LMA Green Loan Rider – what you need to know

Background

The LMA Green Loan Principles were first published in 2018 and were last updated with accompanying guidance in February 2023 (the GLP). Until now, there has been no standard drafting available for green loans complying with the GLP (Green Loans), leading to a level of inefficiency as different law firms and lenders took slightly different approaches to drafting Green Loans. 

Following the successful publication of standard drafting for sustainability-linked loans in 2023, the LMA has now published the first standardised drafting for Green Loans. As with other LMA documents, the Green Loan Draft Provisions intend to provide a starting point for drafting a Green Loan, and parties are expected to amend the provisions to reflect the specific commercial terms of their transaction. 

The Green Loan Draft Provisions are designed to slot into the LMA’s investment grade facility agreement template, however they can also be adapted for use in conjunction with the LMA's other recommended forms of facility agreement.  They are aligned with the latest GLP and accompanying guidance.

The basics of how the drafting works

• Following the structure of the GLP, the transaction documentation must set out what the parties consider are green projects. Such projects can be identified individually, by a specific pre-determined category or by application of a pre-agreed criteria (referred to as Eligible Green Projects, Eligible Project Category, Eligibility Criteria and/or Green Loan Framework respectively). The Green Loan Draft Provisions have been drafted flexibly so they can be used either for a single project or multiple green projects (either existing or future).
• The key provisions are:
  • The "Purpose" clause, requiring any proceeds of a facility or tranche designated for Green Loans to be applied solely towards Eligible Green Projects (or the refinancing of such projects and the borrower’s related costs and expenses);
  • The "Management of proceeds" clause, obliging borrowers to track proceeds and provide evidence to demonstrate compliance with the purpose clause and the GLP;
  • The following representations:
    • a “No misleading Information” representation that all Green Loan Information (i.e. information provided relating to the classification of the loan as a Green Loan, information regarding a green project ceasing to be eligible as such, and information in each Green Loan Report) was true, complete and accurate in all material respects as at the date it was provided and is not misleading in any respect; and
    • a “Green Loan” representation that (i) each Eligible Green Project has been selected and evaluated in accordance with the agreed provisions of the facility agreement and (ii) the borrowers have established policies, procedures and record-keeping practices to continue such compliant identification and selection alongside identifying and managing material environmental and social risks arising from an Eligible Green Project as recommended by the GLP.
    These representations are deemed to be repeated on drawdown dates in respect of the Green Loan facility or tranche and the dates of each Green Loan Report; 
  • The Green Loan Report and Green Loan Information allow for reporting and, if agreed between the parties, verification of the borrower’s compliance with the Eligibility Criteria and/or the Green Loan Framework, terms of the loan documentation and/or the GLP.
  The majority of these provisions are described as the Green Loan Provisions, breach of which do not trigger Events of Default but instead can ultimately trigger a declassification of a loan as a Green Loan. “Green Loan Provisions” does not include the purpose clause, so (as you would expect) a failure to apply the proceeds in accordance with the purpose clause would trigger an Event of Default. 
• The Green Loan Undertakings ensure that no amendments are made to the Green Loan Provisions, Eligibility Criteria or other operative provisions save for minor or technical amendments or corrections.
• A Declassification Event occurs following a breach of certain agreed key provisions, including the Green Loan Provisions. Upon failure to remedy a Declassification Event within any specified grace period, the lenders can declassify the loan as no longer being green. Then the borrower can no longer market the loan as a Green Loan and most importantly the banks’ green-washing risk is mitigated.

Key points to note

The Green Loan Draft Provisions are described by the LMA as being "based on market practice at the time of publication". In our experience there is a wide variety of market practice, and some of the Green Loan Draft Provisions vary from the positions we are used to seeing in the market. However, the LMA is clear that the Green Loan Draft Provisions act as a framework, and there is considerable scope for negotiating a range of items (including the reporting, verification and tracking provisions, Green Loan Provisions and Declassification Events, levels of lender consent to agree changes, and the consequences of non-compliance), so long as the core components of the GLP are complied with.

Revolving facilities

The Green Loan Draft Provisions have been prepared in respect of loans advanced as part of the term facility only, not those advanced under the revolving facility. Whilst the GLP explicitly notes that revolving facilities can be green loans, it notes the extra caution users should take to ensure the use of proceeds component is maintained. This is due to revolving credit facility terms being more general as to their purpose (usually for "general corporate purposes") and consequently more difficult to track the use of proceeds.

Repeating representations

We often see lenders requesting a repeating representation and/or undertaking regarding the facility complying with the GLP. However, such a provision is not included in the Green Loan Draft Provisions on the basis that a Declassification Event would be triggered upon the lenders reasonably considering or receiving evidence of non-compliance with the GLP. Another possible reason for the exclusion could be the lenders’ ability to rely on a “verification report” (or Second Party Opinion) which the GLP recommends being included as a CP to drawdown. 

The working committee has decided that any reference to the GLP should be to those in force as at the date of the facility agreement. This approach avoids the cliff-edge of an immediate breach/declassification upon publication of revised GLP which could occur (or a repapering exercise could be triggered) if the reference was to the GLP in force from time to time.

Reporting timelines

The Green Loan Draft Provisions are designed to cover a wide variety of transactions and projects, each with their own specific milestones, data collection methodology and turnaround. As a result, the LMA has not included any suggestion on the timing or reference period for reporting on the Green Loan. 

Where the nature of the Eligible Green Project permits, we often see borrowers aligning green reporting reference periods to financial years and the deadlines for reporting with those for financial reporting to streamline operational procedures. However, as the reporting covers allocation of drawn amounts, a green revolving facility may require reporting on a more frequent basis alongside interest periods to ensure timely reporting required by the GLP.

Declassification Events

The definition of Declassification Event is broadly drafted and includes:

• misrepresentation in respect of green representations (subject to an optional grace period);
• failure to comply with the Green Loan Provisions (which cover the management of proceeds obligation, green loan reporting and green loan undertakings, but not the purpose clause - again, subject to an optional grace period);
• the delivery of a Green Loan Report which sets out details of non-compliance with the GLP; and
• an optional trigger on the Eligible Green Project no longer complying with the relevant Eligibility Criteria or Green Loans no longer aligning with the GLP.

Notwithstanding the above, the LMA has retained optional drafting and footnotes making it clear that parties can include other Declassification Events in addition to those listed in the Green Loan Provisions.

Additionally, explanatory footnotes clarify the drafting works such that upon the Agent (acting on instructions) exercising its rights in respect of declassification, all Green Loans will be declassified regardless of whether the Declassification Event was in respect of that Green Loan or not. Where multiple “green” facilities, tranches or loans are being provided, Borrowers may look to soften this broad application.

Lender threshold for decision making

The Green Loan Draft Provisions allow the parties to require an All Lender or Majority Lender decision for any declaration of a Declassification Event. Lenders will need to give full consideration as to which they elect for. Borrowers will likely push for an All Lender decision here, but this may not be acceptable to some lenders given a single “holdout” lender could frustrate the declassification process and result in significant greenwashing risk for a lender if a compromised loan continues to be labelled as a Green Loan.

Comparisions of the Green Loan Draft Provisions and APLMA Model Provisions

LMA and APLMA documentation has historically been closely aligned, and the GLP itself and related guidance were jointly published by the LMA, APLMA and LSTA. However, it is noted that the Green Loan Draft Provisions were prepared by the LMA alone, and earlier in 2024 the APLMA published its own model green loan provisions (the APLMA Model Provisions). 

It is not ideal for the market to have two separate sets of standard drafting. However, the divergence can be understood in the context of it being difficult to get so many stakeholders to align on drafting. The LMA’s working committee did review the APLMA Model Provisions in preparing the Green Loan Draft Provisions, but the two standards are different – we have summarised the material differences below:

• Representations: the APLMA Model Provisions do not include an equivalent representation in respect of borrower policy and procedure to implement the Green Loan structure which features in the LMA’s Green Loan Draft Provisions; 
• Declassification Mechanism: whilst the events triggering the start of the declassification procedure are similar (subject to the Material ESG Controversy set out below), the APLMA Model Provisions set out the process of declassification in far more prescriptive detail. The APLMA Model Provisions include a process similar to that in the LMA sustainability-linked loan exposure drafting, where parties have a 45-day window to negotiate amendments, restructuring or other actions to bring the loans or facilities back into compliance during which no publication of the facilities or loans as "green" can occur. After the 45-day window, the facility is automatically declassified on failure to agree any amendments, implement such changes to the lenders’ satisfaction or if the lenders consider in their sole discretion that remedy is impossible; and
• Material ESG Controversy: the APLMA Model Provisions include optional drafting for a potential declassification on the occurrence of a "Material ESG Controversy" being "an event, series of events or circumstances that is determined by the Agent (acting on the instructions of [the Majority Lenders]/[all the Lenders], acting reasonably) as a controversy that would have a negative impact on any Obligor's reputation from an environmental, social or governance perspective". Inclusion of an ESG controversy provision is hotly contested and is not a common feature of Green Loans in Europe. It provides additional protection to lenders, but from the borrower’s perspective it risks a loan being declassified for reasons unconnected with the green loan structure. Although an ESG controversy will not trigger an Event of Default (provided the event or circumstance does not trigger an Event of Default under an alternative term in the agreement), there is no equivalent in the LMA’s drafting and arguably the Material ESG Controversy drafting is wider than the standard expected under the GLP. Lenders using the Green Loan Draft Provisions instead can seek comfort from the borrower’s undertaking to identify and manage any ESG related risks in respect of each Eligible Green Project, failure to comply with such obligation being a Declassification Event.

As mentioned, having these two competing standards is not particularly helpful, particularly for institutions which operate in the UK/Europe as well as Asia Pacific. It is to be hoped that the two standards will align more closely when next updated, with changes being made to reflect the differences in the respective markets, but otherwise sharing a common structure and terminology.

Conclusion

Creating standard drafting in a quickly evolving private market is inherently challenging. Although assumptions made in preparing the Green Loan Draft Provisions may not apply to all transactions, having standard drafting available as a starting point for negotiations benefits the market overall. It is expected that some market participants will have varying positions on certain topics, but using a common format and terminology should assist the market collectively. Green Loans are a consistently popular loan product, and it is understood that the LMA plans to review the drafting within 12-18 months.

Further Information

• If you would like further assistance on understanding these changes, please contact David Milligan, Alex Smith and Katie Knight.
• Our ESG Loans Insights Report identifies market trends based on the data contained in over 60 green loans, social loans and sustainability-linked loans we have advised on.
• If you would like to receive future ESG and Sustainability related content from us, you can subscribe here. More about our ESG and Sustainability practice can be found here.