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Issues lenders need to consider in a syndicated loan agreement

Issues lenders need to consider in a syndicated loan agreement. www.natcfg-globalconsulting.com. Dr Natalie C. F. Gupta . Contents. Ordinary vs Syndicated loans Market Size & Loan Process Main Issues for Lenders Allocation of rights and responsibilities between lenders

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Issues lenders need to consider in a syndicated loan agreement

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  1. Issues lenders need to consider in a syndicated loan agreement www.natcfg-globalconsulting.com Dr Natalie C. F. Gupta

  2. Contents • Ordinary vs Syndicated loans • Market Size & Loan Process • Main Issues for Lenders • Allocation of rights and responsibilities between lenders • Role of ‘syndicate agent’ • Conclusion & Observations

  3. Definitions • Ordinary Loan – contractual agreement • Covenants (condition of the borrower, borrowers performance, continued feasibility of the loan, purpose, other). • Syndicated Loan - same but…. • More lenders: • Issued to a single borrower jointly by a group of lenders (usually banks). • Larger loans and larger companies • ECB (2009) study finds that syndicated loans are the preferred instrument on the extreme end where firms are very large, have high credibility and profitability, but fewer growth opportunities. • Bank may have some form of relationship with the borrower

  4. Market Segment (2012) • Main (only) alternative to bond financing for large firms • Global syndicated lending for 2012: US$3.2 trillion over 8,300 transactions • Share: Americas 56% (US 49%), Europe 21%, Asia-Pacific 11% • JP Morgan top book runner by proceeds (US$327 billion from 1,095 transactions); Bank of America Merrill Lynch (US$280.2 billion from 1,187 transactions). • Fees: US$13.9 billion in 2012 • ECB, 2009: Shift of syndicated loan market closer to the corporate bond market and further away from bilateral bank lending (establishment of secondary market and syndicated loans rated by independent rating agencies)? Source: Thomson Reuters Global Syndicated Loan Review 2012; Bloomberg Global Syndicated Loans League Table 2012.

  5. Process • Borrower seeks funds • Bank acts as a ‘lead’ • Arranger for the transaction • Agent for the syndicate • Borrowers requirements, rate of interest, key covenants • Term sheet used to market the loan • Agent in promoting the loan • Agent in relation to the syndicate • Borrowers rights to borrow and lender obligation to lend

  6. Borrower Perspective • Ranking. ……senior unsecured obligation of the Company and ranks equally in right of payment to all of the Company’s existing and future senior indebtedness and senior in right of payment to all of the Company’s existing and future senior subordinated debt….. • Guarantees. ….The obligations of the borrowers ………unconditionally and irrevocably guaranteed by the Company…. • Repayment and Voluntary Prepayments…..Borrowings …. must be repaid at final • Change of Control….subject to a change of control covenant whereby the Government of Dubai must continue to own, directly or indirectly, over 50 per cent of the Company’s issued share capital…. • Undertakings and Covenants. ….contains a total debt to total debt plus equity financial covenant, where equity refers to the amount of equity on the balance sheet of the Company. Source: DP World Limited Prospectus, page 75.

  7. Main Issues • The company or companies that are the contracting entities (holder of main assets?) • Allocation of rights and responsibilities between lenders • Role of agent - ‘fiduciary?’ (syndicate agent) • Agent of the lenders and not the borrowers • Expected to seek the best possible deal for borrower (White vs Jones [1995] 2 A.C. 207 at 271. • However, the contractual obligation of the borrower ends one the borrower pays back the money to the ‘agent’…. • How about the transaction between the agent and the lenders? Hudson, 2009:899 • Lenders will want to specify in the terms of the agents agency that it acts as trustee of the entire payment from the borrower for the lenders as beneficiaries • Agent will not want responsibilities • Lenders will not want to be constrained in their ability to act

  8. Allocation of Rights and Responsibilities • Rights (e.g. default clauses….) • Are default clauses in their separate loan contracts placed in separate loan agreements? • Can lenders transfer away their rights under the loan so that lender may sell their participation in the loan transaction to third parties? Argo Fund Limited v Essar Limited [2005] EWHC 600 (Comm) – difference between novation and ordinary transfer) • Responsibilities (e.g. syndicate democracy)

  9. Role of Fiduciary • Liability for negligent mis-statement (Natwest Australia Bank v Tricontinental Corporation Ltd [2008] EWC Civ. 53 – bank owes a duty of care towards lenders) • Agent will be the agent of the lenders and not the borrowers • Expected to seek the best possible deal for the borrower (White vs Jones [1995] 2 A.C. 207 at 271. • However, the contractual obligation of the borrower ends one the borrower pays back the money to the ‘agent’…. • How about the transaction between the agent and the lenders? Hudson, 2009:899 • Lenders will want to specify in the terms of the agents agency that it acts as trustee of the entire payment from the borrower for the lenders as beneficiaries • Agent will not want responsibilities • Lenders will not want to be constrained in their ability to act. Do the contractual arrangements permit the lead agent to act on behalf of the other banks?

  10. Role of Fiduciary • Agent can avoid responsibilities by being transparent from the initial stage – marketing of the loan • E.g. the veracity of the information provided by the borrower or third parties on the borrower – • Has the agent made representations or warranties as to the accuracy of the information? • Is there a positive duty of due diligence with regards to the creation of the transaction? Apparently no: IFE Fund SA v Goldman Sachs International [2006] EWHC 2887.

  11. Conclusion • So, what particular issues do the lenders need to consider in a syndicated loan agreement as distinct from an “ordinary” loan? • In addition to the issue covered under covenants and relationship between lender and borrower…. • Relationship between lenders and agent • Relationship between lenders • Relationship between agent and borrower from the point of view of the other lenders

  12. References • European Central Bank (2009) ‘Large Debt Financing: Syndicated Loans versus Corporate Bonds’. Available at: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1028.pdf (accessed 02/13) • Bloomberg (2012) ‘Global Syndicated Loans League Table’ http://about.bloomberg.com/pdf/gslc.pdf (accessed 02/13) • Hudson (2009) Financial Law, Ch. 33, 34. • Thomson Reuters Global Syndicated Loan Review 2012 (accessed 02/13) • Reuters News Sources (various) • DP World Prospectus, 2011. Available at: http://webapps.dpworld.com/portal/page/portal/DP_WORLD_WEBSITE/Investor-Centre/Shares/London%20Listing%20Prospectus.pdf • DP World Prospectus 4 Nov 2010. Available at: http://webapps.dpworld.com/portal/page/portal/DP_WORLD_WEBSITE/Investor-Centre/Bonds/DP-World-Global-Medium-Term-Note-Programme.pdf

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