The LSTA’s Updated DQ Structure: Loan Trading and Drafting Considerations

Earlier this month, the LSTA published a market advisory outlining some recent changes to the disqualified institutions provisions (the “LSTA DQ Structure”) set forth in the LSTA’s Model Credit Agreement Provisions (the “MCAPs”). As in previous iterations, the updated MCAPs contemplate that a borrower should have the discretion to create and periodically update a list of entities that are disqualified from becoming lenders or participants under the credit agreement (a “DQ List”). Under the updated MCAPs, entities included in the DQ List (“Disqualified Institutions”) consist of 1) any entities the borrower identifies to the arranger at or prior to the closing of the commitment letter and 2), any other entities the borrower identifies to the administrative agent from time to time that are competitors of the borrower or its subsidiaries, and 3) any affiliates of Disqualified Institutions under 1) or 2) that the borrower identifies to the administrative agent.

The MCAPs aim to make it easier for lenders to identify Disqualified Institutions by authorizing the administrative agent to post the DQ List to a platform that is freely accessible to lenders. The LSTA’s market advisory also explained that: (i) the administrative agent has no responsibility for monitoring the DQ List; (ii) the DQ List has no retroactive application and any updates to the DQ List would take three Business Days to become effective; and (iii) transferring to a Disqualified Institution does not void the trade but rather allows the borrower to, among other things, limit the Disqualified Institution’s access to confidential information or buy back the Disqualified Institution’s loans. Specifically, the LSTA DQ Structure provides that “all  Disqualified  Institutions  are  prohibited  from  receiving confidential  borrower  information, engaging  in  fundamental  lender  actions  and  taking  part  in creditor decisions in connection with insolvency scenarios.”

DQ Lists are not present in all credit agreements and not all DQ Lists will adhere to the LSTA DQ Structure. Determining whether a DQ List exists and considering the trading and drafting implications on assignments and participations should be part of standard pre-trade diligence for all participants in the secondary loan market. The list below summarizes some best practices for trading in deals where a DQ List is present:

• Sellers should check the DQ List prior to entering into a trade, even if the proposed buyer is a lender.
• After the trade date, sellers should check the DQ List again before sharing confidential information or soliciting direction from the buyer with respect to any votes or corporate actions.
• A buyer that is a competitor of the borrower or an affiliate of a Disqualified Institution may wish to consider making the trade contingent upon the buyer’s not being added to the DQ List.
• If the assignment and assumption does not include a representation from the buyer that it is not a Disqualified Institution, sellers should consider requesting a buyer representation to that effect elsewhere in the trade documentation.