LMA Guide to Sustainability-Linked Leveraged Loans

On 5 October 2023, the Loan Market Association (the “LMA”), in conjunction with the European Leveraged Finance Association, published an updated Best Practice Guide to Sustainability-Linked Leveraged Loans (“SLLLs”) (the “Guide”) . This follows revisions to the Sustainability-Linked Loan Principles (“SLLPs”) in February 2023. The Guide provides practical guidance on the application of the SLLPs to leveraged loans.

SLLPs

The primary function of the SLLPs is to promote the development of Sustainability-Linked Loans (“SLLs”), products designed to support borrowers seeking to improve their sustainability performance.

The Guide (original version June 2021, now updated) addresses the application of the SLLPs to leveraged loans, as well as highlighting the various roles that arise in an SLLL transaction.

Roles

Given the importance of transparency and integrity when applying the SLLPs to loan transactions, specialised roles have emerged, relating to different stages in the lifecycle of the loan.

Sustainability Coordinators

Sustainability coordinators are appointed by the borrower to assist in selecting and negotiating Key Performance Indicators (“KPIs”) and Sustainability Performance Targets (“SPTs”) and in aligning the SLLs with good market practice. The Guide explains that coordinators may be appointed pre-signing or, in circumstances where the loan is later converted to an SLL, post-origination. It further notes that the scope of the sustainability coordinator’s role and terms of appointment can vary significantly from transaction to transaction and across different institutions and regions.

Second Party Opinion (“SPO”) Providers

SPO providers may be appointed pre-issuance by the borrower as an independent reviewer to verify whether the proposed structure aligns with the SLLPs, in particular with regard to KPI selection and SPTs. This verification assures lenders of the quality and coherence of the sustainability-linked structure of the loan.

External Reviewer
An external reviewer is an independent third party appointed by the borrower post-issuance to review its performance level against each SPT for each KPI.

KPIs and SPTs

KPI Selection and Disclosure

The SLLs aim to support a borrower’s efforts in improving its sustainability profile throughout the term of a loan. This is achieved by aligning loan terms to the borrower’s performance, which is measured using one or more internal and/or external sustainability KPIs.

The SLLPs further state that the KPIs must be material to the borrower’s sustainability and business strategy and address relevant ESG challenges of its industry sector.

Calibration of SPTs

The SLLPs provide that SPTs must be calibrated per KPI for each year of the loan term, be set in good faith and remain relevant and ambitious throughout the life of the SLL.

According to the Guide, SPTs should not be established if, at the time of the loan’s origination, the borrower is not ready to set them. In such circumstances, the loan should not be considered an SLLL. However, where the borrower already has a sustainability strategy in place, details of SPTs can be included in the documentation at the time of origination and activated within a 12-month period post-origination.

The Guide provides direction as to the meaning of ambitiousness of SPTs. It notes that comparison as against industry peers and the borrower’s past performance should indicate whether the SPT has improved beyond business as usual and surpassed minimum regulatory requirements.

Reporting & Verification

The Guide emphasises that under the SLLPs, borrowers must report on the performance of the SPTs at least annually to the lender and provide a sustainability confirmation and verification report. The Guide also covers verification requirements.

Documentation and Drafting

In May 2023, the LMA published model provisions for SLLs for inclusion in loan documentation, whether leveraged or otherwise, the first of their kind.

The Guide is a welcome addition to the LMA documentation in this area. However, it is too early to assess its adoption and implementation by borrowers or lenders, including appointment of the various roles. It is likely that lenders will need to create new positions outside existing relationship managers, but this remains to be seen.
We will monitor the market’s reaction, as well as any further developments.

For further information, please reach out to your usual Maples Group contact or any of the persons listed below.