TRW & Co · Banking and finance
LMA Facility Agreements: Key Terms for Borrowers
An LMA facility agreement is an English-law loan agreement built on the Loan Market Association's recommended forms. The template decides most of the mechanics, but borrowers who negotiate the definitions, covenants, default triggers and transfer rights gain real operating headroom. This guide explains the clauses that matter most and how to approach them.
Key pointThe margin gets the attention, but the definitions decide the outcome: how earnings, debt and permitted transactions are defined determines whether the business can act without a lender waiver when trading turns.
At a glance
Market-standard starting point
Loan Market Association recommended forms are the usual starting point for English-law syndicated loans, with separate forms for investment-grade, leveraged, real estate and developing markets deals.
Conditions precedent before drawdown
Borrowers must deliver constitutional documents, resolutions, legal opinions, financial statements and know-your-customer information before the first utilisation can be made.
Covenants depend on definitions
Leverage and interest cover tests turn on how earnings and debt are defined, so add-backs and exclusions should be modelled against realistic downside scenarios.
Defaults allow acceleration
Once an event of default is continuing, the agent may cancel commitments and accelerate loans on the instructions of the required lender majority.
Transfers shape the lender group
Borrower consent rights, deemed consent periods and white or black lists decide who can buy the debt, which matters most in distress.
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The short answer: what an LMA facility agreement is
An LMA facility agreement is a loan agreement based on the recommended forms published by the Loan Market Association, the trade body for the syndicated loan market in Europe, the Middle East and Africa. Most syndicated and many bilateral corporate loans governed by English law start from these templates, which set out how the money is drawn, what the borrower promises, what counts as a default and how lenders can sell their participations.
For borrowers, the important point is that the template is a starting point, not a fixed text. The commercial terms are negotiated through the term sheet and the drafting of key clauses, and small changes to definitions can make a large difference to how much headroom a business has when trading becomes difficult.
This guide explains the main clauses a borrower should focus on: conditions precedent, representations, information undertakings and financial covenants, general undertakings, events of default and the transfer provisions. It is written for finance directors, general counsel and founders negotiating English-law facilities.
The legal and market framework
There is no statute that governs facility agreements as such. An LMA facility agreement is a commercial contract, interpreted by the English courts under ordinary principles of contractual construction. Courts give considerable weight to the wording agreed by sophisticated parties, so the drafting really does decide outcomes.
The Loan Market Association publishes a family of recommended forms. Its documentation library includes investment-grade facility agreements, leveraged facility agreements, real estate finance documents, developing markets documents, and sustainability-linked and secondary trading documents. Each form comes with guidance notes and drafting options.
Several other legal regimes sit around the agreement:
- Interest benchmarks. Sterling loans now reference the Sterling Overnight Index Average, known as SONIA, which the Bank of England administers. The FCA oversaw the LIBOR transition, and LMA forms were updated to provide compounded risk-free rate mechanics.
- Security. Security given in support of the facility must be registered at Companies House under Part 25 of the Companies Act 2006. Our guide to taking security in England covers this.
- Insolvency law. The Insolvency Act 1986 and restructuring tools such as the Part 26A restructuring plan can override contractual rights when a borrower is in distress.
- Sanctions and anti-corruption. Lenders require representations and undertakings that reflect UK, EU and US sanctions and bribery laws.
How an LMA facility agreement is negotiated in practice
The typical process runs from mandate to first drawdown. Understanding the sequence helps a borrower decide when to push on which point.
- Term sheet. The arranger and borrower agree pricing, tenor, facility types, financial covenants, key thresholds and baskets. Anything not addressed here will usually default to the lender-friendly LMA position.
- First draft from lenders' counsel. Lenders' solicitors prepare the first draft on the relevant LMA form, adapted to the term sheet and to the arranger's house positions.
- Borrower mark-up. The borrower's solicitors focus on definitions, covenant mechanics, undertakings, default triggers, cure rights and transfer restrictions, and raise operational issues the business will face.
- Due diligence and conditions precedent. The lenders' counsel issue a conditions precedent list: constitutional documents, board resolutions, legal opinions, financial statements, security documents and know-your-customer information.
- Signing. The agreement is signed, often electronically, together with the fee letters and any security and guarantee documents.
- Utilisation. The borrower delivers a utilisation request once all conditions precedent are satisfied or waived, and the funds are advanced.
- Ongoing compliance. Compliance certificates, information undertakings and covenant testing continue for the life of the loan.
Key clauses in an LMA facility agreement for borrowers
Conditions precedent
Conditions precedent are the documents and evidence the borrower must deliver before it can draw. The initial list is negotiated with the agreement. Borrowers should resist open-ended items such as "any other document the agent may reasonably request" at signing, and should agree which items can be delivered after signing as conditions subsequent.
Representations
Representations are statements of fact about the borrower group: its status, its powers, no default, accuracy of information, litigation, sanctions, financial statements and similar matters. Some are made only at signing; others are "repeating representations" made again on each utilisation request and at the start of each interest period. Qualifying representations by materiality and awareness, and limiting which ones repeat, reduces the risk of an inadvertent default.
Information undertakings and financial covenants
The borrower must supply annual and periodic financial statements and a compliance certificate showing whether the financial covenants are met. Typical covenants test leverage (debt against earnings), interest cover and sometimes cashflow cover or minimum liquidity. Investment-grade borrowers often negotiate few or no financial covenants; leveraged borrowers usually accept more.
The definitions behind the covenant, especially what counts as debt and how earnings are adjusted, matter as much as the ratio itself. Borrowers should model the covenants against their business plan before signing, and should seek an equity cure right where sponsors are involved.
General undertakings
These include the negative pledge (no other security), restrictions on disposals, acquisitions, mergers, additional borrowing, loans and guarantees, and a change of business. Each restriction is normally subject to "permitted" baskets. Generous, well-defined baskets are what allow the business to operate without repeatedly asking lenders for consent.
Events of default
Events of default include non-payment, breach of financial covenants, other breaches, misrepresentation, cross default, insolvency and insolvency proceedings, creditors' process, unlawfulness, cessation of business and, in many deals, a material adverse change. Once an event of default is continuing, the agent can, on the instructions of the required majority of lenders, cancel commitments and accelerate the loans.
Borrowers should negotiate grace periods for payment and technical defaults, cure periods for other breaches, thresholds for cross default and creditors' process, and objective wording for any material adverse change clause.
Transfers and assignments
The LMA forms allow lenders to transfer their participations by assignment or novation through a transfer certificate. Borrowers typically negotiate a consent right, often on the basis that consent cannot be unreasonably withheld and is deemed given if not refused within a set period, together with exceptions for transfers to existing lenders and affiliates or while an event of default continues. Many borrowers also seek a "white list" or "black list" to prevent loans passing to competitors or distressed debt investors.
| Feature | Investment-grade form | Leveraged form |
|---|---|---|
| Typical borrower | Large, rated corporates | Sponsor-backed acquisition vehicles and mid-market groups |
| Financial covenants | Often none or light | Usually leverage and interest cover, sometimes more |
| Security | Usually unsecured | Typically secured over shares and assets of the group |
| General undertakings | Short list with broad permissions | Detailed restrictions with permitted baskets |
| Transfer restrictions | Borrower consent with deemed consent | Heavily negotiated, including white and black lists |
| Events of default | Narrower, higher thresholds | Broader, including change of control and audit qualifications |
The definitions clause is where most borrower headroom is won or lost. A well-negotiated definition of earnings, financial indebtedness or permitted disposal can be worth more in practice than a small reduction in margin, because it decides whether the business can act without asking lenders for a waiver.
Amendments, waivers and lender decision-making
Most decisions under an LMA facility agreement are taken by the "Majority Lenders", a defined group of lenders holding a stated proportion of the commitments. Certain fundamental changes, such as extending the maturity date, reducing the margin or changing the pro rata sharing provisions, require the consent of all lenders or all affected lenders.
Borrowers should pay attention to "snooze and lose" provisions (lenders who do not respond within a set time are disregarded), "yank the bank" rights (to replace a lender that blocks an all-lender decision) and how the votes of defaulting lenders are treated. These mechanics make a material difference when a waiver is needed quickly.
Other clauses in an LMA facility agreement worth negotiating
Beyond the headline clauses, several provisions in an LMA facility agreement shift cost and risk to the borrower in ways that are easy to miss in a first review.
Mandatory prepayment and change of control
Most facilities require prepayment if the borrower is sold or a sponsor loses control, and leveraged deals often add prepayment from disposal proceeds, insurance proceeds and excess cashflow. Borrowers should check the definition of control, negotiate reinvestment rights for disposal and insurance proceeds, and seek a "portability" exception where a sale is foreseeable.
Tax gross-up and indemnities
The borrower usually bears the risk of withholding tax on interest, subject to the lender being a "qualifying lender" at the outset. The LMA forms allocate this risk carefully, and borrowers should make sure they are not taking on tax costs caused by a lender's own choice of lending office or a transfer to a lender that is not qualifying.
Increased costs and illegality
Increased costs clauses pass on to the borrower the cost of certain changes in law or regulation affecting lenders. Borrowers commonly negotiate exclusions, time limits for claims and a right to prepay the affected lender. The illegality clause allows a lender to withdraw if it becomes unlawful for it to lend, which is increasingly relevant where sanctions regimes change.
Sustainability-linked features
A growing number of facilities adjust the margin by reference to sustainability performance targets. The LMA publishes sustainability-linked loan guidance, and our sustainable finance team advises on these terms. Borrowers should make sure the targets are measurable, the reporting obligations are realistic and a failure to report does not become an event of default in an LMA facility agreement where a margin step-up would be the proportionate consequence.
Illustrative scenario: a covenant breach that did not need to happen
This scenario is illustrative only. It does not describe a real client or matter.
A mid-market services group signs a leveraged LMA facility agreement to fund an acquisition. Eighteen months later, the group restructures a loss-making division, incurring one-off costs. The compliance certificate shows a leverage covenant breach.
The definition of earnings allowed exceptional items to be added back, but only up to a fixed cap and only if certified by the auditors, a qualification the group's mark-up had not challenged. The group must now seek a waiver, which the lenders grant in exchange for a fee and a margin increase. A wider add-back and a deemed equity cure would probably have avoided the breach altogether.
The lesson is that borrowers should test the facility against realistic downside scenarios during negotiation, not after signing.
Risks and common mistakes for borrowers
Accepting the first draft's definitions
Lenders' counsel will usually prepare the first draft on positions favourable to the lenders. Borrowers who focus only on pricing and leave definitions unchanged often discover later that ordinary business activity, such as an intra-group loan or a small acquisition, requires lender consent.
A careful mark-up of definitions such as permitted acquisitions, permitted disposals, financial indebtedness and earnings is the most efficient use of negotiation time.
Overlooking repeating representations
Repeating representations are made again on each utilisation and at the start of each interest period. If a fact has changed, such as a new piece of litigation, the borrower may be unable to draw or may be in default for misrepresentation.
Borrowers should limit which representations repeat, add materiality qualifiers and keep a disclosure process in place so that changes are reported and, if necessary, waived before a utilisation request is made.
Weak cross-default thresholds
A cross-default clause allows the lenders to accelerate if the borrower group defaults on other debt. Without a meaningful threshold, a small dispute with a supplier of asset finance could trigger a default on the main facility.
Borrowers should negotiate a monetary threshold that reflects the size of the group and exclude disputed amounts being contested in good faith.
Ignoring transfer provisions until distress
When a borrower's credit weakens, lenders may sell to funds that take a more aggressive approach to waivers and enforcement. If the borrower's consent right falls away on any event of default, it may lose control over its lender group at the worst moment.
Borrowers should negotiate consent rights that survive minor defaults, black lists of competitors and restrictions on transfers to loan-to-own investors where the market allows.
The cross-border angle
English-law facility agreements are widely used for borrowers based outside the UK, including groups in the Gulf, South Asia and Africa. The LMA's developing markets forms are often used for these deals. A choice of English law and the English courts, or London arbitration, is generally respected, but enforcement against assets abroad depends on local law.
For borrowers in Bangladesh, foreign currency borrowing is subject to regulatory approval and reporting rules administered by Bangladesh Bank and other authorities. These requirements should be checked early because they can affect conditions precedent, drawdown mechanics and repayment. TRW & Co's London and Dhaka offices advise on both sides of such transactions, and our UK–Bangladesh trade and finance team coordinates English-law documentation with local approvals.
What borrowers should do next
- Negotiate the term sheet in detail, including covenant definitions and baskets, before the first draft arrives.
- Model financial covenants against downside scenarios and seek cure rights.
- Limit repeating representations and add materiality and awareness qualifiers.
- Agree grace periods, cure periods and realistic default thresholds.
- Protect your position on transfers, including consent rights and black lists.
- Check the security package and any personal guarantee requested from shareholders or directors.
- Build a compliance calendar for information undertakings and certificates.
Our banking and finance team acts for borrowers and sponsors on investment-grade, leveraged finance and private credit facilities, including sustainability-linked loans. To discuss a facility, contact our London office.
Frequently asked questions
01What is the Loan Market Association?
The Loan Market Association is the trade body for the syndicated loan market in Europe, the Middle East and Africa. Its members include banks, non-bank lenders, law firms and borrowers. It publishes recommended form documents, guidance notes and market standards for primary and secondary loan transactions. Its forms are widely used as the starting point for English-law facility agreements, which reduces negotiation time because the parties are working from a familiar framework.
02Are LMA documents binding as they stand?
No. The recommended forms are templates. They only become binding once the parties adapt and sign them. The LMA itself expects users to tailor the documents to each transaction, and it includes options and square-bracketed choices. In practice, the commercial terms agreed in the term sheet and the negotiated drafting of definitions, covenants and default provisions are what bind the parties, interpreted under English contract law.
03What is a repeating representation?
A repeating representation is a statement of fact that the borrower is deemed to make again at set times, usually on each utilisation request, each utilisation date and the first day of each interest period. If the statement is no longer true on that date, the borrower may be unable to draw and may be in default. Borrowers usually negotiate a short list of repeating representations and add qualifications such as materiality or awareness.
04Can a lender transfer its loan without the borrower's consent?
It depends on the agreement. The LMA forms provide for transfers by assignment or novation, and borrowers commonly negotiate a consent right with a deemed consent if they do not respond within a stated period. Consent is usually not required for transfers to other lenders or affiliates, or while certain events of default are continuing. Borrowers may also negotiate lists of permitted or prohibited transferees.
05What happens if a financial covenant is breached?
A breach of a financial covenant is normally an event of default. The lenders can then waive it, usually for a fee and sometimes for amended terms, or, on the required majority's instructions, cancel commitments and accelerate the loans. Some agreements include an equity cure right that lets shareholders inject money to remedy the breach. Borrowers should engage with the agent early, before the compliance certificate is due.
06Does a facility agreement need to be a deed?
Facility agreements are usually signed as simple contracts because the lenders provide consideration by making the money available. Some related documents, particularly security documents and some guarantees, are executed as deeds. Execution formalities also depend on whether a party is a company and on any power of attorney used, so execution blocks should be checked as part of the conditions precedent process.
Sources and official materials
- Loan Market Association — Trade body and publisher of recommended form loan documents
- LMA documentation library — Investment-grade, leveraged and specialist recommended forms
- SONIA interest rate benchmark (Bank of England) — Sterling risk-free reference rate
- LIBOR transition (FCA) — Regulator's information on the end of LIBOR
- Companies Act 2006, Part 25 — Registration of company charges supporting facilities
General information only, current as at 21 October 2026. It is not legal advice and does not create a solicitor–client relationship. It reflects the law of England and Wales unless stated otherwise; Scotland and Northern Ireland have separate legal systems, and the law changes frequently. Check current official sources and take advice on the facts of your matter.