications and Trading Association, Inc. (“LSTA”) made effective a revised LSTA Distressed Trade Confirmation that incorporates a buy-in/sell-out (“BISO”) mechanism for all distressed trades entered into on or after such date. The BISO provisions sets forth basic obligations that parties to a LSTA Distressed Trade Confirmation must comply with in order to settle a trade and deadlines for complying with such obligations.1 A party that has timely performed such obligations may exercise certain remedies against a non-performing counterparty. Specifically, the new BISO provision allows a party to enter into a cover transaction (buy-in or sell-out, as the case may be), provided, it has first delivered a BISO notice to a non-performing counterparty and afforded such counterparty the prescribed time to cure such non-performance.
In order for a party to be eligible to deliver a BISO notice to a non-performing counterparty, such party must qualify as a “performing party.” Market participants should take the steps necessary to be deemed a “performing party” on every trade they are party to in order to preserve their right to exercise the BISO remedies at a later time. The exact obligations that must be satisfied (and the timing to satisfy those obligations) in order for a buyer or a seller to be deemed a “performing party” vary depending on, among other things, which party is designated as the “drafting party”. The “drafting party” is the party responsible for drafting and delivering the documents necessary to settle the transaction. Unless otherwise specified at the time of trade, the seller will be the drafting party.
Generally, a seller will be deemed a “performing party” if, prior to the BISO Trigger Date (in most cases, the fiftieth (50th) business day after the trade date), the seller: (i) executes and delivers the trade confirmation, (ii) delivers draft settlement documents in reasonably acceptable form, (iii) delivers executed upstream predecessor transfer agreements (if any) in reasonably acceptable form and (iv) owns the loans it has committed to sell. A seller will lose the right to affirmatively utilize the BISO provisions if it does not fulfill the obligations of a “performing party” prior to the BISO Trigger Date.
The requirement that a seller own the debt in order to be deemed a performing party may be difficult for a dealer to satisfy if the dealer purchased the debt from an upstream party and such upstream transaction has not yet closed. In such a situation a dealer/seller may be unable to establish itself as a “performing party” by the BISO Trigger Date and find itself as the recipient of a BISO notice from its downstream buyer. In order to protect itself from a buy-in in such a scenario, a dealer/seller may be required to perform its “Upstream BISO Obligations”, which include the delivery to the downstream buyer of an upstream trade confirmation (with the purchase rate redacted) showing that the seller has an open upstream transaction to acquire at least the amount of debt being sold to its buyer.2
A buyer will be deemed a “performing party” if, prior to the BISO Trigger Date, the buyer (generally as the non-drafting party) executes: (x) the confirmation and (y) the settlement documents, and authorizes the seller to submit its signature to the assignment agreement to the administrative agent in order to effectuate the transfer (such requirement to execute the settlement documents is contingent upon the buyer receiving reasonably acceptable settlement documents and upstream predecessor transfer agreements (if any)).
A performing party may deliver a BISO Notice to a non-performing party anytime after the BISO Trigger Date. Upon receipt of a BISO Notice, the recipient generally has twenty (20) business days to cure and itself become a “performing party”. In the event the BISO notice recipient does not cure within the allotted cure period, then the performing party that delivered the BISO notice will have ten (10) business days from the end of such cure period to enter into a cover transaction. In the event the performing party does not timely enter into a cover transaction, then the obligations of the parties under the confirmation shall be deemed reinstated and in full force and effect. In the event that the performing party enters into a cover transaction, the obligations of the parties under the confirmation shall be deemed terminated other than in respect of any Buy-in Damages or Sell-out Damages.
The LSTA distressed BISO provisions are set up to be economically neutral. For example, in the event that the buyer, as the performing party, effectuates a cover trade and, in connection therewith, has to pay more to buy in the bank loans than it had originally agreed to pay under the confirmation, then in such circumstances the seller, as the non-performing party, shall be required to make the buyer whole by essentially paying the buyer the difference between the cover price and the original purchase price. However, in the event the cover price paid by buyer is less than the original price provided for in the confirmation, then the buyer would have to pay to seller the difference between the original price and the cover price. Thus, the buyer as a performing party cannot reap the economic benefit of paying less to buy in the debt in connection with a cover transaction.
The foregoing is summary of the general principals governing the new BISO mechanism. For your reference, we have provided the following three documents that we hope will be helpful in the event you need to work your way through these complex BISO provisions.
- A detailed Q&A memorandum designed to provide guidance on frequently asked questions with respect to the BISO provisions.
- A flow chart depicting the chain of events which may develop in connection with a cure by a BISO notice recipient after receipt of a BISO notice.
- A flow chart depicting the chain of events which may develop in which a BISO notice recipient fails to cure after receipt of a BISO notice.
1. The distressed BISO provisions are similar in substance and mechanics to the already existing BISO provisions set forth in the LSTA Par/Near Par Trade Confirmations. However, due to the complexities of settling LSTA distressed bank loan transactions as compared to settling par/near par bank loan transactions, the distressed BISO provisions have expanded timelines and additional nuances.
2. One primary goal of the LSTA in implementing the par and distressed BISO provisions was to reduce credit counterparty risk by having open trades settle faster. Short selling was identified as a cause in delayed settlements. With the implementation of the BISO provisions, a mechanism now exists where a buyer can identify a short seller to remedy the short sale. However, both the par and distressed BISO provisions provide a dealer/seller with the ability to do a short sale provided an upstream buy-in transaction occurs no later than five (5) business days after the trade date of the underlying confirmation between seller and buyer. Thus, a short bank loan sale must be covered by a dealer within T+5 of the short sale or the dealer forever loses its ability to perform its Upstream BISO Obligations in order to prevent a buy-in.