Market disruption clauses are playing an increasing role in
lending transactions in the South African market. The purpose of
such clauses is to protect a lending bank when the so-called
"base rate" (generally a publicly quoted screen rate such
as "JIBAR"), which forms the cost of funding component of
variable interest rate funding, does not represent its true cost of
funding. This situation would typically occur when there is a lack
of liquidity in the inter-bank lending market, which results in a
bank's cost of funding rising above the publicly quoted screen
rate.
In certain lending transactions, especially more heavily
leveraged transactions, lenders may consider whether their ability
to rely on a market disruption clause should act as a draw stop
event. For example, if there is a significant change in the
liquidity premium (ie the cost to the bank of obtaining funds) as
it applies on the date of the term sheet produced for a certain
transaction versus the
