Sustainability-linked loans have become increasingly common in recent years, and the Loan Market Association (LMA) has responded to this by publishing model provisions for sustainability-linked loans. These model provisions follow on from the updated Sustainability Linked Loan Principles and the accompanying guidance published in February.
The model provisions aim to strengthen the integrity of the sustainability-linked loan market, among other things, by providing a basic drafting framework for negotiations. The model provisions are non-binding and intended to act as a basis for drafting an agreement and negotiation and to reflect current market practice. This brings documentation used in the market closer to a standard while streamlining the negotiation process which, until now, has often been time-consuming given the range of different practices concerning agreements within the market.
The model provisions include proposed provisions which, after customisation and negotiation on a case-by-case basis, can be inserted directly into the LMA model leveraged loan (senior/mezzanine) agreement and adapted for use with the LMA's other recommended model loan agreements. The model provisions also include extensive drafting notes emphasising aspects that parties should consider when undertaking a sustainability-linked loan transaction.
However, a sustainable finance transaction naturally involves a range of circumstances and complexities that cannot all be prepared for in advance. This is why certain provisions which are commonly negotiated between parties have been intentionally omitted from the model provisions (sustainability-linked conditions precedent, for example). The model provisions also include a rendez vous clause, which enables the parties to negotiate on the basis that any necessary amendments to the calculation methodology, sustainability objectives, KPIs or related terms included in the loan agreement can be made later. A 'declassification concept' is also included in the model provisions. It allows the agent to declassify the loan as 'sustainability-linked' following specific events.
The sustainability-linked loan market is developing rapidly, which makes it challenging to respond to the changes. It will be interesting to see how the market will react to these new model provisions and what the related market practice will look like.
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