July 24, 2024 - On July 23rd, the LSTA hosted its sixth Summer Series webinar. This session addressed the LSTA’s new Form of Emerging Business Credit Agreement (“EBCA”) which includes three supplements, a Security Supplement, a Financial Covenants Supplement, and an Agency Supplement. The presenters for the session were the LSTA’s external counsel who drafted the agreement and led LSTA members through the drafting process. They included Thomas Mellor of Morgan Lewis who was joined by John Hreno of Morgan Lewis and Sean Zoltek of White & Case.
Members were first assured that everything they had learned in the first five sessions of the summer series was relevant for today’s discussion. The focus of today’s session was on the EBCA form, forms generally, and how to select the most appropriate form for a particular deal. Every lending transaction is different, and thus a form that works for one transaction may not be suitable for another transaction. Members were cautioned not to assume that a lengthy credit agreement is packed with lender protections. Instead, it may very well be packed with provisions that give the borrower certainty and flexibility to run its business.
In 2020, Morgan Lewis had been approached by clients, and the LSTA had been approached by some of their members, to create a form for simpler deals with a focus on the technology industry. Early-stage debt forms were regarded as too restrictive for some borrowers and did not allow for negotiation by them, while syndicated forms typically failed to focus on intellectual property which is important for these borrowers.
The EBCA should be viewed as another tool in your toolbox. The goal of this template is to create a form which can be more quickly negotiated and thus more cheaply completed. It is so much more than a bilateral form (although it is the first bilateral credit agreement which the LSTA has ever published). It is more than a venture debt template. This form fills a gap; it plugs the hole between an early-stage venture company and a more established middle market company.
The EBCA is intended to be used for a borrower that is an “emerging business”. For the purposes of this form, the term “emerging business” captures a borrower that is no longer a new venture but is not yet an established middle market company. The current form is designed to bridge the gap between the “off the shelf” form for new venture companies and the more highly negotiated and tailored agreements of the larger more established middle market companies. Borrowers using these forms will likely be generating regular and consistent revenue but will often not have consistently positive EBITDA. They will likely desire more flexibility when it comes to running their businesses, making decisions about their investments, and determining how to grow their businesses. But the form must also provide lenders who are willing to put their money at risk, with typical lender protections. The goal of the EBCA was to create a more balanced form that the parties can then use as they start their negotiations.
The new form could be useful for loans between $25 million to $100 million, but the size of the loan should not drive the form of template that is chosen. Members will see that the EBCA’s structure follows the general format of a syndicated loan form, but those forms typically do not have security interest elements. The EBCA is designed for a single US borrower and one US lender with a focus on those provisions that are typically negotiated by those parties. The form is intended to be nimble, and other provisions that may be needed can easily be “bolted” on to the form. The EBCA form includes a guaranty and a security supplement. The terms of a security agreement have been incorporated in the credit agreement itself, and this reflects common practice in the venture debt space. The security supplement allows for simplified security provisions to be inserted into the credit agreement, and thus it streamlines the documentation process by including it in the credit agreement. Additionally, because the borrower’s own collateral and structure is typically more straightforward than companies further along in their life cycle, the incorporation of security terms in the credit agreement itself can be more easily achieved. The separate Security Supplement serves this purpose, but, of course, if the parties prefer to use a separate security agreement the form can easily be adapted for that purpose. Parties should note that the Security Supplement is not exhaustive of all applicable security
As noted above, a Financial Covenants Supplement and an Agency Supplement for the EBCA have also been provided. It is a balancing act – giving the borrower flexibility but giving the lenders the protections they would expect to have. The form of EBCA includes incredibly helpful and detailed footnotes that make the form easy to use. We encourage our members to download it and become familiar with it. Click here for the replay and slides.
