LMA to set out guidance on loan buy-backs

LONDON May 29 (Reuters) - The Loan Market Association said on Thursday it would set out guidance on debt buy-backs by borrowers, after companies owned by private equity firms triggered controversy by buying back bank debt at a discount.

Danish telecoms company TDC started debate in the European market when it hired Deutsche Bank to buy back about 200 million euros ($311.9 million) of its bank debt below par in February.

Such a buy-back raises the risk of lenders not receiving equal treatment and creates uncertainty over voting rights should a company find itself in distress.

The buy-backs -- a new phenomenon in the syndicated loan market -- have come as the credit crunch has led lenders to sell loans at significant discounts in the secondary market as they seek to free up their strained balance sheets.

The LMA acknowledged that buy-backs had not been contemplated in current loan documentation.

"Although we consider the issuer of a borrower buying back its own debt to be largely a commercial one, we will be reviewing our standard documentation to ensure this is adequately provided for, with the effect that all lenders are treated equitably," Claire Dawson, executive director of the LMA, said in a statement.

The new documentation will include options for borrower and lenders to negotiate whether a debt buy-back is permitted or not.

The LMA said the guidance would set out how a borrower should approach its lending syndicate to discuss a buy-back, the cash which the borrower is permitted to use for such purchases, and voting rights if a buy-back does not result in the debt being extinguished. (Reporting by Richard Barley, editing by Will Waterman)