LSTA Publishes Revised Documents Effective April 24, 2014

The Loan Syndications and Trading Association (LSTA) has released new forms of its primary trading documents, effective for trades entered into on or after April 24, 2014.1

The LSTA's updated forms are primarily designed to address foreign withholding tax requirements that will become effective July 1, 2014 under the Foreign Account Tax Compliance Act (FATCA). Additionally, the LSTA has significantly revised its Participation Agreements (for both Par and Distressed trades) to include changes consistent with those previously incorporated into its Purchase and Sale Agreement for Distressed Trades (PSA) and to incorporate the LSTA Collateral Annex, which was last updated in June 2013. No significant changes have been made to the Par and Distressed Trade Confirmations or the PSA Transaction Specific Terms.

What is FATCA?2

FATCA was enacted in March 2010 to combat offshore tax evasion by US taxpayers through a new reporting and withholding regime. Under the general premises of FATCA, a foreign financial institution (FFI) must ascertain whether its account holders are US taxpayers, and assuming so, the FFI must disclose information to the Internal Revenue Service (IRS) about such US accounts and act as a withholding agent by imposing a 30 percent withholding tax on any such recalcitrant US accounts that have not properly disclosed information about themselves to the IRS. FFIs that do not comply with FATCA will be subject to a 30 percent withholding tax on any "Withholdable Payments" received by such FFI.

How Does FATCA Affect the Loan Trading Market?

"FFI" is broadly defined to include many market participants, such as foreign banks, hedge funds, private equity funds and collateralized loan obligations. "Withholdable Payments" are defined as certain US-source payments, including interest payments and—effective January 1, 2017—principal repayments and gross sale proceeds of loans that produce US-source interest payments.

Loans that are outstanding as of July 1, 2014, including any standby letters of credit and revolving credit facilities that are drawn upon after July 1, 2014, will be "grandfathered" and therefore not subject to FATCA unless such loans are materially modified after such date. A "material modification" can include an extension of maturity or a spread change of 25 basis points or more.

How Do the Revised LSTA Documents Address FATCA Tax Withholding Issues?

Similar to the pre-existing tax withholding language, the LSTA makes FATCA a...