LMA Sustainability-Linked Loans Precedent Term Sheet

On 12 October 2023, the LMA published a precedent term sheet for sustainability-linked loans (SLLs) to sit alongside the LMA's precedent SLL drafting.

The substance of the term sheet mirrors the LMA's SLL precedent drafting published in May which has assisted with the standardisation of drafting within this practice area (see our previous article here). The LMA's SLL term sheet offers a helpful starting point for commercial parties with the sustainability specific provisions helpfully separated into part 8 of the precedent term sheet for ease of reference.

The following key points are included:

1. ESG standards remain at the forefront of SLLs, and this is reflected by their prime placement within the term sheet
2. the number of Key Performance Indicators (KPI) given in the term sheet is 4, suggesting multiple KPIs are preferred to maintain the integrity of the product;
3. the inclusion of a mechanism to adjust the margin both upwards and downwards in respect of the number of Sustainability Performance Targets (SPT) met; notably provides optionality for no adjustment or margin increases where fewer than 2 SPTs have been met;
4. if the loan is to be declassified, it is noted that any margin adjustment will cease (rather than adjust to the highest option to ensure this is not punitive);
5. there is optionality included around the frequency of provision of sustainability compliance certificates i.e. quarterly or annually, and a focus on the need for external reviewer to prepare such data to ensure the integrity of the product; and
6. the rendezvous option to permit re-negotiation of KPIs is maintained if the group structure of the obligors changes and/or the calculation methodology needs to be adjusted to allow for flexibility.

Notable by absence are the following:

1. declassification remains a 'one way street' - there continues to be no re-classification upon an declassification of the loan; and
2. no specific sustainability conditions precedent have been included, a reflection of their absence in the precedent drafting guidance given earlier this year.

This standardised option allows the commercial parties to focus on the substance of the sustainability provisions rather than the form these take and has the dual function of maintaining the integrity of the product.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.