LSTA

New LSTA Par Confirm Penalizes Buyers for Settlement Delays

 

In an effort to reduce settlement times, the Loan Syndications and Trading Association (the “LSTA”) recently revised its standard par loan trading documents to penalize buyers who take too long to settle. Beginning September 1, 2016, buyers who fail to fulfill their obligations to timely settle par loan trades will forfeit the right to receive interest that accrues prior to the settlement date. The changes do not apply to loans trading on distressed documents.

The LSTA’s revisions represent the trade group’s most aggressive step to combat settlement delays. The revisions are also the most consequential changes to the LSTA’s standard par trading documents in years.

Under the current version of the LSTA’s Standard Terms and Conditions for Par/Near Par Trade Confirmations (the “Standard Terms”), buyers are automatically compensated for interest that accrues on a loan during the period beginning on the seventh business day after the trade date up through the settlement date (“Delayed Compensation”). Starting on September 1, 2016, this provision will no longer be automatic. Instead, par loan buyers will only be entitled to Delayed Compensation if they satisfy several new requirements, including paying the purchase price to the Seller in accordance with specific timing requirements (the “Delayed Compensation Prerequisites”). The LSTA believes that the Delayed Compensation Prerequisites will create a new sense of urgency for buyers to close trades and discourage buyers from tying up sellers’ balance sheets. READ MORE

Solus v. Perry: Case Update

Since May, we’ve followed Solus v. Perry, a New York County Supreme Court case originally filed in July of 2012. The case centered around whether Perry entered into a binding oral agreement to sell Solus a participation interest in a $1.6 billion claim against Bernie Madoff’s bankruptcy estate. The parties agreed on a price and some other material terms during a phone call in April of 2012 but never signed a written agreement. In its pleadings, Perry claimed that because its trader noted that the trade was “subject to documentation,” no agreement was ever formed.

Last Monday, the parties filed a stipulation discontinuing the case with prejudice.

During oral arguments on the parties’ summary judgment motions last year, Judge Saliann Scarpulla noted that several issues with meaningful implications for the distressed trading market would need to be resolved before summary judgment could be entered, including: (1) whether there is an industry custom regarding the binding nature of oral contracts for unsecured claim trades; (2) whether an agreement that a trade is subject to documentation means there is no binding contract; and (3) whether the need for consent of a third party means there is no binding contract if such consent is not obtained.

The Solus v. Perry case will not produce an opinion resolving these issues. However, market participants should take note that even in New York, these issues are still considered open questions. Therefore, we reiterate the conclusions from our May article:

  • When possible, get a trade confirmation signed immediately after entering into an oral trade.
  • If an executed trade confirmation is not forthcoming, confirm that your counterparty is familiar with the LSTA standard terms or other relevant industry customs and intends to work within those guidelines.
  • Be proactive any time a counterparty delivers a communication during or after trade time that could be interpreted as evidence that a binding agreement does not already exist.
  • Exercise special care when dealing with counterparties and people with whom you do not typically trade.

Enforceability of Oral Contracts for Loan and Claim Trades

The Loan Syndications and Trading Association (the “LSTA”) scored a major victory in 2002 when New York adopted LSTA-sponsored legislation designed to make oral agreements to trade bank loans and claims arising from business debts legally binding. Since then, participants in both the syndicated loan market and the claims trading market have come to rely upon the idea that trades entered over the phone are binding, so long as the parties agreed to the material terms of the trade.

A 2014 Fifth Circuit Court of Appeals decision calls this assumption into question for loan trading, and a case that is currently pending in New York state court could extend the uncertainty to business debt claim trades as well.

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