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Note: Nowadays many International Swaps and Derivatives Association Master Agreements are loan-linked whether the loans are on a bilateral, club or syndicated basis.
Nowadays many International Swaps and Derivatives Association Master Agreements are loan-linked whether the loans are on a bilateral, club or syndicated basis. Typically banks will require all or a large proportion of the loan exposure to be hedged by interest-rate swaps until its maturity.
There are several things to investigate when preparing a loan-linked ISDA Master Agreement Schedule:
* Is there a hedging letter?
* The treatment of events of default;
* The treatment of pre-payments;
* Is the hedging to share in the security package under the Loan Agreement and, if so, to what extent?
* The relationship among the ISDA Master Agreement, Loan Agreement and Intercreditor Deed; and
* Is the loan to be pre-hedged, simultaneously hedged or post hedged?
Hedging Letter
With club and syndicated loans it is quite common to have a hedging letter which the borrower and the facility agent will sign. This is usually between one and four pages long and states the purpose of the hedging, the minimum percentage of the loan that is to be hedged and possibly some of the main terms which may feature in the ISDA Schedule e.g. market quotation and second method to apply in a 1992 ISDA Master Agreement. ISDA negotiators need to take heed of the contents of the hedging letter.
The Treatment Of Events Of Default
In Section 5(a) of the ISDA Master Agreement there are eight events of default:
* 5(a)(i) Failure to Pay or Deliver;
* 5(a)(ii) Breach of Agreement;
* 5(a)(iii) Credit Support Default;
* 5(a)(iv) Misrepresentation;
* 5(a)(v) Default Under Specified Transaction;
* 5(a)(vi) Cross Default;
* 5(a)(vii) Bankruptcy; and
* 5(a)(viii) Merger Without Assumption;
Typically all of these are in the Loan Agreement, except for'Default Under Specified Transaction' (derivatives cross default) and'Merger Without Assumption'.
This is not usually a problem as'Default Under Specified Transaction' is unlikely to apply because the bank or banks will probably...