(Bloomberg) -- A trade group for the U.S. leveraged loan industry is stepping in to avert a repeat of the legal fracas that ensued after Citigroup Inc. erroneously sent $900 million to Revlon Inc. lenders.
The Loan Syndication & Trade Association is drafting language to insert into credit agreements that would address situations where the administrative agent makes an accidental payment. The industry group on Friday sent out an advisory notifying its members, which consists of both Wall Street banks that arrange and sell leveraged loans and the investors and funds that buy them.
“It's helpful when the LSTA puts something out because they are talking to everyone,” said Jessica Reiss, head of loan covenants at Covenant Review. “On something like this, it's important to have consistency. It will reduce lawsuits.”
Under the LSTA's proposed draft, lenders would have to return the erroneous payments within two business days and notify the agent if they have received a payment amount different than expected. If lenders opt to keep the funds, then the lender is assumed to have assigned the loan to the agent, which in turn would be allowed to sell the loans.
The effort stems from last month's surprise court ruling in favor of holdout Revlon creditors who refused to return $500 million of the misdirected cash to Citigroup. In response, Wall Street banks began inserting new language into loan deals that would require investors to return the money if such an error occurred again.
While the insertions, which were in the works before the decision, all aimed to strengthen the hand of administrative agents that oversee interest distributions and repayment schedules, they varied in language and terms.
The LSTA plans to monitor the market in the coming weeks to see what the market settles on before finalizing the language, the group said.
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