November 2, 2022 - On Tuesday, November 1st, LSTA’s Bridget Marsh and Tess Virmani presented to Professor Ronald Mann’s Commercial Finance class at Columbia Law School. This was their sixth annual presentation and was delivered to a packed class many of whom asked thought-provoking questions about the US loan market during the lecture. The presentation focused on loan market fundamentals, including its history, origination practices, secondary market trading issues, basics of a credit agreement, participations, and ESG. Virmani paused to share her insights about the Lehman bankruptcy filing during the Global Financial Crisis and how the bank was able to cherry pick open trades (“executory contracts”) and highlighted the success of the LSTA’s form of participation agreement pursuant to which Lehman was grantor. Those participations, all of which Lehman had documented on the LSTA form, were granted sale accounting treatment. As a reminder, a loan participation is a transfer within the scope of ASC 860-10. If the transfer of the interest is not a transfer of the entire financial interest then it is only a secured borrowing. If, however, the transfer does meet the definition of a participating interest, then generally the transfer should be afforded sale accounting treatment.
The presentation concluded with Virmani presenting on ESG. She noted that, although ESG disclosure is immature in the loan market today, it is set to improve, with the LSTA leading the way for the loan market. Currently, ESG reporting in the loan market remains sporadic, uneven and superficial; but ESG disclosure is no longer a nice to have, it is a need to have in today’s market. The LSTA is leading industry-wide efforts to harmonize ESG data requests. The LSTA’s ESG Due Diligence Questionnaire (DDQ) facilitates ESG dialogue amongst transaction parties, can serve as a starting point for borrowers new to ESG and establishes a baseline of ESG information. Best practice is to make the completed DDQ available to all lenders and prospective lenders. Click here for the slide deck.