The Tale of Standardization: The Use of LMA Standard Forms in CEE
If there is a holy book for finance lawyers, at least on this side of the Atlantic Ocean, it would be the Loan Market Association (LMA) standard form.
Aimed to improve liquidity and efficiency in the syndicated loan markets in EMEA, the recommended standard forms developed by the LMA are here to stay. Although intended as a non-binding recommended form to be used as a starting point for negotiation only, boilerplates and other provisions proposed by the LMA have become widely accepted market standards.
English law governs the LMA standard documentation. In fact, it is not a single form but a selection of different forms for various types of transactions, including investment grade, real estate or leveraged transactions. While Germany, France and Spain enjoy their own LMA-based primary documents governed by their respective local laws, CEE jurisdictions are still in the basket of the developing markets for which the LMA produced its developing markets standard documentation. Standard forms for developing markets are governed by English law, based on the assumption that international lenders are likely to opt for legal documentation governed by a globally recognized legal framework instead of the law of the borrower’s jurisdiction.
So, what is the practice of using LMA standard forms like in Poland, the Czech Republic, Slovakia and Hungary?
For many years, the use of facility agreements based on the LMA standard has been widespread in the Polish market. The LMA standard has been followed in transactions documented under English law and Polish law. In large-cap deals and where the primary syndicate includes foreign lenders, especially international financial institutions such as the EBRD and EIB, the parties are more likely to use facility agreements governed by English law. In medium-cap deals and transactions where only Polish banks are involved, especially to avoid additional legal costs, frequently the facilities agreements, although based on the LMA standard, are governed by Polish law. Banks and law firms have developed their own templates, to greater or lesser degree, based on the LMA form. When it comes to specific LMA provisions that have to be modified to conform to mandatory Polish law provisions, various solutions are proposed.
The above approach has been taken a step further with the development by the Polish Bank Association (Związek Banków Polskich, ZBP) of a Polish law-governed standard form of a facility agreement based on the LMA standard documentation. The ZBP standard form is not an official LMA document, but it has been developed with the LMA’s consent. It is not only a transposition of the LMA form to Polish law, but also a translation of the LMA standard form to the Polish language. The objective, similar to the Western European LMA standard forms, was to adapt the LMA documentation specifically to the requirements of local law while also, to the extent possible, retaining the form and substance of the LMA English law documents.
The Polish standard form was initially announced in November 2016. It will certainly help to unify the various approaches on how the specific LMA provisions can be transposed to Polish law. Some banks specifically require that credit loan documentation is based on the ‘Polish LMA’ standard form. Whether such standard form will completely replace the numerous forms used by financial institutions and law firms so far, time will tell.
LMA standard forms modified with respect to Czech law are frequently used in the Czech Republic, especially for large-scale and complex transactions. Czech lawyers started to draft facility agreements based on the LMA standard some 15 years ago.
Small- and medium-scale transactions are usually carried out based on the respective bank’s forms. Banks’ internal forms are substantially simpler and shorter than the LMA standard forms and usually include reference to the bank’s business terms and conditions.
In 2011 and 2012, the Czech Banking Association (CBA), in cooperation with major Czech banks and law firms with extensive finance experience, developed its own standard based on the LMA standard. The CBA standard was further amended in 2013 and 2014 to adopt the new Civil Code in the Czech Republic. Based on the CBA effort, a facility agreement form and an enforcement agreement form (regulation of the enforcement procedure among the finance parties) were introduced, in both the Czech and English languages.
Although these CBA standard forms are now available, banks and law firms prefer to use their own agreements, which they have developed over the years based on the LMA standard, which nevertheless reflect the Czech law specifics.
LMA standard forms modified with respect to Slovak law are frequently used in the Slovak Republic, especially for large-scale and complex transactions (clubs and syndications). Depending on the type of financing, investment grade, leveraged or real estate forms are used. Slovak modifications relate mostly to the position of the security agent, repayment and transfer certificate, and there are specific provisions that deal with insolvency proceedings. Slovak facility agreements based on the LMA standard have been used for some 15 years, mostly by Slovak offices of international law firms that are usually seen as banks’ counsels (which also helped to standardize the forms used on the local market).
In the beginning, borrowers and bankers struggled to understand the clauses of the LMA standard forms. A negotiation strategy based on an argument that the wording of a clause is “LMA standard” was not well received. Today, borrowers, although still unhappy to see that they have to negotiate over a 100-page document, are becoming more familiar with the LMA standards. One of the reasons for this is that Slovak language versions of the forms are also standardized to some extent, which makes negotiation for borrowers easier.
In Hungary, loan documentation based on the LMA standard form started to be used around 10-15 years ago, especially for syndicated loans. Today, such LMA standard forms are used in nearly all significant international and Hungarian domestic financing transactions, despite the fact that the legal thinking and legal concepts that underlie the LMA standards do not always match the Hungarian legal terminology and regulatory tradition.
According to market players, the importance of the LMA standard forms in Hungary will increase in the coming years, since growth of project financing is expected in Hungary following the long-lasting downturn after the financial crisis.
Although the use of the LMA standard forms is widespread in CEE jurisdictions, in many cases, the governing law of the LMA-based facility agreement is adapted to the local law and LMA forms are modified accordingly to conform to the local mandatory provisions. As such, transposition of a common law-based document to the laws of civil law jurisdictions can be tricky. In some countries, initiatives were undertaken to further standardize loan documentation on a local level.
This is the first part of a series of posts devoted to the LMA standard provisions sensitive to jurisdiction-specific concerns in CEE, so stay tuned!