Sustainable finance in general, and the sustainability-linked loan (SLL) market in particular, have become incredibly popular over the past couple of years.
Part of the reason for the success of SLLs is that it is a globally-recognised instrument: the SLL Principles were developed jointly by the three main regional syndicated loan bodies (the Loan Market Association (LMA) in Europe, the Asia Pacific Loan Market Association (APLMA) in Asia Pacific and the Loan Syndications & Trading Association (LSTA) in the United States).
However, one of the difficulties in developing the SLL market has been the fact that, while the SLL Principles are available, to date there has been no standard market drafting. While some elements of SLLs are necessarily transaction-specific, there is no reason in principle why standard drafting could not be developed for other standard SLL features (e.g. the margin rachet).
A joint approach of all three syndicated loan bodies is not practical, given the LSTA template facility agreement is very different from those of the LMA and APLMA. However, that has not stopped each of the APLMA, LMA and LSTA developing their own initiatives:
- The APLMA was first of the three to react. In mid-2022 it published an SLL term sheet appendix. While this does not amount to full-form drafting, it represented a significant advance for SLLs in Asia Pacific. For the first time, loan market participants were given a prompt as to the type of headline issues they needed to address at term sheet stage in order to document an SLL. It remains to be seen if the APLMA rider will be updated later in 2023 after the LMA SLL rider (see below) is published in order to conform the terms.
- Yesterday (6 February 2023) the LSTA published an exposure draft of what it describes as "Drafting Guidance for Sustainability-Linked Loans". While it is an "exposure draft" rather than an approved LSTA form, it sets out some helpful suggested definitions and drafting for LSTA-based SLLs. This will be of particular interest to US companies who typically use the LSTA template.
- A working group at the LMA is in the process of developing a rider for LMA-based sustainability-linked loans. This will include full-form drafting for SLLs, and is expected to be published in Q2 of 2023.
All three developments mentioned above are to be welcomed, in providing structure and consistency to the growing SLL market.