December 1, 2023 - This week the LSTA published the LSTA’s first bilateral loan agreement, the new Form of Emerging Business Credit Agreement (the “EBCA”). This new form is the product of a collaborative project of the LSTA’s Primary Market Committee (all LSTA members are invited to join this committee) and the Commercial Finance Committee of the American Bar Association (as ComFin committee chair, I welcome all ABA business law sections members to this committee).
The new EBCA includes three supplements, a Security Supplement, a Financial Covenants Supplement and an Agency Supplement. We worked under the expert guidance of our external counsel, Thomas Mellor and Sean Zoltek of Morgan, Lewis & Bockius LLP, who drafted the EBCA form. They have led us in the production of an excellent form with numerous guideposts and in-depth drafting notes, some of which are highlighted below.
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 and making decisions about, for example, investments and distributions. Our goal with this form is to take into account the interests of the borrowers and their growing businesses, on the one hand, and on the other hand, those of the lenders who are willing to put their money at risk, in order to create a more balanced form that the parties can then use as they start their negotiations.
We anticipate that our form could be useful for loans between $25 million to $100 million, and it assumes the borrower is formed in the US and it has U.S.-based operations with limited, if any, foreign operations or assets located outside the US. If significant activity takes place or material assets are located outside the U.S., then parties will need to adapt the form and include foreign borrower and/or foreign assets language as well as considering local law requirements, in particular, if there are foreign guarantors — and of course, the taxes clause.
As with all LSTA forms, the agreement is governed by New York law. However, because of comments from the ABA’s Commercial Finance Committee, in the penultimate turn of the document, we included provisions specific to credit agreements that are governed by the laws of California, Illinois or Texas. Drafting notes in Annex I to the EBCA highlight language that should be included if the agreement is governed by the laws of California or if the entity has assets (in particular real estate assets) located there. For example, language has been provided whereby each loan party waives all rights and defenses that they may have if their obligations are secured by such real property.
We have also drafted a security supplement, a financial covenants supplement, and an agency supplement for the EBCA. The terms of a security agreement have been incorporated in the credit agreement itself; this reflects common practice in the venture debt space where the loan is to be secured. This form assumes that subsidiaries of the borrower will become guarantors of the facility irrespective of whether or not the facility is secured. 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 as well. Parties should note that the security supplement is not exhaustive of all applicable security interest provisions that parties may need for their deal; only the typical ones have been flagged for the draftperson’s consideration.
Loans extended to emerging businesses often will not include financial or performance covenants. As noted in the covering memo of the Financial Covenants Supplement, because the borrower’s future growth trajectory is uncertain, it may be practically difficult to draft meaningful metrics at closing that can accurately predict the company’s growth prospects and its ability to comply with financial or maintenance covenants while the loan is outstanding. As such, the parties may agree to include more deal-specific reporting mechanisms for such performance metrics rather than more traditional leverage and fixed charge maintenance covenants. If financial and performance covenants are included, they will be heavily negotiated and well-tailored to the borrower, its business, and the relevant industry.
Because EBCA loans typically have only one lender, we were able further to streamline the EBCA form by not including the typical LSTA agency provisions. However, if the deal is being done on a club basis, agency provisions can be included, particularly if the deal is secured or includes more than a small number of non-affiliated lenders. A sample Agency Supplement has been included if the deal requires an agent.
As with all forms of agreements, we have attempted to flag issues and provide a starting point for parties to consider and adapt to the borrower’s business. This is particularly true for the representations and covenants. The parties must of course consider the nature of the representations and covenants that are suitable for the borrower and its business.
Click here for the agreement/supplements and the blacklined version which shows the change made to the Exposure Draft (a reference to the OCC’s recent November 1st Bulletin has been included as new note 12). I would like to thank Thomas Mellor and Sean Zoltek of Morgan, Lewis & Bockius LLP for their excellent drafting and advice on this project.