The DQ List is comprised of all those entities identified by the borrower, on or before the date of the commitment letter (the 2014 structure referenced the date of the credit agreement), as not being permitted to own its loans. The borrower may update the list, from time to time, with the names of its competitors (this term is not defined, but the MCAPs highlight that the term should be defined with specificity in reference to the particular borrower and its business). The definition in the MCAPs has also been expanded and now the borrower may also include, by sending written notice to the agent from time to time, affiliates of a Primary Disqualified Institution (as defined above) and entities otherwise reasonably identifiable as an affiliate of a Primary Disqualified Institution solely on the basis of the similarity of such affiliate’s name to the name of any entity set forth on the DQ List, but excluding any Bona Fide Debt Fund (as defined). A Primary Disqualified Institution is, generally, an entity already included on the DQ List.
It is worth noting that LMA style credit agreements tend to provide for a list of approved entities (this is colloquially referred to as a “whitelist”). This achieves a similar result, but instead the list includes the universe of entities that are permitted to own a portion of the borrower’s loans rather than create a list of those that cannot own those loans. When the two approaches began to emerge about a decade ago, the U.S. loan market considered and rejected the idea of adopting an approved list of entities in favor of the DQ List because the U.S. loan market has many institutional investors and is ever-evolving, and market participants considered it to be too difficult to draw up a list of all possible approved funds.
Posting and Sharing the DQ List
In the LSTA’s DQ Structure, the agent is expressly authorized by the borrower to post the DQ List to that portion of the platform that is designated for public side lenders. Posting the DQ List to a platform that the lenders can freely and regularly access properly notifies lenders and other market participants, who may be interested in acquiring an interest in the loan, of the identities of the Disqualified Institutions. The LSTA DQ Structure provides that the agent is not obligated to monitor or enquire as to whether a lender, participant, prospective lender, or prospective participant is a Disqualified Institution, and further, that the agent bears no liability arising out of any assignment or participation made in contravention of the provisions of the LSTA DQ Structure (given that agents serve as loan administrators only and, therefore, seek to limit their discretionary responsibilities, this approach is understandable). Because of this, it is important that credit agreements provide that the DQ List and any updates to it for competitors or affiliates are disseminated or otherwise accessible not only to the agent but to all lenders and prospective purchasers. The LSTA form of assignment agreement provides that every assignee is required to represent that it meets all the requirements to be an assignee under the successors and assigns provision of the credit agreement (subject to such consents, if any, as may be required). By confirming that it meets all those requirements, the assignee is also confirming that it is not a Disqualified Institution. The assignee could not give this representation if it did not have the right to check the DQ List and ensure that it was not included on it.
Application of DQ List—Trading with and Yanking a Disqualified Institution
One of the critical reasons the LSTA first tackled the drafting of the DQ Structure in 2014 was that members reported seeing language in credit agreements that sought to nullify trades entered by lenders with disqualified institutions. The LSTA’s approach in the LSTA DQ Structure is not to try to invalidate or nullify trades made in contravention of the disqualified institution provisions but to provide the borrower with an array of remedies to protect its interests if a Disqualified Institution becomes a lender, including purchasing the loan, cancelling the commitment, and/or forcing an assignment. Thus, the borrower can (i) let the assignment or participation stand (while prohibiting such Disqualified Institution from receiving information provided to lenders, attending lender meetings, engaging in fundamental lender actions and taking part in creditor decisions in connection with insolvency scenarios), (ii) for trades involving a revolving commitment, terminate the revolving commitment of such Disqualified Institution and prepay or purchase the obligations of the borrower owing to such entity in connection with that revolving commitment, (iii) for trades involving a term loan, prepay or purchase the term loans held by such Disqualified Institution, or (iv) require the Disqualified Institution to assign its rights and interests to an eligible assignee, effectively allowing the borrower to “yank” the Disqualified Institution by buying back the loan or forcing an assignment. The price paid to the Disqualified Institution will be the lesser of the principal amount of the loan and the amount that the Disqualified Institution paid for the loan. The option to pay at market price, which was included in the 2014 structure, has been deleted from the updated MCAPs.
Provisions which establish that trades are rendered null and void by subsequent unilateral action of the borrower contravene the balance established in the LSTA DQ Structure and create uncertainty in the market. If a secondary market participant is on a borrower’s DQ List for a deal, a lender may not settle a trade by assignment or by participation with that participant (subject to a three-day period which is discussed below). This is a workable restriction which does not impede the liquidity of the market because the LSTA DQ Structure assumes the DQ List will be posted on the platform and, therefore, may be accessed by lenders. It would not be suitable for the DQ List to apply to participations (and assignments) if lenders could not regularly and easily review it because, since 2002, loan trades may become legally binding contracts when they are orally entered into by the traders. Thus, when the seller and buyer agree on the material terms of the trade, the loan trade becomes a legally binding contract between them. The signing of the LSTA Par/Near Par Trade Confirmation (the “Par Confirm”) or LSTA Distressed Trade Confirmation (the “Distressed Confirm”) evidences that loan trade but need not ever be signed for the loan trade still to be a legally binding contract. If the parties are unable to settle the trade as an assignment or as a participation they are still required under Section 1 of the LSTA Par Confirm or Distressed Confirm to settle that trade “on the basis of a mutually agreeable alternative structure or other arrangement that affords Buyer and Seller the economic equivalent of the agreed-upon trade”.
The updated portion of a DQ List also has no retroactive effect, and the MCAPs state that any updating of the list shall take three business days to take effect. The LSTA suggests three days but highlights that parties should consider the appropriate time period for effectiveness of notice regarding modifications to the DQ List. The period is designed to allow time for the lenders to learn about the new additions and brief their teams accordingly. Thus, if a lender has already entered into a trade with a party which is subsequently added to the list, the parties may still settle their trade; however, the borrower has the right to “yank” that entity by buying back the loan (see discussion above).
Prohibition on Sharing of Information
Under the protections set forth in the MCAPs’ provisions related to successors and assigns, 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. Thus, credit documentation should not invalidate any assignment or participation to a Disqualified Institution because the borrower and its information is always protected and may not be shared with the Disqualified Institution, even if it is in the syndicate.
The LSTA’s DQ Structure works when each element of the paradigm is present. If the DQ List is to apply not only to assignments but also to participations, then it must be posted so lenders may easily review it and know with whom they can settle their loan trades. If the agent has no responsibility for monitoring the list, then parties must be able freely and regularly to access it and share it with prospective assignees. If the list is capable of being updated periodically for competitors and affiliates, then there must be a notice period before the updated DQ List takes effect.