Under the 2014 MCAPs, a Disqualified Institution is an entity designated by the borrower in writing either prior to the closing of the credit agreement or, solely with respect to competitors of the borrower, from time to time thereafter. The definition of Disqualified Institution raised several questions. First, to whom must the Disqualified Institution be identified and/or the list of Disqualified Institutions (DQ List) be disclosed? Borrowers and sponsors are often sensitive to disclosing their DQ Lists to the broader lending syndicate because they consider such information proprietary. On the other hand, existing and potential investors in the loans need to know which institutions are on the DQ List to ensure that they comply with the credit agreement when entering into an assignment. Several solutions to these competing interests have been proposed, ranging from requiring that the DQ List be published on the electronic agency platform available to the syndicate in order to become effective, to prohibiting distribution of the DQ List to lenders at all. Instead the borrower is given the ability to review each assignment prior to effectiveness (even where the borrower is in default or otherwise has no consent right with respect to that assignment). Since each approach has merit and each administrative agent bank has developed its own preferred procedure, the 2014 MCAPs leave the exact mechanism to be negotiated between the transacting parties. The key innovation of the 2014 MCAPs is that the negotiated mechanism is now contemplated to be specifically addressed in the credit agreement and provisions have been added to facilitate the disclosure of the DQ List to lenders, including through the electronic agency platform.

Another area of debate has been the scope of entities that could be added to the group of Disqualified Institutions after the closing date. There are a number of variations in the market ranging from credit agreements that do not allow the DQ List to be updated at all to agreements that include as Disqualified Institutions all affiliates of competitors and entities identified on the DQ List whether or not those affiliates are identified. The 2014 MCAPs adopted a middle ground by contemplating updating the DQ List for “Competitors” (which the transacting parties are invited to define on a transaction-specific basis). Transacting parties are always free to choose a more expansive definition of Disqualified Institutions. For example, they may choose to include entities clearly identifiable as affiliates based solely on the similarity of their names whether or not added to the DQ List. However, in doing so, transacting parties will need to carefully assess the impact on other provisions of the 2014 MCAPs and whether such a standard is sufficiently well defined to avoid confusion and delay in the secondary market.

The 2014 MCAPs provide that “[n]o assignment or participation shall be made to any entity that was a Disqualified Institution as of the date (the ‘Trade Date’) on which the assigning lender entered into a binding agreement to sell and assign all or a portion of its right and obligations under this Agreement.” Accordingly, if an assignor and an assignee enter into an agreement to purchase and sell loans and the proposed assignee subsequently becomes a Disqualified Institution, the assignor may proceed with the assignment without violating the credit agreement prohibition. In other words, the designation of an assignee as a Disqualified Institution after the applicable Trade Date will not be given retroactive effect.

The 2014 MCAPs further provide that an assignment in violation of the foregoing prohibition does not render the assignment void. Rather, the 2014 MCAPs state in detail the consequences of an assignment in violation of this prohibition. The same consequences also apply to the extent a member of the lending syndicate becomes a Disqualified Institution after the Trade Date. Specifically:

The 2014 MCAPs include the option of “market price” in brackets in recognition of the difficulty that may exist in establishing a market price at any given time, depending on the nature of the loans. Transacting parties may or may not wish to address this issue in their credit agreement.

In addition, a Disqualified Institution:

These consequences generally mirror those applicable to Affiliated Lenders (as described below), except that the last bullet point is more punitive in the context of Disqualified Institutions in that it does not contain an exception for votes where the Disqualified Institution is disproportionately affected.

Importantly, the 2014 MCAPs make it clear that the administrative agent bank “shall not be responsible or have any liability for, or have any duty to ascertain, inquire into, monitor or enforce compliance with the provisions [of the MCAPs] relating to Disqualified Institutions.” The administrative agent bank is authorized (but not obligated) to post the DQ List to the electronic agency platform which provides a mechanism for distributing the DQ List to the entire lender group. The DQ List is expressly deemed to be suitable for posting on the public side of the platform.

Finally, the LSTA form of Assignment and Assumption does not require the assignee to “check the box” to confirm that it is not a Disqualified Institution. However, with a slight modification to the standard form of Assignment and Assumption, and the inclusion of a footnote, the LSTA has clarified that, by making the standard representation that the assignee “meets all the requirements to be an assignee,” the assignee is effectively representing that it is not a Disqualified Institution (at the applicable Trade Date).

For more information on disqualified institutions, see: What's Market: 2014 Mid-year Trends in Large Cap and Middle Market Loan Terms.

For information on assignments, see:

An “Affiliated Lender” is an affiliate of the borrower and, where applicable, the sponsor, other than the borrower and its subsidiaries. There are two categories of Affiliated Lender. “Debt Fund Affiliates” are “bona fide debt funds or investment vehicles that are primarily engaged in making, purchasing, holding or otherwise investing in commercial loans, bonds and similar extensions of credit in the ordinary course of business” as to which neither an affiliate of the borrower nor the sponsor “has the power, directly or indirectly, to direct or cause the direction of such Affiliated Lender’s investment decisions.” Debt Fund Affiliates are thought to be independent of their sponsor, and accordingly the restrictions that apply to them are less stringent than those which apply to other types of Affiliated Lenders that are not independent. Any Affiliated Lender that is not a Debt Fund Affiliate is referred to as a “Non-Debt Fund Affiliate.”

A Non-Debt Fund Affiliate is permitted to purchase term loans (but not revolving loans) pursuant to open-market purchases subject only to both:

Note that Non-Debt Fund Affiliates are not required by the 2014 MCAPs to make a “no material nonpublic information” representation, nor are the parties to an assignment to a Non-Debt Fund Affiliate required to provide a “big boy” disclaimer as to their independent expertise. Once the Non-Debt Fund Affiliate is identified as such to its counterparty, the 2014 MCAPs leave it to the parties to determine how to allocate the related risk. The LSTA forms of secondary trade documentation may sufficiently address this issue for most purposes.

A Non-Debt Fund Affiliate that becomes a lender:

A Debt Fund Affiliate is also permitted to acquire term loans but is exempt from the foregoing restrictions. The only limitation applicable to Debt Fund Affiliates is that their vote on amendments, waivers or modifications of, or other actions taken under, the credit facility, will be excluded to the extent in excess of 49.9% of the amount of loans and commitments required to be held by lenders in order for them to constitute “Required Lenders.” In other words, for any required lender vote, a majority of the consenting lenders must be entities that are not Debt Fund Affiliates.

The borrower (and its subsidiaries) are permitted to purchase term loans (but not revolving loans) pursuant to Dutch auction procedures open to all lenders, so long as there is no default or event of default. In addition, the purchase is subject to the borrower making a representation that it is not in possession of any information that could be material to the transacting parties’ decision to buy or sell the loans (Excluded Information) that has not been disclosed to the term lenders generally (other than term lenders that do not wish to receive such information). Upon consummation of the buyback by the borrower (or its subsidiaries), the loan is immediately and automatically cancelled. The 2014 MCAPs have also proposed specified buyback mechanics in a new Exhibit L. These mechanics offer a procedure for running a “reverse Dutch auction” for agents to consider, which provides each lender of the applicable class the opportunity to participate in the buyback program.

It is worth noting that the “no default” condition, and the right to an equal opportunity to participate in the buyback program and access information, are driven by a key difference between borrower buybacks and affiliate buybacks. A borrower buyback involves using cash of the credit group to make a non-pro rata payment to a group of lenders that have a legitimate expectation that they have a pro rata claim to that cash, particularly in a default scenario. The same considerations do not arise for affiliate buybacks, where the proceeds to buy the loan come from funds that are outside, or that have been permitted to leave, the credit group.