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THE LAW OF MULTI-BANK FINANCING
Syndicated Loans and the Secondary Loan Market
THE LAW OF MULTI-BANK FINANCING
Syndicated Loans and the Secondary Loan Market
Agasha MugashaLLB (Hons), DipLP, LLM PhD
Professor of Law, University of Essex
1
1Great Clarendon Street, Oxford ox2 6dp
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v
PREFACE
This book uses the designation ‘multi-bank fi nancing’ to encompass different transactions where a group of banks acts in concert to provide credit to one bor-rower. It focuses on syndicated loans and the secondary loan practices of loan trading, credit derivatives, and collateralized debt obligations as practised in the London international fi nancial market and governed by English law. Over the years, many of the non-bank fi nancial institutions have joined this activity and this book notes that development.
The book is written to appeal to different legal audiences. The only assumption made by the author is that the reader is interested in the law as well as its context. There is also moderate coverage of some signifi cant law or practices encountered in other major jurisdictions. Chapter 6 is exclusively on US case law on loan par-ticipation and is included for useful analogies. The chapter sheds light on the US courts’ approach to bank documents and the reasons behind some of the contrac-tual provisions commonly encountered in such documents. While there is gener-ally more case law in the United States, however, reference to it is minimized in this book due to the different social and economic underpinnings.
Syndicated lending is quick, effi cient, and versatile. It results in the geographical and institutional sharing of credit and risk, thus delivering an internationally inte-grated fi nancial market. Innovations and expansion continue in syndicated loans, contributing to further development of the relevant law. The involvement of non-bank fi nancial institutions in this market has led to different methodologies in the lending markets as well as litigation. Most notably, there is increasing convergence of capital, loan, and equity markets in a trend that is set to continue. Loan markets routinely borrow techniques from bond and equity markets and vice versa.
The documentation of syndicated loans generally depends on market practice and the commercial terms of the deal at hand. Market practice largely derives from the conventions of the London market, which are generally shaped by fi nan-cial history in its past and modern forms. Considering the number and size of transactions in London alone, there is sparse case law that is directly on syndicated loans in particular, loan agreements in general, or indeed all multi-bank fi nancing transactions. For the most part, the practitioners apply general principles of law in developing the law and practice of multi-bank fi nancing. The courts, mostly by applying the Anglo-American classical notion of freedom of contract, have adopted an approach that facilitates the growth of trade and fi nancial structures
vi
and practices. They have therefore been proactive in developing multi-bank fi nancing and international banking in general by interpreting contractual docu-ments in a manner that generally conforms to market practice. The regulators have equally played their part by creating an enabling environment for the further growth of these transactions.
The fi nancial industry is dynamic, and so is the world economy. There is bound to be further growth in multi-bank fi nancing transactions and the law and regula-tions that govern them. Further developments to, and indeed alternative interpre-tations of, the views presented in this book, are therefore inevitable and healthy.
Agasha MugashaBrentwood, Essex
1 May 2007
Preface
vii
ACKNOWLEDGEMENTS
I am truly grateful to the multitude of individuals and institutions that assisted in different ways and made the publication of this book possible. A selection stands out and deserves special mention. None of them, however, is responsible for any errors in this book, for which I am solely responsible.
This book was written in the course of my employment and benefi ted from the study leave scheme in the Department of Law at the University of Essex. It also received signifi cant support in the form of direct funding from the British Academy and the UK Arts and Humanities Research Council (AHRC). The research also benefi ted from the generosity of Osgoode Hall Law School of York University in Canada, and the American University Washington College of Law in the United States, where I held short appointments as a visiting scholar in the course of writ-ing the book. I am grateful to these institutions as well as to my colleagues and the administrative staff there.
This book would be lacking some essential parts if the following individuals in the United Kingdom (and indirectly their organizations) had not been generous with information: Mark Campbell at Clifford Chance, Graham Penn at Sidley Austin, Richard Calnan at Norton Rose, Tom Price and Sally Moore at Markit, Petra Hofer at Dealogic, Daren Kemp at Sidley Austin, two anonymous reviewers com-missioned by OUP, and Caroline Checkley, the Law Librarian at the University of Essex. The Loan Markets Association also kindly gave me access to its two recom-mended forms of primary documents.
Outside the United Kingdom, the Loan Syndications and Trading Association in New York (through Elliott Ganz) was very generous at all times. I also obtained useful information from Michael Avidon in New York; Daniel Bradlow, Michael Swetye and Frank Byamugisha in Washington, DC; Clint Calder in Toronto; Edwin Kikonyogo, Jeff Midzuk, Eric Le Grange and Graeme Tucker in Johannesburg; Martin Bandeebire in Kampala; and my former Essex LLM stu-dents Atiq Imdad Ali, Subir Chakraborty, Lingzhi Fu, Gozde Hascelik, Lee Mason, Zhang Min, Henry Nampandu, Boseda Olofi nmakin, Aurelie Payet, Qian Qian Wang, Shujin Yang, and Li Zhe.
Professor Benjamin Geva introduced me to syndicated loans and his continuing support is priceless, together with that of Professors John F Dolan and Jean-Gabriel Castel; John C Lancaster, Pearl Rozenberg, Kevin McGuinness, William Kanyesigye, Betty and John Nganwa, Maude Bishop, and my South African
viii
friends and academic colleagues, Mr Justice Frans Malan, Jopie Pretorius, Angela Itzikowitz, Charl Hugo, and Sarel Du Toit.
I needed permission from McGill-Queen’s University Press, which permission was kindly given, for me to publish this book with Oxford University Press because the book is on a similar topic to my earlier book, The Law of Multi-bank Financing (Syndications and Participations), which was published in Canada in 1997. I pub-licly acknowledge my gratitude to McGill-Queen’s University Press. It bears emphasis, though, that the two books are very different in substance even though inevitably I do express the same ideas or occasionally use the same text.
Finally, I am truly grateful to my family and friends who have always been there for me and have thus contributed immeasurably to this work.
Agasha MugashaBrentwood, Essex
1 May 2007
Acknowledgements
ix
CONTENTS—SUMMARY
Table of Cases xxvTable of Legislation xxviiTable of European Directives xliTable of International Treaties and Conventions xliiiList of Tables xlvList of Figures xlviList of Abbreviations xlvii
1. Multi-Bank Financing: What It is and is Not 1 2. Multi-Bank Financing: Who Uses It, Where, and Why? 61 3. Arranging Syndicated Loans, Sub-participations,
and Loan Participations 99 4. The Nature of Credit Facilities used in Syndicated
Loans and Secondary Loan Markets 175 5. Syndicated Loans: Legal Relationships Between
the Borrower and Lenders, and among Syndicate Lenders 203 6. Loan Participations: Legal Relationships Between
the Lead Bank and Participants, Participants and Borrower, and Among Participants 271
7. Loan Sub-participations: Legal Relationships Between the Lead Bank and Sub-participant, and Borrower and Sub-participant 341
8. The Secondary Market for Syndicated Loans: Loan Trading, Credit Derivatives, and Collateralized Debt Obligations 353
9. The Agent Bank in Syndicated Loans and Loan Participations 403
10. Syndicated Loans and Borrower Insolvency: Winding-up and Workout Procedures 439
11. The Regulation of Syndicated Loans and the Secondary Loan Market Practices 471
12. Conclusion 513
x
Appendix 1: Multicurrency Term Facility Agreement (Miranda Projects/The Prospero Group/Ariel Bank Ltd) 527
Appendix 2: LSTA Sample Par/Near Par Participation Agreement 585Appendix 3: LSTA Purchase and Sale Agreement for Distressed Trades 596Appendix 4: LSTA Assignment and Assumption 622Appendix 5: LSTA Model Transfer Provision 627
Index 631
Contents—Summary
xi
CONTENTS
Table of Cases xxvTable of Legislation xxviiTable of European Directives xliTable of International Treaties and Conventions xliiiList of Tables xlvList of Figures xlviList of Abbreviations xlvii
1. Multi-Bank Financing: What It is and is Not
I. Introduction 1.01
II. The Dynamism of Multi-Bank Financing 1.05A. Increasing Sophistication of Client Needs 1.06B. Impact of Economic Cycles 1.07C. Different Types of Financial Institutions and Methods 1.08D. Impact of Changing Regulations 1.09
III. Designation of ‘Multi-Bank Financing’ 1.10A. Increasing Participation of Other Financial Institutions 1.13
IV. Description of Multi-Bank Financing Transactions 1.14A. Primary Transactions 1.15
1. The Syndicated Loan 1.15a. Common varieties of syndicated loans 1.17b. Niche-market syndicated loans 1.26
2. Club Deal Loans 1.31B. Secondary Loan Market Practices 1.35
1. Loan Participation and Loan Sub-participation: Early Differences between New York and London Practices 1.37
2. Loan Sub-participations 1.383. Loan Participations 1.40
a. General description 1.40b. Differentiation between types of loan participation 1.41
4. Transferable Loan Facilities—a Historical Note 1.50a. Transferable loan certifi cates 1.51b. Transferable loan instruments 1.52c. Current practices 1.53
5. Loan Trading 1.546. Credit Derivatives 1.557. Collateralized Debt Obligations 1.58
xii
V. Multi-Bank Financing Contrasted with Similar Financing Techniques 1.61A. Introduction 1.61B. Multi-Bank Financing Contrasted with Equity
Syndications and Participations 1.63C. Multi-Bank Financing Contrasted with Capital
Market Methods 1.64D. Multi-Bank Financing Contrasted with International
Bonds/Eurobonds 1.65E. Multi-Bank Financing Contrasted with
Commercial Paper Programmes 1.68F. Multi-Bank Financing Contrasted with Securitization 1.70
1. Traditional Sale Structure 1.722. Sale of Assets to a Trustee of a Receivables Trust 1.73
VI. Conclusion 1.76
2. Multi-Bank Financing: Who Uses It, Where, and Why?
I. Introduction 2.01
II. The Parties—Who Uses Multi-Bank Financing? 2.02A. The Borrowers 2.02
1. Who are the Borrowers? 2.022. Regulation of the Borrowers 2.06
B. The Lenders and Investors 2.071. Banks 2.08
a. Different types of banks 2.08b. Regulation of banks 2.12
2. Non-Bank Financial Institutions 2.15a. Hedge funds 2.16b. Pension funds 2.19c. Insurance companies 2.20d. Collateralized debt obligations 2.21e. Building societies 2.22f. Equity funds 2.23g. Mutual funds and prime rate funds 2.24h. Finance companies 2.25i. Islamic fi nance 2.26j. Vulture funds 2.27k. International Finance Corporation 2.28l. Credit unions (cooperative credit associations) 2.29
III. Components of the Financial Market—Where Multi-Bank Financing Occurs 2.30A. Domestic Market 2.31B. Foreign Market 2.32
Contents
xiii
C. International Financial Market—the Euromarket 2.331. The Concept and Origins of the Eurocurrency 2.342. The Development of the Eurodollar Market 2.353. Characteristics and Advantages of the Euromarket 2.36
a. Regional markets 2.38
IV. The Rationale—Why Parties Use Multi-Bank Financing 2.39A. The Borrower 2.40
1. Advantages of Syndicated Loans 2.402. Advantages of Loan Trading and Other
Secondary Loan Market Methods 2.43B. The Banks 2.44
1. Advantages of Syndicated Loans 2.45a. The diversifi cation of the risk of non-payment 2.46b. Complying with regulations 2.47c. Earning arrangement fees 2.48d. Increasing prestige and publicity 2.49e. Developing profi table relationships 2.50
2. Reasons for Secondary Loan Market Practices 2.51a. Note on credit derivatives 2.52b. Sale considerations 2.53c. Purchase considerations 2.62
V. Conclusion 2.68
3. Arranging Syndicated Loans, Sub-participations, and Loan Participations
I. Introduction 3.01
II. Arranging Syndicated Loans 3.03A. Procedure in Brief 3.03
1. Key Roles 3.062. Effect of Electronization on Documentation 3.103. Self-arranged Syndicated Loans 3.11
B. Detailed Procedure 3.141. Originating the Loan 3.14
a. The offer and the mandate 3.16b. Types of offer 3.17c. Legal effect of the mandate 3.25d. Arranger’s potential liability to the borrower 3.40
2. Negotiating the Loan 3.483. Marketing the Loan 3.50
a. Finalizing the syndicate group 3.52b. Preparing the information package or memorandum 3.53c. Dealing with professional advisers 3.56d. Liability for inaccurate or erroneous information 3.57
4. Action in Contract or Tort? 3.635. Arranger’s Potential Liability to the Participants 3.64
Contents
xiv
6. Misrepresentation 3.67a. Effective misrepresentation 3.68b. Materiality 3.71c. Inducement and reliance 3.72
7. Heads of Action—Specifi c Categories of Misrepresentation 3.76a. Fraudulent misrepresentation 3.77b. Negligent misrepresentation 3.80c. Innocent misrepresentation 3.100d. Statutory misrepresentation 3.102e. Overseas statutory regimes 3.113
8. Negligence 3.114 9. Breach of Fiduciary Duty 3.11510. Obviating Liability for Misinformation or Non-information 3.132
a. Exemption or disclaimer clauses 3.132b. Due diligence 3.139c. Involving the participants 3.140d. Indemnity from the borrower 3.141
III. Arranging Loan Participations and Sub-participations 3.142A. Arranging a Loan Sub-Participation 3.142B. Loan Participation Procedures 3.143C. Liability Arising from the Selling Process 3.147
IV. Conclusion 3.148
4. Nature of Credit Facilities Used in Syndicated Loans and Secondary Loan Markets
I. Introduction 4.01
II. Direct Loans 4.03A. Money Loans 4.04B. Overdraft Facilities 4.07
III. Documentary Credits 4.09A. Overview of Letters of Credit 4.09B. Syndications of Documentary Credits 4.11
1. One Bank Issues a Documentary Credit for its Own Account 4.13
2. One Bank Issues a Documentary Credit on behalf of the Syndicate 4.14
3. Each Bank Issues its Own Documentary Credit 4.15C. Participations of Documentary Credits 4.17
1. Introduction 4.172. Participations Granted by the Issuing Bank 4.213. Participations Granted by the Confi rming Bank 4.234. Participations Granted by the Nominated Bank 4.26
Contents
xv
IV. Bank Guarantees and Standby Letters of Credit 4.29A. Introduction 4.29B. Syndications of Bank Guarantees 4.33
1. Motives Behind Syndications of Bank Guarantees 4.332. The Syndication Procedure 4.343. Specifi c Types And Purposes of Bank Guarantees 4.38
a. Tender guarantee 4.39b. Advance payment or repayment guarantee 4.40c. Performance guarantee 4.41
C. Syndications of Direct Pay Standby Letters of Credit 4.45D. Participations of Bank Guarantees and Standby Credits 4.47
V. Bankers’ Acceptances 4.51A. Bankers’ Acceptances as a Funding Facility 4.51B. Syndications of Bankers’ Acceptances 4.56C. Participations in Bankers’ Acceptances 4.58
1. Risk Participations 4.592. Generic Participations 4.603. Observations 4.62
VI. Conclusion 4.64
5. Syndicated Loans: Legal Relationships Between the Borrower and Lenders, and among Syndicate Lenders
I. Introduction 5.01
II. The Legal Nature of the Syndication Arrangement 5.06A. Importance of Determining the Legal Nature 5.06B. Legal Nature of the Syndication Arrangement 5.07
1. Separate Loans 5.082. Joint Tenancy or Joint Venture 5.143. Partnership 5.15
III. Contractual Provisions in a Syndicated Loan Agreement 5.16A. Key Determinants of Loan Classifi cations and Terminology 5.19B. Key Features of Euroloan Lending 5.20
1. The Concept of Matched Funding 5.202. The Concept of Net Lending (Yield Protection) 5.21
C. Legal Relations between the Lenders and the Borrower 5.231. Defi nitions 5.242. The Facility 5.253. Purpose and Utilization of the Facility 5.264. Payments, Repayment and Prepayment 5.28
a. Payment of interest 5.29b. Repayment of principal 5.35c. Prepayment and cancellation 5.37
Contents
xvi
d. Payment of fees, costs, and expenses 5.41e. Payment of taxes 5.42
5. Security, Guarantees, and Insurance 5.43a. Security 5.43b. Guarantees, indemnity, and support arrangements 5.47c. Insurance 5.51
6. Conditions Precedent 5.52 7. Representations and Warranties 5.56
a. Pari passu 5.58b. Material adverse change clause 5.60
8. Undertakings 5.63a. Informational undertakings 5.64b. Financial covenants 5.65c. General undertakings 5.69
9. Amendments, Waivers, and Consents 5.7010. Default 5.75
a. Events of default 5.76b. Problems with cross-default clauses 5.79c. Consequences of default 5.83
11. Change of Parties and Transfers of Loan Interests 5.94a. Methods of transferring loan interests 5.95b. Conditions of assignment or transfer 5.96c. Change of lenders 5.97
12. Governing Law, Jurisdiction, and Service of Process 5.9913. Legal Opinions 5.10314. Miscellaneous Provisions 5.105
D. Legal Relationships Among the Lenders 5.1061. Sharing Payments 5.106
a. The Iranian crisis 5.109b. The Argentinian crisis 5.110c. Sovereign debt-restructuring 5.112d. Double-dipping 5.113e. Cross-jurisdictional and cross-currency set-off 5.114f. Other aspects 5.115
2. Majority Voting 5.116E. Legal Relationships Between the Lenders and the Agent Bank 5.124
IV. Conclusion 5.125
6. Loan Participations: Legal Relationships Between the Lead Bank and Participants, Participants and Borrower, and Among Participants
I. Introduction 6.01
Contents
xvii
II. Lead Bank and Participant Relationship 6.08A. The Legal Nature of the Participation Arrangement 6.10
1. Analysis 6.12a. Sale theory: assignor-assignee relationship 6.13b. Debt theory: creditor-debtor relationship 6.21c. Ownership in common or tenancy in common 6.26d. Partnership or joint venture 6.27e. Trust 6.32f. Agency 6.37
B. Economic Consequences of Characterization 6.411. Borrower’s Insolvency 6.42
a. Set-off by the lead bank 6.43b. Set-off by the participant 6.46c. Entitlement to collateral and other collections 6.49
2. Lead Bank’s Insolvency 6.51a. Set-off by the borrower 6.52b. Set-off and other claims by the participant 6.53
3. Participant’s Insolvency 6.68C. Form of the Participation Agreement 6.74
1. Oral Participation Agreements 6.742. Written Participation Agreements 6.76
a. Conclusion of the contract 6.79b. Precedence of documents 6.80c. Admissibility of extrinsic evidence 6.82
D. Contents of the Participation Agreement: Contractual Rights and Duties 6.871. Credit Information 6.91
a. Allocation of the credit risk 6.942. Initial and Subsequent Funding 6.95
a. Initial funding 6.96b. Subsequent funding 6.97c. Failure to fund the loan 6.98
3. Receipts, Collections, and Expenses 6.99a. Lead bank’s duty to collect the loan 6.100b. Sharing and appropriation of collections 6.102c. Apportionment of costs and expenses 6.104
4. Servicing the Loan 6.108a. The servicing function 6.108b. Termination of servicing 6.110
5. Modifi cations and Waiver 6.1116. Default and Enforcement 6.1157. Risks and Standard of Care 6.1208. Assignment of the Loan 6.1229. Representations and Warranties 6.125
a. Conditions precedent 6.127
Contents
xviii
10. Breach and Non-Performance 6.128a. Elevation 6.129b. Subrogation 6.130
11. Miscellaneous Provisions 6.13112. Implied Terms 6.132
a. Presumptions about participation agreements 6.133b. Fiduciary obligations 6.135c. Duty of good faith and fair dealing 6.136d. Duty to use reasonable care 6.140e. Observations 6.141
III. Participant-Borrower Relationship 6.142
IV. Participant-Participant Relationship 6.144
V. Conclusion 6.152
7. Loan Sub-participations: Legal Relationships Between the Lead Bank and Sub-participant, and Borrower and Sub-participant
I. Introduction 7.01A. Description of Sub-participation 7.03
1. Funded Sub-participation 7.042. Risk Sub-participation 7.05
II. Legal Relationships in Sub-participation Arrangement 7.06A. Legal Nature of a Sub-participation Arrangement 7.06
1. The Lead Bank–Sub-participant Relationship 7.062. The Sub-participant and the Borrower 7.10
B. The Sub-participation Agreement 7.111. Form of the Agreement 7.112. Delivery of Documents 7.123. Confi dentiality 7.134. Payment of the Sub-participation 7.145. Distributions 7.15
a. Distributions in cash 7.16b. Distributions not in cash 7.17c. Shortfall in distributions of interest or fees 7.18d. Contingent receipt of payment 7.19
6. Representations and Warranties 7.20a. Representations and warranties by the lead bank
and sub-participant 7.20b. Representations and warranties by the lead bank 7.21c. Exclusion of warranties and representations 7.22
7. Confi rmations by the Sub-participant 7.238. Undertakings by the Lead Bank 7.249. Administration of the Sub-participation 7.25
Contents
xix
10. Indemnities 7.2611. Transfers 7.2712. Governing Law 7.2813. Jurisdiction 7.2914. Other provisions 7.30
8. The Secondary Market For Syndicated Loans: Loan Trading, Credit Derivatives, and Collateralized Debt Obligations
I. Introduction 8.01
II. Loan Trading 8.03A. Past Obstacles to Loan Trading 8.04B. The Legal Framework for Loan Trading 8.06
1. Methods of Transferring Property Interests—Common Law Principles 8.12a. Novation 8.12b. Assignment 8.16c. Declaration of trust 8.34d. Charges 8.42
C. Reasons for Loan Trading 8.44D. Development of the Systems for Loan Trading 8.45
1. Objective Pricing 8.462. Loan Rating 8.473. Loan Identifi cation 8.484. Industry Body Support 8.495. Financial Institution Involvement 8.506. Use of the Internet 8.51
E. Legal and Regulatory Issues 8.541. Loan Trading Contracts—the Courts’ Approach 8.532. Transfer of Loan Interests 8.553. Transfer in Breach of Express Prohibition—Requirement
for Consent 8.564. Confi dentiality 8.575. Set-off 8.586. Prudential Concerns 8.59
III. Credit Derivatives 8.60A. Description of Credit Derivatives 8.60B. Advantages of Credit Derivatives 8.61C. Types of Credit Derivatives 8.63
1. Credit Default Swap 8.642. CDS Squared 8.673. Total Return Swap and Total Rate of Return Swap 8.684. Credit Linked Note 8.715. Repackaged Note 8.73
Contents
xx
D. Legal and Regulatory Issues 8.741. Legal Issues 8.74
a. Mis-selling of products 8.75b. Enforceability and interpretation of the contractual
documents 8.76c. Transfer of property interests 8.79
2. Regulatory Issues 8.80a. Provisioning for operational risk 8.80b. Are credit derivatives insurance business or insurance
contracts? 8.82c. Is a credit derivative a gaming or wagering contract? 8.85
IV. Collateralized Debt Obligations 8.86A. A Description of CDOs 8.86B. Why CDOs are Appealing 8.87C. Types of CDOs 8.88
1. Underlying Assets 8.892. Arbitrage versus Balance Sheet CDOs 8.903. Cash versus Synthetic CDOs 8.934. Static versus Managed CDOs 8.975. Cashfl ow versus Market Value CDOs 8.99
D. Legal Issues 8.1011. Jurisdiction of the SPV 8.1012. Transfer of Assets 8.102
a. Effective transfer 8.102b. True sale opinions 8.103c. Consent requirements 8.104
3. Set-off 8.1054. Lender Liability 8.106
V. Conclusion 8.107
9. The Agent Bank in Syndicated Loans and Loan Participations
I. Introduction 9.01
II. General Approach to the Agent Bank’s Legal Status and Functions 9.04A. True Agent or Special Agent Debate 9.06
1. Agent Bank as a True Agent 9.07a. True agent with fi duciary duties 9.07b. True agent disclaiming fi duciary duties 9.08
2. Agent Bank as a Special Agent 9.09B. Analysis 9.10
1. Meaning of the Word ‘Agent’ 9.112. The Duties of the Agent Bank 9.12
Contents
xxi
3. The Authority of the Agent Bank 9.144. Observations 9.15
III. Contents of the Agency Clause 9.17A. General Principles of Law 9.17
1. Duty to Exercise Due Care and Skill 9.182. Implied Duties—Fiduciary Duties 9.193. Authority of the Agent Bank 9.23
a. Express actual authority 9.27b. Implied actual authority 9.28
B. Specifi c Aspects of the Agency Clause 9.321. Appointment and Authorization 9.33
a. Irrevocability of the appointment 9.35b. Delegation to the agent bank 9.36
2. Duties of the Agent Bank 9.38a. Checking that the conditions precedent
have been satisfi ed 9.41b. Receiving utilization requests 9.42c. Administering interest periods 9.43d. Administering interest rates and mandatory costs 9.44e. Dealing with market disruption events 9.45f. Administering foreign exchange transactions
and multi-currency facilities 9.47g. Calculating limits for availability, tranches,
fronting banks, and swinglines 9.48h. Calculating and requesting fees and general expenses 9.49i. Acting as a conduit for information 9.50j. Monitoring fi nancial covenants 9.51k. Acting as a conduit for payments 9.52l. Checking certain types of information 9.53m. Transfers of lenders’ commitments
and changes to borrowers and guarantors 9.54n. Waivers, amendments, and consent 9.55o. Handling events of default and organizing banking
meetings 9.563. Protections Given to the Agent Bank 9.584. Confl ict of Interests 9.635. Additional Remuneration 9.656. Use of Confi dential Information 9.667. Reimbursement and Indemnifi cation of the Agent 9.678. Termination and Replacement of the Agent Bank 9.69
IV. Conclusion 9.72
Contents
xxii
10. Syndicated Loans and Borrower Insolvency: Winding-up and Workout Procedures
I. Introduction 10.01A. Practical Considerations Concerning Insolvency Procedures 10.05B. Meaning of Insolvency 10.11
1. Commercial Insolvency 10.122. Balance-sheet Insolvency Test 10.13
II. Formal Statutory Insolvency Proceedings 10.15A. Winding-up or Liquidation 10.16
1. Winding-up by the Court 10.172. Voluntary Winding-up—a Brief Note 10.183. Legal Consequences of Winding-up on Syndicated Loans 10.19
a. Capacity to conduct winding-up proceedings 10.20b. Legal proceedings and enforcement of claims 10.21c. Disposition of property 10.22d. Completion of the agreement 10.23e. Obligations of the borrower 10.24f. The company’s business 10.25g. Management—appointment of the liquidator 10.26h. Distribution of assets 10.27
B. Administrative Receivership—Limited Application 10.29
III. Rescue and Restructuring Methods and Procedures 10.33A. A Brief Comparison of English and US Law Procedures 10.35B. Administration 10.36
1. Commencement of Administration 10.392. Basic Mechanics of Administration 10.403. Consequences of Administration Relevant
to Syndicated Loans 10.41C. Company Voluntary Arrangement 10.43
1. The Company Voluntary Arrangement Process 10.462. Small Companies—a Note 10.53
D. The London Approach 10.551. Main Features of the London Approach 10.56
a. Information gathering 10.57b. The standstill period 10.58c. Interbank issues 10.59d. Financial support 10.61e. Subsequent developments 10.62
IV. Conclusion 10.63
Contents
xxiii
11. The Regulation of Syndicated Loans and the Secondary Loan Market Practices
I. Introduction 11.01
II. Regulation of Capital Adequacy 11.02A. Introducing Basel II 11.02B. Three Approaches to Measuring Credit Risk 11.08
1. Standardized Approach 11.092. Internal Ratings-based Approaches—Foundation
and Advanced 11.10C. Calculation of Minimum Capital Requirements 11.12
1. Regulatory Capital 11.132. Risk Weighting 11.14
a. Claims on sovereigns 11.16b. Claims on banks 11.17c. Claims on securities fi rms 11.18d. Claims on corporates 11.19e. Higher risk categories 11.20f. Off-balance sheet items 11.21
3. Credit Risk Mitigation 11.22a. Collateralized transactions 11.23b. On-balance sheet netting 11.24c. Guarantees and credit derivatives 11.25
4. Securitization Framework 11.26D. Regulating Capital Adequacy in the United Kingdom—
Implementation of Basel II 11.281. Exposure Reclassifi cation 11.312. Asset Management Techniques—Generally 11.33
a. Transfer of loan assets 11.34b. Novation 11.36c. Assignment 11.37d. Declaration of trust 11.38e. Sub-participation 11.39f. Undrawn commitments 11.40
3. Commitments to Lend 11.414. Credit Risk Mitigation Techniques 11.42
a. Financial collateral 11.43b. Non-Financial collateral 11.44c. Guarantees and credit derivatives 11.45d. Netting of fi nancial obligations 11.46
III. Regulation of Large Loan Exposures 11.49
IV. Regulation of Debentures 11.51
Contents
xxiv
V. Prohibition of Market Abuse 11.52A. Syndications Practice Generally 11.55B. Secondary Loan Trading 11.57C. Securitization 11.58
VI. Environmental and Social Regulation 11.60A. The Equator Principles 11.61
1. Description 11.612. Background to the Equator Principles 11.653. The Content of the Equator Principles 11.71
a. Preamble 11.72b. Scope 11.74c. Statement of principles 11.76d. Action plan—environmental management system 11.80e. Financial institution reporting and independent
monitoring 11.85B. An Early Critique of the Equator Principles 11.86
VII. Conclusion 11.89
12. Conclusion
I. Introduction 12.01A. Summary 12.04B. Law and Regulation 12.08
II. Future Directions 12.16A. General 12.16B. The Conceptual-Functional Approach to
Multi-Bank Financing 12.18C. Standardization and Harmonization for Syndicated Loans
and Secondary Loan Market Practices 12.21
Appendix 1: Multicurrency Term Facility Agreement (Miranda Projects/The Prospero Group/Ariel Bank Ltd) 527
Appendix 2: LSTA Sample Par/Near Par Participation Agreement 585Appendix 3: LSTA Purchase and Sale Agreement for Distressed Trades 596Appendix 4: LSTA Assignment and Assumption 622Appendix 5: LSTA Model Transfer Provision 627
Index 631
Contents
1
1
MULTI-BANK FINANCING: WHAT IT IS AND IS NOT
I. Introduction 1.01
II. The Dynamism of Multi-Bank Financing 1.05A. Increasing Sophistication of
Client Needs 1.06B. Impact of Economic Cycles 1.07C. Different Types of Financial
Institutions and Methods 1.08D. Impact of Changing Regulations 1.09
III. Designation of ‘Multi-Bank Financing’ 1.10A. Increasing Participation of Other
Financial Institutions 1.13
IV. Description of Multi-Bank Financing Transactions 1.14A. Primary Transactions 1.15
1. The Syndicated Loan 1.15a. Common varieties of
syndicated loans 1.17b. Niche-market syndicated
loans 1.262. Club Deal Loans 1.31
B. Secondary Loan Market Practices 1.351. Loan Participation and Loan
Sub-participation: Early Differences between New York and London Practices 1.37
2. Loan Sub-participations 1.383. Loan Participations 1.40
a. General description 1.40b. Differentiation between
types of loan participation 1.41
4. Transferable Loan Facilities— a Historical Note 1.50a. Transferable loan
certifi cates 1.51b. Transferable loan
instruments 1.52c. Current practices 1.53
5. Loan Trading 1.546. Credit Derivatives 1.557. Collateralized Debt
Obligations 1.58
V. Multi-Bank Financing Contrasted with Similar Financing Techniques 1.61A. Introduction 1.61B. Multi-Bank Financing Contrasted
with Equity Syndications and Participations 1.63
C. Multi-Bank Financing Contrasted with Capital Market Methods 1.64
D. Multi-Bank Financing Contrasted with International Bonds/Eurobonds 1.65
E. Multi-Bank Financing Contrasted with Commercial Paper Programmes 1.68
F. Multi-Bank Financing Contrasted with Securitization 1.701. Traditional Sale Structure 1.722. Sale of Assets to a Trustee of a
Receivables Trust 1.73
VI. Conclusion 1.76
Multi-Bank Financing: What It is and is Not
2
I. Introduction
This introductory chapter describes the different types and phases of multi-bank fi nancing and distinguishes multi-bank fi nancing from similar transactions. These initial remarks are completed in chapter 2, which describes who uses multi-bank fi nancing, where, and why.
Multi-bank fi nancing occurs when a number of banks act in concert to extend credit to a borrower. The combination of the banks is usually highly coordinated, but in some cases the banks act in loose associations that are linked only by the simultaneous extension of credit to a borrower. The two main phases of multi-bank fi nancing are the syndicated loan and secondary loan market practices. In a syndicated loan, several banks simultaneously make a loan to a borrower on the basis of a single set of loan documents. A mandated lead arranger (or simply the arranger) originates and puts together the loan; a bookrunner keeps the records and distributes the loan to the various lenders; an agent bank administers the loan; and the participants provide the funds. In a secondary loan market practice (there are different types), the bank’s interest in the loan is sold or otherwise transferred to other banks or fi nancial institutions. The common methods for doing this are the sub-participation, loan participation, loan trading, credit derivatives, and collateralized debt obligations. Viewed together, the two phases of multi-bank fi nancing comprise a group of related credit-and-risk-transfer techniques that permit the participants in the fi nancial markets to manage their credit and risk more precisely.
There is considerable diversity in the terminology used to refer to the key fi nancial practices discussed in this book. Some key words—such as syndication, arranger, participation, sub-participation, and participant—are not terms of art. They are ordinary English words that may be used in different contexts to mean different things. This observation holds true both in the fi nancial community and in legal literature where the terms ‘syndication’, ‘participation’, and ‘sub-participation’ are frequently used in their ordinary meaning, sometimes inter-changeably and at other times complementarily. Occasionally, too, the words are qualifi ed by adjectives or used interchangeably with others such as ‘primary’ syn-dication, ‘true’ syndication, ‘simple’ syndicate, ‘secondary syndication’, ‘direct’ or ‘indirect’ participation, ‘silent participation’, and ‘sub-participation’. It is there-fore important for readers to pay particular regard to the substance of the fi nancial practices and also to be consistent with the labels used in any particular discus-sion. This book ascribes to the fi nancial practices it discusses the labels and mean-ing commonly attached to them in euroloan practices, as practiced principally in London in the United Kingdom. There is also some inevitable use of terminology from industry practices in New York because of the overlapping practices in the
1.01
1.02
1.03
3
two leading international fi nancial centres of London and New York. In the last decade the major participants in the syndicated loans market have been develop-ing common terminology and standard practices and documents that are increas-ingly used by the leading industry players. These documents, particularly those made under the auspices of the Loan Markets Association (LMA) and Loan Syndication and Trading Association (LSTA), are fairly representative of current practice and are discussed in this book as such.
Table 1.1 below, illustrates the syndicated loans market by showing the state of the market in the three years up to the end of 2006. The diagram illustrates total amounts and the types of the leading fi nancial institutions involved.
II. The Dynamism of Multi-Bank Financing
Multi-bank fi nancing techniques continue to evolve. The factors behind the evo-lution have impacted on the legal documentation for the transactions and also explain some of the cases that have come before the courts. The modern practice of syndicated loans and secondary loan market practices can fairly be described as one where banks are trying to satisfy the increasingly sophisticated needs of their clients in a competitive environment that involves many different types of fi nan-cial institutions and against the background of a complex and demanding regula-tory environment. It is therefore appropriate to mention briefl y at this point some of the important drivers of modern practices. The remarks are further explained in chapter 2 and the remainder of the book.
A. Increasing Sophistication of Client Needs
Multi-bank fi nancing developed simultaneously as a domestic and international facility. The borrowers are usually large and sophisticated entities that are aware of, and have access to, other types of fi nancing as well. They would thus seek to obtain the cheapest source of funds and will switch lenders if necessary. Their needs are also varied and may simultaneously be domestic or international. Often the borrower is a conglomerate or holding company whose fi nancing needs require a combination of different fi nancing facilities. The consequence is that the lenders are continually adapting as they seek to accommodate varied and sophisticated clients. In some cases the borrowers have been known to specify the composition of the lending institutions or the size of the lending group. The borrowers also fre-quently have an eye to the bond market, and may borrow by way of syndicated loan as a bridge fi nancing to a later bond issue. There are thus many short-term loans in the region of twelve to eighteen months which the borrower expects to refi nance in the bond market, as well as loans with longer tenors.
The Dynamism of Multi-Bank Financing
1.04
1.05
1.06
Multi-Bank Financing: What It is and is Not
4
Tab
le 1
.1 T
op le
nder
s for
glo
bal s
yndi
cate
d lo
ans,
200
4–20
06
2006
4 20
05
Ran
kLe
nder
Par
ent
Dea
l Val
ue ($
) (m
)N
o.%
shar
eR
ank
Lend
er P
aren
tD
eal V
alue
($) (
m)
No.
%sh
are
1JP
Mor
gan
261,
589.
781,
739
6.54
1JP
Mor
gan
215,
508.
871,
779
6.24
2C
itig
roup
211,
276.
311,
379
5.28
2C
itig
roup
178,
868.
061,
444
5.18
3B
anc
of A
mer
ica
178,
318.
951,
840
4.45
3B
anc
of A
mer
ica
147,
214.
931,
973
4.26
4D
euts
che
Ban
k12
9,91
6.50
718
3.25
4B
NP
Pari
bas
110,
242.
791,
393
3.19
5R
BS
128,
114.
8990
43.
205
Mit
subi
shi U
FJ F
inan
cial
G
roup
106,
509.
191,
931
3.08
6M
itsu
bish
i UFJ
Fin
anci
al
Gro
up11
5,56
4.89
2,10
42.
896
AB
N A
MR
O10
5,70
3.83
1,33
13.
06
7B
NP
Pari
bas
113,
925.
851,
214
2.85
7D
euts
che
Ban
k10
4,34
9.59
789
3.02
8B
arcl
ays C
apit
al10
1,97
3.13
643
2.55
8R
BS
97,3
71.9
398
22.
829
AB
N A
MR
O96
,574
.39
1,20
32.
419
Bar
clay
s Cap
ital
96,9
28.2
079
12.
8010
Wac
hovi
a89
,355
.93
1,20
12.
2310
HSB
C86
,093
.45
1,09
72.
4911
Miz
uho
88,3
03.4
91,
781
2.21
11C
alyo
n84
,069
.75
1,02
22.
4312
Cre
dit S
uiss
e84
,659
.81
523
2.11
12W
acho
via
79,3
89.9
81,
251
2.30
13C
alyo
n84
,218
.33
936
2.10
13C
redi
t Sui
sse
73,3
40.3
355
52.
1214
HSB
C76
,340
.42
877
1.91
14M
izuh
o72
,057
.25
1,68
32.
0815
Gol
dman
Sac
hs76
,185
.41
324
1.90
15SG
Cor
pora
te &
In
vest
men
t Ban
king
69,5
77.6
084
12.
01
16SG
Cor
pora
te &
In
vest
men
t Ban
king
65,1
24.4
173
41.
6316
Sum
itom
o M
itsu
i Ban
king
C
orp
59,4
50.5
01,
452
1.72
17Su
mit
omo
Mit
sui B
anki
ng
Cor
p61
,215
.37
1,52
31.
5317
ING
50,3
19.9
973
71.
46
18M
orga
n St
anle
y52
,375
.67
270
1.31
18U
BS
46,4
07.9
142
61.
3419
Scot
ia C
apit
al51
,215
.37
620
1.28
19N
ATIX
IS44
,650
.69
596
1.29
20U
BS
51,0
97.5
042
11.
2820
Scot
ia C
apit
al44
,336
.95
564
1.28
Su
btot
al2,
117,
346.
407,
879
52.9
0
Subt
otal
1,87
2,39
1.80
7,51
354
.17
To
tal
4,00
2,83
4.32
9,42
710
0.00
To
tal
3,45
6,33
0.03
8,64
910
0.00
5
The Dynamism of Multi-Bank Financing
2004
To
tal
Ran
kLe
nder
Par
ent
Dea
l Val
ue ($
) (m
)N
o.%
shar
eR
ank
Lend
er P
aren
tD
eal V
alue
($) (
m)
No.
%sh
are
1JP
Mor
gan
17
9,57
4.79
1,74
16.
851
JP M
orga
n65
6,67
3.45
5,25
96.
522
Ban
c of
Am
eric
a
125,
291.
981,
893
4.78
2C
itig
roup
511,
958.
934,
105
5.08
3C
itig
roup
12
1,81
4.56
1,28
24.
653
Ban
c of
Am
eric
a45
0,82
5.87
5,70
64.
474
AB
N A
MR
O
91,
937.
011,
249
3.51
4D
euts
che
Ban
k31
9,90
6.42
2,29
23.
175
Deu
tsch
e B
ank
8
5,64
0.34
785
3.27
5B
NP
Pari
bas
309,
443.
703,
869
3.07
6B
NP
Pari
bas
8
5,27
5.06
1,26
23.
256
Mit
subi
shi U
FJ
Fina
ncia
l Gro
up30
3,14
3.70
5,49
43.
01
7M
itsu
bish
i UFJ
Fin
anci
al
Gro
up
81,
069.
631,
459
3.09
7R
BS
298,
201.
852,
737
2.96
8B
arcl
ays C
apit
al
78,
706.
3578
43.
008
AB
N A
MR
O29
4,21
5.23
3,78
32.
929
RB
S
72,
715.
0285
12.
789
Bar
clay
s Cap
ital
277,
607.
682,
218
2.75
10W
acho
via
6
9,37
2.60
1,19
62.
6510
Wac
hovi
a23
8,11
8.51
3,64
82.
3611
HSB
C
65,
721.
6793
32.
5111
Cal
yon
229,
937.
112,
831
2.28
12C
alyo
n
61,
632.
5587
32.
3512
HSB
C22
8,15
5.55
2,90
72.
2613
Cre
dit S
uiss
e
55,
985.
2256
32.
1413
Cre
dit S
uiss
e21
3,98
5.36
1,64
12.
1214
SG C
orpo
rate
& In
vest
men
t B
anki
ng
47,
732.
8868
81.
8214
Miz
uho
200,
282.
434,
291
1.99
15Su
mit
omo
Mit
sui B
anki
ng
Cor
p
44,
598.
111,
063
1.70
15SG
Cor
pora
te &
In
vest
men
t Ban
king
182,
434.
902,
263
1.81
16M
izuh
o
39,
921.
6882
71.
5216
Sum
itom
o M
itsu
i B
anki
ng C
orp
165,
263.
984,
038
1.64
17Sc
otia
Cap
ital
3
7,76
0.22
553
1.44
17G
oldm
an S
achs
144,
590.
2181
31.
4318
ING
3
7,14
5.55
691
1.42
18U
BS
134,
499.
591,
283
1.33
19U
BS
3
6,99
4.17
436
1.41
19Sc
otia
Cap
ital
133,
312.
541,
737
1.32
20N
ATIX
IS
34,
094.
7845
61.
3020
ING
131,
892.
642,
006
1.31
Su
btot
al1,
452,
984.
185,
847
55.4
5
Subt
otal
5,42
4,44
9.64
21,2
6853
.82
To
tal
2,62
0,18
5.85
6,71
610
0.00
To
tal
10,0
79,3
50.1
924
,792
100.
00
Sour
ce: D
ealo
gic
Multi-Bank Financing: What It is and is Not
6
B. Impact of Economic Cycles
The usual economic cycles affect (1) the number of loan transactions, (2) the size of the loan facilities, (3) pricing for the loans, (4) default rates, and (5) institu-tional demand for secondary trading. A buoyant economy with low default rates encourages lenders to commit to large loans and more frequently, whereas a con-tracting economy usually results in a more cautious approach in the number of transactions and the terms on which the loans are made. A deteriorating economy with high default rates spurs the secondary market in distressed loans.
C. Different Types of Financial Institutions and Methods
The early syndicated loans were simple structures assembled exclusively or nearly so among banks. The transactions are no longer simple and they are no longer exclusive to banks. Nowadays other types of fi nancial institutions are actively involved and include collateralized loan obligations (CLOs), hedge funds, pension funds, and insurance companies to mention but a few1 Many of these institutions are by nature investors and not lenders and they bring with them different requirements and methods of operation. They also have different com-mitments to the business activity of lending and apply different criteria before they get involved. In the secondary loan markets, for example, the investors require loan interests to be rated and require credit risk to be packaged in a certain way before they can invest in it. This in turn impacts on the documentation for primary documents as well because syndicated loans are typically made in con-templation of a future transfer. Decades ago borrowers could tap funding either by way of syndicated loan, capital market borrowing, or equity fi nancing. To date, the three methods interact signifi cantly. Loan markets routinely borrow tech-niques from bond and equity markets and the funding was provided by different institutions. It is generally acknowledged that there is increasing convergence of the methods of syndicated loans and capital markets. This development has been enhanced by the increasing participation of non-bank fi nancial institutions in syndicated loans. However, the apparent convergence extends only to similarity in procedures and the ultimate economic benefi t. Each method remains intact in its own right, serves its original purpose, and coexists with the other two. The convergence of fi nancing methods and the participating institutions makes it clear that the traditional stance of regulation according to institution is no longer appropriate. The trend for regulation seems to focus on equality of treatment for the fi nancial institutions and securities concerned. This seeks to avoid regulatory
1 See ch 2 below.
1.07
1.08
7
arbitrage and also reduces the likelihood of regional, jurisdictional, or industry concentrations of risk driven by regulatory considerations.
D. Impact of Changing Regulations
In the early days, banks syndicated loans either because they could not individu-ally raise the amount required by the borrower or because the banks wanted to diversify the risk of lending. These origins, while still important, are no longer the main drivers of multi-bank fi nancing. Globally and domestically there have been fairly continuous changes in the regulatory environment and this has a direct impact on the business of syndicated loans and related practices. Perhaps the most noteworthy regulatory measure that has directly affected syndicated loans and related practices is capital adequacy regulation. The fi rst capital adequacy regula-tions (Basel I)2 had a dramatic impact on the practice of syndicated loans by con-straining the overall size of the lending portfolios of individual leading international banks. The operative capital adequacy regulations (Basel II)3 refi ne the calculation of the capital required of individual banks by further distinguishing between different assets and types of risk. Again, the regulations are affecting the business of syndicated loans and related practices by differentiating between types of assets, which affects the choices that banks make. Other regulations that have had an impact on syndicated loans are those that place limits on large exposures, thus effectively putting a limit on how much a bank can lend to an individual bor-rower or group of related borrowers. Furthermore, the more liberal regulatory environment now permits different types of fi nancial institutions to participate in syndicated loans (previously some did not) which means the market is more liquid but also more demanding because different institutions specify different requirements.
III. Designation of ‘Multi-Bank Financing’
The label ‘multi-bank’ is a misnomer for the range of activity and institutions covered in this book. ‘Multi-bank’ fi nancing suggests that two or more banks together fi nance a borrower. However, many types of non-bank fi nancial institutions actively take part in these deals and the trend is set to continue. It is appropriate, therefore, to inquire why the narrower ‘multi-bank’ label is suitable for practices that include institutions other than banks. The label ‘multi-bank’ is
2 Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards (July 1988) as amended.
3 Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards, A Revised Framework (November 2005).
Designation of ‘Multi-Bank Financing’
1.09
1.10
Multi-Bank Financing: What It is and is Not
8
justifi ed because it captures the practical reality that banks historically occupied and still occupy the pivotal role in syndicated loans and secondary loan market practices. Banks remain the primary source for corporations that wish to borrow by way of loans. Furthermore, commercial lending is the main business activity of banks as a group as contrasted to other fi nancial institutions, and most banks are primarily and regularly engaged in primary lending. In the practice of syndi-cated loans and secondary market practices, the banks occupy a central position because they are the main initiators of the transactions, they participate in greater numbers than any other type of fi nancial institution, and they frequently advance the largest portion of the value of the funds. While it is the case that the institu-tional investors in recent years do provide large amounts of capital in the primary and secondary markets that sometimes exceed those of banks, it is rare for a non-bank fi nancial institution to maintain an on-going leading role in a syndicated loan beyond the structuring of the loan. Banks set the agenda in this area, hence the label ‘multi-bank fi nancing’.4
In law, lending is one of the twin elements (the other one being the taking of deposits) that have consistently been recognized as the primary business of bank-ing.5 Even where the ‘business of banking’ has not been decided with certainty, and it may be the case that it is no longer important to have such a defi nition,6 it is clear that banks spearhead the provision of commercial lending. The banks, as deposit taking institutions and custodians of national savings, are uniquely placed for general lending and the unrestricted making of commercial loans has, as a rule of practice, remained a core function of the banks. Extending credit generally in the primary markets has thus largely been in the domain of the banks.
Tables 1.2 to 1.7 below, illustrate the dominant position of the banks as book run-ners and mandated lead arrangers in the practice of syndicated loans globally, in Europe, the Middle East, and Africa (EMEA) and the United States. The tables should be read in conjunction with Table 1.1 above, which showed that the banks are also the leading providers of funds.
4 The term ‘multi-lender’ would also be suitable, but it lacks the inherent protections and privi-leges the law confers on banks. For these see United Dominion Trust Ltd v Kirkwood [1966] 1 All ER 968, 975 (CA).
5 State Savings Bank of Victoria Commissioners v Permewan, Wright & Co Ltd (1915) 19 CLR 457; United Dominion Trust Ltd v Kirkwood (n 4 above) 975.
6 The operative terminology for regulatory purposes is ‘credit institution’ because Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions defi nes a credit institution as ‘an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credits for its own account’. In practical terms, banks are the most vis-ible credit institutions.
1.11
1.12
9
Designation of ‘Multi-Bank Financing’
Tab
le 1
.2 T
op b
ook
runn
ers f
or g
loba
l syn
dica
ted
loan
s, 2
004–
2006
2006
2005
Ran
kB
ookr
unne
r D
eal V
alue
($) (
m)
No.
%sh
are
Ran
kB
ookr
unne
rD
eal V
alue
($) (
m)
No.
%sh
are
1JP
Mor
gan
528,
777.
691,
051
13.2
11
JP M
orga
n49
1,74
8.75
1,03
714
.23
2C
itig
roup
377,
466.
2062
09.
432
Cit
igro
up41
7,93
4.36
723
12.0
93
Ban
c of
Am
eric
a35
7,33
3.73
1,14
98.
933
Ban
c of
Am
eric
a31
5,60
7.25
1,17
59.
134
RB
S14
4,22
4.96
263
3.6
4D
euts
che
Ban
k12
4,53
9.22
220
3.6
5D
euts
che
Ban
k13
3,51
3.17
219
3.34
5R
BS
116,
398.
4225
43.
376
BN
P Pa
riba
s12
5,78
5.13
397
3.14
6B
NP
Pari
bas
112,
106.
2941
33.
247
Bar
clay
s Cap
ital
124,
075.
2924
53.
17
Bar
clay
s Cap
ital
110,
112.
4626
23.
198
Wac
hovi
a11
5,23
2.84
430
2.88
8W
acho
via
99,8
60.5
643
32.
899
Cre
dit S
uiss
e97
,32
2.68
209
2.43
9A
BN
AM
RO
80,4
17.1
431
22.
3310
Cal
yon
72,2
19.4
021
81.
810
Cal
yon
77,4
78.8
823
22.
2411
Gol
dman
Sac
hs70
,459
.18
141
1.76
11M
izuh
o76
,668
.89
654
2.22
12M
izuh
o69
,062
.34
707
1.73
12SG
Cor
pora
te &
In
vest
men
t Ban
king
63,5
96.7
616
21.
84
13Su
mit
omo
Mit
sui
Ban
king
Cor
p68
,324
.34
648
1.71
13C
redi
t Sui
sse
62,5
43.2
517
51.
81
14A
BN
AM
RO
64,6
16.9
430
11.
6114
HSB
C59
,813
.55
207
1.73
15M
itsu
bish
i UFJ
Fi
nanc
ial G
roup
59,3
89.7
172
71.
4815
Sum
itom
o M
itsu
i Ban
king
C
orp
58,9
27.8
356
11.
7
16M
erri
ll Ly
nch
50,7
56.5
813
01.
2716
Gol
dman
Sac
hs54
,566
.64
100
1.58
17M
orga
n St
anle
y50
,469
.25
641.
2617
Mit
subi
shi U
FJ F
inan
cial
G
roup
47,8
94.7
855
61.
39
18SG
Cor
pora
te &
In
vest
men
t Ban
king
49,8
73.9
713
61.
2518
Lehm
an B
roth
ers
40,0
93.5
092
1.16
19D
resd
ner K
lein
wor
t46
,015
.10
911.
1519
Dre
sdne
r Kle
inw
ort
37,7
78.6
378
1.09
20H
SBC
44,1
15.9
014
21.
120
UB
S31
,892
.57
890.
92
Su
btot
al2,
649,
034.
386,
285
66.1
8
Subt
otal
2,47
9,97
9.76
5,98
271
.75
To
tal
4,00
2,83
4.32
9,42
710
0
Tota
l3,
456,
330.
038,
649
100
Multi-Bank Financing: What It is and is Not
10
Tab
le 1
.2 (
cont
.)
2004
Tota
l
Ran
kB
ookr
unne
rD
eal V
alue
($) (
m)
No.
% sh
are
Ran
kB
ookr
unne
rD
eal V
alue
($) (
m)
N
o.%
shar
e
1JP
Mor
gan
483,
357.
621,
059
18.4
51
JP M
orga
n1,
503,
884.
063,
147
14.9
22
Cit
igro
up31
2,08
3.05
669
11.9
12
Cit
igro
up1,
107,
483.
612,
012
10.9
93
Ban
c of
Am
eric
a30
8,26
7.11
1,14
111
.77
3B
anc
of A
mer
ica
981,
208.
093,
465
9.73
4B
arcl
ays C
apit
al10
0,62
3.10
253
3.84
4D
euts
che
Ban
k35
8,33
0.03
675
3.56
5D
euts
che
Ban
k10
0,27
7.64
236
3.83
5B
arcl
ays C
apit
al33
4,81
0.85
760
3.32
6W
acho
via
85,5
61.7
541
03.
276
RB
S31
5,02
1.96
697
3.13
7B
NP
Pari
bas
77,0
01.6
933
62.
947
BN
P Pa
riba
s31
4,89
3.11
1,14
63.
128
AB
N A
MR
O54
,935
.24
257
2.1
8W
acho
via
300,
655.
151,
273
2.98
9R
BS
54,3
98.5
818
02.
089
Cre
dit S
uiss
e21
0,69
2.94
540
2.09
10C
redi
t Sui
sse
50,8
27.0
115
61.
9410
AB
N A
MR
O19
9,96
9.32
870
1.98
11H
SBC
41,7
55.5
318
41.
5911
Cal
yon
190,
024.
3459
71.
8912
Cal
yon
40,3
26.0
514
71.
5412
Miz
uho
167,
485.
921,
467
1.66
13Su
mit
omo
Mit
sui
Ban
king
Cor
p38
,505
.90
381
1.47
13Su
mit
omo
Mit
sui
Ban
king
Cor
p16
5,75
8.07
1,59
01.
64
14SG
Cor
pora
te &
In
vest
men
t Ban
king
35,2
68.4
912
81.
3514
Gol
dman
Sac
hs15
0,71
1.11
317
1.5
15M
itsu
bish
i UFJ
Fi
nanc
ial G
roup
32,6
98.2
130
01.
2515
SG C
orpo
rate
& In
vest
men
t B
anki
ng14
8,73
9.23
426
1.48
16Le
hman
Bro
ther
s25
,912
.61
800.
9916
HSB
C14
5,68
4.98
533
1.45
17G
oldm
an S
achs
25,6
85.3
076
0.98
17M
itsu
bish
i UFJ
Fin
anci
al
Gro
up13
9,98
2.70
1,58
31.
39
18C
omm
erzb
ank
Gro
up23
,233
.87
970.
8918
Dre
sdne
r Kle
inw
ort
102,
522.
7222
71.
0219
Mer
rill
Lync
h22
,443
.92
630.
8619
Lehm
an B
roth
ers
101,
082.
5027
01
20M
izuh
o21
,754
.69
106
0.83
20M
erri
ll Ly
nch
95,7
41.0
127
20.
95
Su
btot
al1,
934,
917.
364,
743
73.8
5
Subt
otal
7,03
4,68
1.70
16,9
8869
.79
To
tal
2,62
0,18
5.85
6,71
610
0
Tota
l10
,079
,350
.19
24,7
9210
0
Sour
ce: D
ealo
gic.
11
Designation of ‘Multi-Bank Financing’
Tab
le 1
.3 T
op b
ook
runn
ers f
or E
ME
A sy
ndic
ated
loan
s, 2
004–
2006
2006
2005
Ran
kB
ookr
unne
r D
eal V
alue
($) (
m)
N
o.%
shar
eR
ank
Boo
krun
ner
Dea
l Val
ue ($
) (m
)
No.
%sh
are
1R
BS
101,
648.
3718
26.
841
Cit
igro
up12
3,39
4.51
205
8.65
2C
itig
roup
91,6
51.3
713
66.
162
RB
S98
,967
.66
185
6.94
3B
NP
Pari
bas
85,9
26.4
125
65.
783
BN
P Pa
riba
s89
,942
.38
283
6.31
4B
arcl
ays C
apit
al77
,959
.44
155
5.24
4B
arcl
ays C
apit
al77
,678
.08
175
5.45
5D
euts
che
Ban
k68
,977
.92
814.
645
Cal
yon
68,9
61.2
414
54.
836
Cal
yon
56,7
54.0
313
93.
826
JP M
orga
n66
,255
.71
854.
647
JP M
orga
n55
,736
.68
633.
757
Deu
tsch
e B
ank
66,2
45.9
395
4.64
8SG
Cor
pora
te &
In
vest
men
t Ban
king
46,0
41.6
311
33.
18
SG C
orpo
rate
&
Inve
stm
ent B
anki
ng59
,969
.98
136
4.2
9D
resd
ner K
lein
wor
t42
,794
.14
852.
889
AB
N A
MR
O51
,367
.70
933.
610
AB
N A
MR
O27
,416
.49
861.
8410
HSB
C48
,181
.43
122
3.38
11H
SBC
25,8
03.7
462
1.74
11D
resd
ner K
lein
wor
t37
,636
.96
772.
6412
Gol
dman
Sac
hs24
,527
.87
261.
6512
ING
21,8
10.1
797
1.53
13N
orde
a B
ank
AB
23,9
66.3
981
1.61
13N
orde
a B
ank
AB
21,6
83.2
473
1.52
14C
omm
erzb
ank
Gro
up22
,919
.61
871.
5414
Gol
dman
Sac
hs19
,791
.73
141.
3915
Mor
gan
Stan
ley
22,5
56.5
915
1.52
15C
omm
erzb
ank
Gro
up17
,657
.10
911.
2416
Ban
co S
anta
nder
Cen
tral
H
ispa
no S
A -
BSC
H19
,681
.22
331.
3216
Uni
Cre
dit G
roup
16,8
58.4
175
1.18
17C
redi
t Sui
sse
19,4
31.0
734
1.31
17M
orga
n St
anle
y16
,817
.13
121.
1818
ING
19,0
98.9
887
1.28
18U
BS
13,8
92.7
216
0.97
19U
niC
redi
t Gro
up16
,507
.43
791.
1119
Cre
dit S
uiss
e11
,708
.31
190.
8220
NAT
IXIS
16,5
01.6
177
1.11
20N
ATIX
IS11
,455
.93
590.
8
Su
btot
al86
5,90
0.98
1,27
358
.23
Su
btot
al94
0,27
6.30
1,29
965
.91
To
tal
1,48
7,11
4.84
2,15
710
0
Tota
l1,
426,
518.
652,
143
100
Multi-Bank Financing: What It is and is Not
12
Tab
le 1
.3 (
cont
.)
2004
Tota
l
Ran
kB
ookr
unne
rD
eal V
alue
($) (
m)
No.
%sh
are
Ran
kB
ookr
unne
rD
eal V
alue
($) (
m)
No.
%sh
are
1B
arcl
ays C
apit
al70
,708
.36
171
7.43
1C
itig
roup
284,
193.
2050
07.
352
Cit
igro
up69
,147
.32
159
7.27
2R
BS
248,
253.
0752
06.
423
BN
P Pa
riba
s59
,296
.29
232
6.23
3B
NP
Pari
bas
235,
165.
0877
16.
084
Deu
tsch
e B
ank
52,3
87.6
994
5.5
4B
arcl
ays C
apit
al22
6,34
5.88
501
5.86
5JP
Mor
gan
51,8
80.7
072
5.45
5D
euts
che
Ban
k18
7,61
1.55
270
4.85
6R
BS
47,6
37.0
415
35.
016
JP M
orga
n17
3,87
3.10
220
4.5
7C
alyo
n35
,403
.10
873.
727
Cal
yon
161,
118.
3637
14.
178
AB
N A
MR
O35
,262
.61
104
3.71
8SG
Cor
pora
te &
In
vest
men
t Ban
king
137,
809.
1734
73.
57
9H
SBC
32,6
89.3
911
03.
439
AB
N A
MR
O11
4,04
6.81
283
2.95
10SG
Cor
pora
te &
In
vest
men
t Ban
king
31,7
97.5
698
3.34
10H
SBC
106,
674.
5529
42.
76
11C
omm
erzb
ank
Gro
up20
,537
.45
782.
1611
Dre
sdne
r Kle
inw
ort
98,6
05.0
221
82.
5512
Dre
sdne
r Kle
inw
ort
18,1
73.9
156
1.91
12C
omm
erzb
ank
Gro
up61
,114
.16
256
1.58
13U
niC
redi
t Gro
up15
,559
.95
651.
6313
Nor
dea
Ban
k A
B58
,653
.33
200
1.52
14Ll
oyds
TSB
14,9
53.0
146
1.57
14G
oldm
an S
achs
54,9
76.4
357
1.42
15N
orde
a B
ank
AB
13,0
03.7
146
1.37
15IN
G53
,569
.34
242
1.39
16IN
G12
,660
.20
581.
3316
Uni
Cre
dit G
roup
48,9
25.7
921
91.
2717
Mer
rill
Lync
h10
,887
.75
31.
1417
Mor
gan
Stan
ley
42,9
67.5
034
1.11
18G
oldm
an S
achs
10,6
56.8
317
1.12
18Ll
oyds
TSB
39,4
24.9
112
71.
0219
Inte
sa S
anpa
olo
8,69
7.95
310.
9119
Cre
dit S
uiss
e38
,199
.31
730.
9920
Ban
c of
Am
eric
a7,
967.
4923
0.84
20N
ATIX
IS34
,835
.09
176
0.9
Su
btot
al61
9,30
8.31
1,08
865
.07
Su
btot
al2,
406,
361.
643,
668
62.2
5
To
tal
951,
739.
111,
752
100
Tota
l3,
865,
372.
596,
052
100
Sour
ce: D
ealo
gic.
13
Designation of ‘Multi-Bank Financing’
Tab
le 1
.4 T
op b
ook
runn
ers f
or U
S sy
ndic
ated
loan
s, 2
004–
2006
2006
2005
Ran
kB
ookr
unne
rD
eal V
alue
($) (
m)
No.
%sh
are
Ran
kB
ookr
unne
rD
eal V
alue
($) (
m)
No.
%sh
are
1JP
Mor
gan
469,
219.
9697
124
.91
1JP
Mor
gan
419,
035.
7192
426
.68
2B
anc
of A
mer
ica
348,
456.
401,
119
18.5
2B
anc
of A
mer
ica
299,
065.
871,
113
19.0
43
Cit
igro
up25
6,97
2.87
383
13.6
43
Cit
igro
up26
2,48
8.00
395
16.7
14
Wac
hovi
a11
3,54
2.40
425
6.03
4W
acho
via
99,8
60.5
643
36.
365
Cre
dit S
uiss
e66
,714
.12
163
3.54
5D
euts
che
Ban
k56
,999
.72
117
3.63
6D
euts
che
Ban
k61
,945
.01
129
3.29
6C
redi
t Sui
sse
46,3
03.0
015
02.
957
Gol
dman
Sac
hs43
,936
.47
111
2.33
7G
oldm
an S
achs
32,1
66.7
483
2.05
8B
arcl
ays C
apit
al42
,347
.83
722.
258
Lehm
an B
roth
ers
31,0
71.4
582
1.98
9M
erri
ll Ly
nch
39,3
67.0
511
92.
099
Bar
clay
s Cap
ital
28,9
04.3
766
1.84
10R
BS
38,5
25.4
669
2.04
10W
ells
Far
go27
,622
.05
155
1.76
11PN
C B
ank
NA
32,4
50.9
017
61.
7211
AB
N A
MR
O20
,414
.61
165
1.3
12W
ells
Far
go32
,010
.03
209
1.7
12K
eyB
anc
Cap
ital
Mar
kets
19,7
05.2
413
81.
2513
UB
S28
,304
.00
841.
513
UB
S17
,911
.95
721.
1414
Lehm
an B
roth
ers
26,8
36.6
986
1.42
14G
E C
apit
al17
,279
.62
137
1.1
15B
NP
Pari
bas
26,1
91.4
764
1.39
15R
BS
16,4
80.3
766
1.05
16M
orga
n St
anle
y24
,477
.29
461.
316
SunT
rust
Ban
ks15
,270
.35
590.
9717
AB
N A
MR
O23
,369
.58
169
1.24
17B
NP
Pari
bas
15,0
74.3
963
0.96
18G
E C
apit
al23
,097
.74
192
1.23
18M
erri
ll Ly
nch
14,7
52.6
668
0.94
19K
eyB
anc
Cap
ital
Mar
kets
18,6
40.6
714
80.
9919
PNC
Ban
k N
A13
,052
.75
180
0.83
20B
ear S
tear
ns17
,088
.13
580.
9120
Mor
gan
Stan
ley
12,8
20.9
833
0.82
Su
btot
al1,
733,
494.
083,
618
92.0
1
Subt
otal
1,46
6,28
0.38
3,48
093
.36
To
tal
1,88
4,01
7.67
4,04
010
0
Tota
l1,
570,
499.
763,
793
100
Multi-Bank Financing: What It is and is Not
14
Tab
le 1
.4 (
cont
.)
2004
Tota
l
Ran
kB
ookr
unne
rD
eal V
alue
($) (
m)
No.
%sh
are
Ran
kB
ookr
unne
rD
eal V
alue
($) (
m)
No.
% sh
are
1JP
Mor
gan
423,
811.
9295
630
.92
1JP
Mor
gan
1,31
2,06
7.58
2,85
127
.19
2B
anc
of A
mer
ica
296,
707.
771,
080
21.6
42
Ban
c of
Am
eric
a94
4,23
0.05
3,31
219
.57
3C
itig
roup
213,
551.
6538
615
.58
3C
itig
roup
733,
012.
511,
164
15.1
94
Wac
hovi
a85
,351
.75
408
6.23
4W
acho
via
298,
754.
711,
266
6.19
5D
euts
che
Ban
k46
,167
.37
134
3.37
5D
euts
che
Ban
k16
5,11
2.09
380
3.42
6C
redi
t Sui
sse
42,9
98.7
013
53.
146
Cre
dit S
uiss
e15
6,01
5.82
448
3.23
7B
arcl
ays C
apit
al24
,122
.93
581.
767
Bar
clay
s Cap
ital
95,3
75.1
319
61.
988
Lehm
an B
roth
ers
22,0
12.9
071
1.61
8G
oldm
an S
achs
91,0
36.2
125
61.
899
Wel
ls F
argo
19,5
56.1
915
51.
439
Lehm
an B
roth
ers
79,9
21.0
523
91.
6610
Gol
dman
Sac
hs14
,933
.00
621.
0910
Wel
ls F
argo
79,1
88.2
651
91.
6411
UB
S13
,956
.21
711.
0211
Mer
rill
Lync
h65
,385
.12
245
1.36
12B
ank
of N
ew Y
ork
12,6
58.4
866
0.92
12R
BS
60,9
87.7
815
91.
2613
BN
P Pa
riba
s11
,799
.78
540.
8613
UB
S60
,172
.15
227
1.25
14PN
C B
ank
NA
11,2
76.5
415
30.
8214
PNC
Ban
k N
A56
,780
.19
509
1.18
15M
erri
ll Ly
nch
11,2
65.4
158
0.82
15A
BN
AM
RO
54,8
70.4
342
61.
1416
SunT
rust
Ban
ks11
,145
.61
710.
8116
BN
P Pa
riba
s53
,065
.64
181
1.1
17A
BN
AM
RO
11,0
86.2
592
0.81
17G
E C
apit
al50
,770
.61
424
1.05
18G
E C
apit
al10
,393
.24
950.
7618
Mor
gan
Stan
ley
46,1
64.4
211
10.
9619
Scot
ia C
apit
al9,
853.
6344
0.72
19K
eyB
anc
Cap
ital
Mar
kets
44,2
26.2
532
40.
9220
Mor
gan
Stan
ley
8,86
6.15
320.
6520
SunT
rust
Ban
ks43
,258
.81
198
0.9
Su
btot
al1,
301,
515.
483,
248
94.9
4
Subt
otal
4,49
0,39
4.82
10,3
2393
.06
To
tal
1,37
0,89
0.39
3,45
410
0
Tota
l4,
825,
407.
8211
,287
100
Sour
ce: D
ealo
gic.
15
Designation of ‘Multi-Bank Financing’
Tab
le 1
.5 T
op m
anda
ted
lead
arr
ange
rs fo
r glo
bal s
yndi
cate
d lo
ans,
200
4–20
06
2006
2005
Ran
kM
anda
ted
Arr
ange
rD
eal V
alue
($) (
m)
No.
%sh
are
Ran
kM
anda
ted
Arr
ange
rD
eal V
alue
($) (
m)
No.
%sh
are
1JP
Mor
gan
414,
670.
391,
378
10.3
61
JP M
orga
n34
2,49
2.56
1,37
99.
912
Cit
igro
up32
5,23
1.88
1,01
48.
132
Cit
igro
up32
5,96
1.65
1,09
89.
433
Ban
c of
Am
eric
a29
6,28
3.28
1,54
87.
43
Ban
c of
Am
eric
a27
0,00
0.72
1,62
57.
814
RB
S17
5,24
6.05
583
4.38
4D
euts
che
Ban
k14
4,65
7.79
432
4.19
5D
euts
che
Ban
k16
4,77
2.80
427
4.12
5R
BS
142,
652.
5655
84.
136
BN
P Pa
riba
s15
2,34
2.12
777
3.81
6B
NP
Pari
bas
139,
534.
9779
94.
047
Bar
clay
s Cap
ital
130,
918.
8443
63.
277
Bar
clay
s Cap
ital
134,
160.
1949
93.
888
Wac
hovi
a11
6,49
9.85
802
2.91
8A
BN
AM
RO
118,
108.
4166
93.
429
Mit
subi
shi U
FJ
Fina
ncia
l Gro
up10
4,39
3.86
1,11
52.
619
Wac
hovi
a10
0,32
5.92
833
2.9
10C
redi
t Sui
sse
103,
040.
9429
72.
5710
HSB
C98
,895
.76
518
2.86
11A
BN
AM
RO
95,0
93.0
966
82.
3811
Cal
yon
97,9
95.0
549
12.
8412
Miz
uho
94,6
80.1
995
82.
3712
Miz
uho
83,5
88.1
079
92.
4213
Cal
yon
93,1
89.7
749
72.
3313
Cre
dit S
uiss
e78
,574
.55
266
2.27
14Su
mit
omo
Mit
sui
Ban
king
Cor
p87
,278
.99
864
2.18
14SG
Cor
pora
te &
In
vest
men
t Ban
king
78,1
78.6
137
42.
26
15G
oldm
an S
achs
79,4
09.9
419
91.
9815
Mit
subi
shi U
FJ F
inan
cial
Gro
up75
,396
.03
812
2.18
16H
SBC
79,3
72.4
041
31.
9816
Sum
itom
o M
itsu
i Ban
king
Cor
p67
,972
.19
694
1.97
17SG
Cor
pora
te &
In
vest
men
t Ban
king
67,0
85.9
932
51.
6817
Gol
dman
Sac
hs51
,138
.53
130
1.48
18M
orga
n St
anle
y52
,902
.93
119
1.32
18IN
G44
,106
.12
303
1.28
19U
BS
52,7
37.3
519
41.
3219
UB
S41
,355
.07
171
1.2
20Sc
otia
Cap
ital
48,2
53.2
327
51.
2120
Dre
sdne
r Kle
inw
ort
39,8
12.6
615
41.
15
Su
btot
al2,
733,
403.
887,
192
68.2
9
Subt
otal
2,47
4,90
7.43
6,80
871
.61
To
tal
4,00
2,83
4.32
9,42
710
0
Tota
l3,
456,
330.
038,
649
100
Multi-Bank Financing: What It is and is Not
16
Tab
le 1
.5 (
cont
.)
2004
Tota
l
Ran
kM
anda
ted
Arr
ange
rD
eal V
alue
($) (
m)
No.
%sh
are
Ran
kM
anda
ted
Arr
ange
rD
eal V
alue
($) (
m)
No.
%sh
are
1JP
Mor
gan
305,
429.
351,
373
11.6
61
JP M
orga
n1,
062,
592.
314,
130
10.5
42
Cit
igro
up26
4,32
5.69
1,02
210
.09
2C
itig
roup
915,
519.
213,
134
9.08
3B
anc
of A
mer
ica
245,
321.
401,
519
9.36
3B
anc
of A
mer
ica
811,
605.
404,
692
8.05
4D
euts
che
Ban
k11
9,72
4.13
447
4.57
4D
euts
che
Ban
k42
9,15
4.72
1,30
64.
265
Bar
clay
s Cap
ital
116,
447.
5346
64.
445
BN
P Pa
riba
s40
1,92
5.41
2,23
23.
996
BN
P Pa
riba
s11
0,04
8.33
656
4.2
6R
BS
392,
612.
751,
557
3.9
7A
BN
AM
RO
99,5
19.6
360
43.
87
Bar
clay
s Cap
ital
381,
526.
561,
401
3.79
8W
acho
via
91,6
65.3
579
33.
58
AB
N A
MR
O31
2,72
1.13
1,94
13.
19
RB
S74
,714
.14
416
2.85
9W
acho
via
308,
491.
112,
428
3.06
10H
SBC
70,6
85.8
341
52.
710
Cal
yon
253,
433.
941,
338
2.51
11C
alyo
n62
,249
.12
350
2.38
11H
SBC
248,
953.
991,
346
2.47
12M
itsu
bish
i UFJ
Fi
nanc
ial G
roup
56,8
79.6
353
42.
1712
Mit
subi
shi U
FJ
Fina
ncia
l Gro
up23
6,66
9.52
2,46
12.
35
13C
redi
t Sui
sse
54,1
25.2
024
02.
0713
Cre
dit S
uiss
e23
5,74
0.68
803
2.34
14Su
mit
omo
Mit
sui
Ban
king
Cor
p49
,490
.08
514
1.89
14Su
mit
omo
Mit
sui
Ban
king
Cor
p20
4,74
1.26
2,07
22.
03
15SG
Cor
pora
te &
Inve
stm
ent
Ban
king
46,4
12.2
328
61.
7715
Miz
uho
203,
528.
591,
957
2.02
16C
omm
erzb
ank
Gro
up33
,714
.90
211
1.29
16SG
Cor
pora
te &
Inve
stm
ent
Ban
king
191,
676.
8298
51.
9
17Sc
otia
Cap
ital
32,3
66.7
222
51.
2417
Gol
dman
Sac
hs15
7,64
2.92
433
1.56
18D
resd
ner K
lein
wor
t30
,079
.87
131
1.15
18U
BS
123,
082.
6954
01.
2219
Mer
rill
Lync
h29
,427
.69
139
1.12
19D
resd
ner K
lein
wor
t11
7,57
4.02
445
1.17
20U
BS
28,9
90.2
617
51.
1120
Scot
ia C
apit
al11
7,30
5.64
739
1.16
Su
btot
al1,
921,
617.
095,
398
73.3
4
Subt
otal
7,10
6,49
8.68
19,4
1670
.51
To
tal
2,62
0,18
5.85
6,71
610
0
Tota
l10
,079
,350
.19
24,7
9210
0
Sour
ce: D
ealo
gic.
17
Designation of ‘Multi-Bank Financing’
Tab
le 1
.6 T
op m
anda
ted
lead
arr
ange
rs fo
r EM
EA
synd
icat
ed lo
ans,
200
4–20
06
2006
2005
Ran
kM
anda
ted
Arr
ange
rD
eal V
alue
($) (
m)
No.
%sh
are
Ran
kM
anda
ted
Arr
ange
rD
eal V
alue
($) (
m)
No.
%sh
are
1R
BS
113,
948.
4732
17.
661
Cit
igro
up12
1,20
8.53
337
8.5
2C
itig
roup
90,9
46.3
926
66.
122
RB
S10
2,81
4.32
342
7.21
3B
arcl
ays C
apit
al85
,531
.89
256
5.75
3B
NP
Pari
bas
92,3
52.8
646
06.
474
BN
P Pa
riba
s84
,639
.12
399
5.69
4B
arcl
ays C
apit
al90
,294
.72
315
6.33
5D
euts
che
Ban
k83
,374
.22
166
5.61
5C
alyo
n73
,272
.99
271
5.14
6JP
Mor
gan
65,5
13.4
712
44.
416
HSB
C70
,903
.12
307
4.97
7C
alyo
n60
,983
.29
253
4.1
7SG
Cor
pora
te &
In
vest
men
t Ban
king
67,8
01.7
727
44.
75
8SG
Cor
pora
te &
In
vest
men
t Ban
king
54,9
49.1
423
83.
78
Deu
tsch
e B
ank
65,9
40.6
617
94.
62
9H
SBC
54,2
06.4
220
23.
659
JP M
orga
n63
,889
.28
145
4.48
10D
resd
ner K
lein
wor
t43
,186
.99
146
2.9
10A
BN
AM
RO
57,7
35.0
520
94.
0511
AB
N A
MR
O39
,958
.68
203
2.69
11D
resd
ner K
lein
wor
t39
,505
.88
150
2.77
12G
oldm
an S
achs
33,9
78.3
739
2.28
12IN
G34
,069
.84
202
2.39
13N
ATIX
IS33
,279
.32
170
2.24
13U
niC
redi
t Gro
up28
,805
.61
174
2.02
14C
omm
erzb
ank
Gro
up30
,455
.40
167
2.05
14N
ATIX
IS28
,282
.97
139
1.98
15C
redi
t Sui
sse
29,5
63.7
365
1.99
15C
omm
erzb
ank
Gro
up27
,098
.17
167
1.9
16M
orga
n St
anle
y25
,359
.97
331.
7116
Cre
dit S
uiss
e22
,281
.24
471.
5617
ING
25,1
77.3
719
51.
6917
Nor
dea
Ban
k A
B21
,975
.36
120
1.54
18N
orde
a B
ank
AB
25,0
51.8
913
31.
6818
Gol
dman
Sac
hs21
,864
.01
201.
5319
Ban
co S
anta
nder
Cen
tral
H
ispa
no S
A -
BSC
H24
,929
.52
104
1.68
19M
orga
n St
anle
y21
,616
.52
251.
52
20U
niC
redi
t Gro
up24
,817
.19
184
1.67
20U
BS
19,0
90.9
840
1.34
Subt
otal
1,02
9,85
0.83
1,70
069
.25
Subt
otal
1,07
0,80
3.85
1,70
675
.06
Tota
l1,
487,
114.
842,
157
100
Tota
l1,
426,
518.
652,
143
100
Multi-Bank Financing: What It is and is Not
18
Tab
le 1
.6 (
cont
.)
2004
Tota
l
Ran
kM
anda
ted
Arr
ange
rD
eal V
alue
($) (
m)
No.
%sh
are
Ran
kM
anda
ted
Arr
ange
rD
eal V
alue
($) (
m)
No.
%sh
are
1B
arcl
ays C
apit
al76
,251
.83
288
8.01
1C
itig
roup
283,
161.
8886
17.
332
Cit
igro
up71
,006
.96
258
7.46
2R
BS
272,
860.
8995
17.
063
BN
P Pa
riba
s68
,645
.51
359
7.21
3B
arcl
ays C
apit
al25
2,07
8.44
859
6.52
4R
BS
56,0
98.1
028
85.
894
BN
P Pa
riba
s24
5,63
7.48
1,21
86.
355
Deu
tsch
e B
ank
51,2
26.4
216
75.
385
Deu
tsch
e B
ank
200,
541.
2951
25.
196
JP M
orga
n50
,165
.50
126
5.27
6JP
Mor
gan
179,
568.
2539
54.
657
HSB
C48
,945
.66
233
5.14
7C
alyo
n17
9,25
6.69
707
4.64
8A
BN
AM
RO
45,1
89.8
219
64.
758
HSB
C17
4,05
5.19
742
4.5
9C
alyo
n45
,000
.41
183
4.73
9SG
Cor
pora
te &
In
vest
men
t Ban
king
159,
630.
5570
54.
13
10SG
Cor
pora
te &
In
vest
men
t Ban
king
36,8
79.6
419
33.
8710
AB
N A
MR
O14
2,88
3.55
608
3.7
11D
resd
ner K
lein
wor
t28
,463
.07
120
2.99
11D
resd
ner K
lein
wor
t11
1,15
5.94
416
2.88
12C
omm
erzb
ank
Gro
up24
,442
.11
148
2.57
12C
omm
erzb
ank
Gro
up81
,995
.68
482
2.12
13IN
G20
,573
.51
155
2.16
13N
ATIX
IS80
,659
.41
414
2.09
14N
ATIX
IS19
,097
.11
105
2.01
14IN
G79
,820
.71
552
2.07
15Ll
oyds
TSB
18,5
78.3
392
1.95
15U
niC
redi
t Gro
up72
,073
.82
485
1.86
16U
niC
redi
t Gro
up18
,451
.02
127
1.94
16G
oldm
an S
achs
67,7
87.7
984
1.75
17M
erri
ll Ly
nch
13,0
80.7
49
1.37
17C
redi
t Sui
sse
61,7
78.3
415
31.
618
Ban
c of
Am
eric
a12
,805
.43
501.
3518
Lloy
ds T
SB60
,124
.83
324
1.56
19N
orde
a B
ank
AB
12,1
08.7
180
1.27
19N
orde
a B
ank
AB
59,1
35.9
633
31.
5320
Gol
dman
Sac
hs11
,945
.40
251.
2620
Mor
gan
Stan
ley
51,5
27.1
573
1.33
Su
btot
al72
8,95
5.28
1,39
976
.59
Su
btot
al2,
815,
733.
834,
791
72.8
5
To
tal
951,
739.
111,
752
100
To
tal
3,86
5,37
2.59
6,05
210
0
Sour
ce: D
ealo
gic.
19
Designation of ‘Multi-Bank Financing’
Tab
le 1
.7 T
op m
anda
ted
lead
arr
ange
rs fo
r US
synd
icat
ed lo
ans,
200
4–20
06
2006
2005
Ran
kM
anda
ted
Arr
ange
rD
eal V
alue
($) (
m)
No.
%sh
are
Ran
kM
anda
ted
Arr
ange
rD
eal V
alue
($) (
m)
No.
%sh
are
1JP
Mor
gan
342,
957.
011,
217
18.2
1JP
Mor
gan
272,
602.
811,
197
17.3
62
Ban
c of
Am
eric
a28
1,36
1.18
1,47
014
.93
2B
anc
of A
mer
ica
247,
989.
571,
521
15.7
93
Cit
igro
up20
1,86
7.13
567
10.7
13
Cit
igro
up17
4,57
4.96
599
11.1
24
Wac
hovi
a11
2,68
4.39
745
5.98
4W
acho
via
98,9
17.2
879
76.
35
Deu
tsch
e B
ank
75,5
41.8
023
84.
015
Deu
tsch
e B
ank
77,1
83.8
023
94.
916
Cre
dit S
uiss
e66
,102
.96
216
3.51
6A
BN
AM
RO
51,5
74.4
237
23.
287
RB
S52
,710
.75
206
2.8
7C
redi
t Sui
sse
50,9
54.6
521
03.
248
BN
P Pa
riba
s48
,453
.28
204
2.57
8B
arcl
ays C
apit
al40
,384
.62
151
2.57
9A
BN
AM
RO
43,5
57.7
137
42.
319
RB
S37
,391
.77
201
2.38
10M
itsu
bish
i UFJ
Fin
anci
al
Gro
up41
,671
.80
188
2.21
10B
NP
Pari
bas
37,1
78.4
421
52.
37
11B
arcl
ays C
apit
al41
,240
.30
130
2.19
11W
ells
Far
go36
,342
.67
366
2.31
12G
oldm
an S
achs
39,0
63.2
514
62.
0712
GE
Cap
ital
26,7
10.2
530
11.
713
Wel
ls F
argo
38,1
39.7
641
02.
0213
Gol
dman
Sac
hs25
,743
.05
104
1.64
14M
erri
ll Ly
nch
36,5
33.8
419
31.
9414
SunT
rust
Ban
ks25
,550
.82
238
1.63
15G
E C
apit
al34
,532
.97
345
1.83
15M
itsu
bish
i UFJ
Fi
nanc
ial G
roup
24,8
05.4
616
61.
58
16U
BS
34,3
51.1
615
11.
8216
Scot
ia C
apit
al24
,423
.41
144
1.56
17PN
C B
ank
NA
33,4
13.6
722
81.
7717
Lehm
an B
roth
ers
24,1
25.0
310
41.
5418
Lehm
an B
roth
ers
26,5
96.5
511
81.
4118
Key
Ban
c C
apit
al
Mar
kets
22,7
91.0
528
81.
45
19M
orga
n St
anle
y25
,474
.76
821.
3519
UB
S22
,109
.19
129
1.41
20Su
nTru
st B
anks
25,1
19.9
420
81.
3320
Mor
gan
Stan
ley
16,7
85.7
157
1.07
Subt
otal
1,60
1,37
4.23
3,67
685
Su
btot
al1,
338,
138.
953,
464
85.2
Tota
l1,
884,
017.
674,
040
100
To
tal
1,57
0,49
9.76
3,79
310
0
Multi-Bank Financing: What It is and is Not
20
Tab
le 1
.7 (
cont
.)
2004
Tota
l
Ran
kM
anda
ted
Arr
ange
rD
eal V
alue
($) (
m)
No.
%sh
are
Ran
kM
anda
ted
Arr
ange
rD
eal V
alue
($) (
m)
No.
%sh
are
1JP
Mor
gan
247,
352.
041,
208
18.0
41
JP M
orga
n86
2,91
1.85
3,62
217
.88
2B
anc
of A
mer
ica
227,
976.
251,
419
16.6
32
Ban
c of
Am
eric
a75
7,32
7.00
4,41
015
.69
3C
itig
roup
163,
463.
7059
911
.92
3C
itig
roup
539,
905.
791,
765
11.1
94
Wac
hovi
a90
,813
.19
764
6.62
4W
acho
via
302,
414.
862,
306
6.27
5D
euts
che
Ban
k65
,408
.36
261
4.77
5D
euts
che
Ban
k21
8,13
3.96
738
4.52
6A
BN
AM
RO
43,8
34.9
731
33.
26
Cre
dit S
uiss
e16
0,08
3.40
621
3.32
7C
redi
t Sui
sse
43,0
25.7
819
53.
147
AB
N A
MR
O13
8,96
7.10
1,05
92.
888
Bar
clay
s Cap
ital
35,4
39.1
114
82.
598
BN
P Pa
riba
s12
0,01
3.28
618
2.49
9B
NP
Pari
bas
34,3
81.5
619
92.
519
Bar
clay
s Cap
ital
117,
064.
0342
92.
4310
Wel
ls F
argo
28,4
57.6
734
82.
0810
RB
S10
7,22
7.19
524
2.22
11Sc
otia
Cap
ital
25,3
91.9
616
01.
8511
Wel
ls F
argo
102,
940.
101,
124
2.13
12Su
nTru
st B
anks
23,7
14.7
425
61.
7312
Mit
subi
shi U
FJ F
inan
cial
G
roup
88,4
76.1
150
51.
83
13U
BS
23,0
73.2
814
61.
6813
GE
Cap
ital
81,7
18.7
490
11.
6914
Mit
subi
shi U
FJ F
inan
cial
Gro
up21
,998
.85
151
1.6
14G
oldm
an S
achs
79,7
80.0
533
11.
6515
Lehm
an B
roth
ers
20,9
16.2
410
21.
5315
UB
S79
,533
.64
426
1.65
16G
E C
apit
al20
,475
.52
255
1.49
16Su
nTru
st B
anks
74,3
85.5
070
21.
5417
RB
S17
,124
.67
117
1.25
17Le
hman
Bro
ther
s71
,637
.82
324
1.48
18B
ank
of N
ew Y
ork
17,1
23.6
515
21.
2518
Scot
ia C
apit
al70
,196
.31
393
1.45
19M
erri
ll Ly
nch
15,8
07.1
512
81.
1519
Mer
rill
Lync
h67
,635
.58
449
1.4
20G
oldm
an S
achs
14,9
73.7
581
1.09
20K
eyB
anc
Cap
ital
Mar
kets
60,7
35.4
971
01.
26
Su
btot
al1,
180,
752.
463,
208
86.1
3
Subt
otal
4,10
1,08
7.79
10,3
0484
.99
To
tal
1,37
0,89
0.39
3,45
410
0
Tota
l4,
825,
407.
8211
,287
100
Sour
ce: D
ealo
gic.
21
A. Increasing Participation of Other Financial Institutions
Non-bank fi nancial institutions have signifi cantly increased their rate of partici-pation and percentage share of both syndicated loans and secondary market practices. In the current market conditions they are providing about one-half of the liquidity in secondary market transactions and their share of the primary syndications is also increasing, even though it may not be as high as that in second-ary market transactions. The law is keeping pace with market developments, as seen in the commercial context for, and the trilogy of decisions in Argo Fund Ltd v Essar. In that case a syndicate of banks made a loan which contained restrictions as to the class of persons to whom the loan could be transferred. The loan agree-ment was the standard Loan Markets Association (LMA) 1997 form, which restricted a transfer to a bank or other fi nancial institution, and contained no defi -nition or elaboration of the term ‘other fi nancial institution’. In 1997, loan trad-ing was not as common as it was in 2004 when the case fi rst went to court. In 2004, in the fi rst of the decisions, which was an application for summary judg-ment, the Court held that the expression ‘fi nancial institution’ should narrowly be interpreted to apply to institutions akin to banks, a substantial proportion of whose business involved the making of loans.7 When the matter came to trial, the court adopted a broader, albeit still relatively narrow construction, and held that the expression ‘other fi nancial institution’ covered institutions that shared at least some characteristics of a bank.8 In the Court of Appeal, the expression ‘other fi nancial institution’ was given a yet broader interpretation of ‘a legally recognised form or being, which carries on business in accordance with the laws of the place of its creation and whose business concerns commercial fi nance’. Such an institution was not required to have bank-like characteristics such as the lend-ing of money, whether in the primary or secondary markets.9 In a decision that signifi cantly opened up the secondary loan market to a wider range of fi nancial institutions, the Court of Appeal held that the essential characteristic of a fi nancial institution was that it provides capital to fi nancial markets.10
7 Argo Fund Ltd v Essar [2004] All ER (D) 87 per Steel J.8 Argo Fund Ltd v Essar [2006] 1 All ER (Comm) 56 per Aikens J.9 Argo Fund Ltd v Essar [2006] 2 All ER (Comm) 104, 116 per Auld LJ, Hallett LJ
concurring (CA).10 ibid 120 per Rix LJ (CA). See further ch 2 below.
Designation of ‘Multi-Bank Financing’
1.13
Multi-Bank Financing: What It is and is Not
22
IV. Description of Multi-Bank Financing Transactions
Multi-bank fi nancing transactions may, for convenience, be divided into primary and secondary transactions. Primary transactions are those where the banks lend in concert from the outset. Secondary transactions are those where the lender grants to other fi nancial institutions a legal or economic interest in a loan that has been made or committed. Both primary and secondary loan practices entail some variety either in the number of procedures involved or the options available to the borrower and the banks. As sometimes happens in other human endeavours, the boundary between primary and secondary transactions can be imprecise. The different transactions are described next.
A. Primary Transactions
1. The Syndicated Loan11
A syndicated loan is one where two or more banks join together to lend to a single borrower on the basis of a single set of lending documents, of which the primary document is usually called a ‘loan agreement’, ‘credit agreement,’ ‘facility agree-ment’, or ‘loan facility agreement’.12 All the banks execute the one agreement and there is privity of contract between the borrower and each of the banks. Legally, each of the banks has a separate contract with the borrower even though, for convenience, the separate contracts are printed in one document.13 Any security taken for the loan is for the common benefi t of all the banks. They own propor-tionate interests in it even though for convenience it may be held or monitored by only one of them, often the agent bank; or an independent entity, often a trustee, for the benefi t of all.
Banks all over the world routinely syndicate loans. The largest and most conspicu-ous transactions tend to be international, and are arranged in the principal fi nan-cial centres of the world; for example London and New York. However, there are very many domestic syndications as well as international syndications that take place in other cities. The syndicated loan may combine a money loan, letter of credit facility, bank guarantee facility, or other credit facility. The money loan may take the form of a term facility or revolving facility. Indeed, the credit facility extended by the lenders to the borrower may combine a loan and a bond facility;
11 Also known as ‘primary syndication’, ‘true syndication’, ‘direct loan syndication’, ‘direct participation’, or ‘simple syndicate’.
12 In law, the name of the document does not matter as much as its substance. Indeed, many syndicated credits are known by labels such as ‘revolving facility’, etc.
13 RC Tennekoon, The Law and Regulation of International Finance (London: Butterworths, 2006) 45.
1.14
1.15
1.16
23
it all depends on what the borrower needs.14 Figure 1.1 illustrates the syndicated loan arrangement.
Figure 1.1 The Syndicated Loan
a. Common varieties of syndicated loans
There is a large variety of syndicated loans refl ecting the fl exibility of the fi nancing method in adapting to business enterprise. The following are some of the common varieties encountered today, and they were selected because they further describe syndicated loans.
i. Domestic versus euroloans There is perhaps not much difference in the reasons for, and the structures used in, domestic and euroloans. However, the mindset and many practical considerations are different. Domestic loans tend to be smaller, and will usually involve fewer banks than euroloans. They are also more likely to be made to leveraged borrowers, and be secured. The documenta-tion is also likely to be easier since most parties are resident in one jurisdiction. Perhaps the most important factor that infl uences the documentation is the mind-set of the funding mechanics. The working assumption in most domestic loans is that lenders will fund the loan from their depositor base. This infl uences the interest rate payable on the loan (which can be a fi xed rate), the lead-time needed for the borrower to make a drawdown (which can be as short as one day), and the terms of repayment. This contrasts with euroloans, where the working assump-tion is that the lenders will fund the loan by taking deposits in the interbank market. This in turn infl uences many factors, such as the interest rate payable on the loan (the rate will be fi xed at a level above the interbank rate, which usually fl uctuates). The lead time for the borrower to draw on the loan is longer (because the lenders have to take matching deposits and the agent has to determine the interest rate), and repayments must coincide with the selected interest periods other-wise the borrower will be liable to pay break costs. The large number of lenders from different jurisdictions in euroloans also necessarily infl uences the documen-tation of the loan to take account of matters such as different taxation regimes. The relative ease of arranging a domestic loan accounts for the presence of the
14 See ch 4 below on the various credit facilities.
Description of Multi-Bank Financing Transactions
1.17
1.18
Multi-Bank Financing: What It is and is Not
24
swingline facility in many syndicated loans, which is a loan that can be made at very short notice and acts as a backstop in a syndicated loan facility in case funding is required sooner than can be raised by conventional euroloan methods.
ii. Investment grade, leveraged, and middle market syndicated loans Loans may be categorized depending on the borrower15 and placed in any of the three categories of investment grade, leveraged, or middle market. Investment grade borrowers are those corporations that are highly rated (BBB- or higher by Standard and Poor’s, Baa3 or higher by Moody’s Investors Service, and/or BBB- or higher by Fitch Ratings). These companies tend to be large, established, and profi table, and usually obtain their long-term fi nancing from the issue of bonds or commer-cial paper, which are cheaper methods for them. However, they borrow by way of syndicated loans in the form of revolving credit as back-up for seasonal borrowing needs, backstop commercial paper, or fund acquisitions on a short-term basis.16 Many of the transactions are unfunded credits and are seldom used. For this reason, most of the lenders’ income comes from a facility or ‘non-use’ fee, and the lenders do not earn much interest income.17
Leveraged loans are a subset of corporate loans and are those generally with non-investment grade ratings (BBB- or below). A loan also qualifi es as leveraged even if the borrower is rated investment grade or not rated at all, but the loan is backed by security and has a spread of Libor +125 basis points or higher.18 These loans are more risky than the investment grade loans and are sometimes viewed as speculative-grade instruments. For the higher risk they carry, they also attract higher yield and attract higher interest rates than investment grade loans.19 The leveraged borrowers have signifi cantly less access to the public market alternatives, and thus loans are their best fi nancing alternative. Such loans are made to fi nance companies that are making acquisitions or large capital expenditures, refi nancing, or making dividend payments to shareholders. The loans are attractive to the lenders for several reasons. First, because of the higher interest income and higher front-end fees, even if the risk of default is higher than for investment grade loans; this also makes them attractive as a basis for building investment portfolios in collateralized debt obligations and collateralized loan obligations. Secondly, because the interest rate is periodically set above LIBOR, it keeps pace with
15 The focus would be on the borrower’s credit rating and debt burden, the pricing of the loan, and the borrower’s size.
16 S Miller, ‘Players in the Market’ in AA Taylor and A Sansone (eds), The Handbook of Loan Syndications and Trading (New York: McGraw-Hill, 2006), 48.
17 PC Vaky, ‘Introduction to the Syndicated Loan Market’ in Taylor and Sansone (n 16 above) 45.18 Miller (n 16 above) 47. A distinction is sometimes made between ‘crossover credits’, which are
those just below investment grade rating, and highly leveraged transactions (HLTs).19 AA Taylor and R Yang, ‘Evolution of the Primary and Secondary Leveraged Loan Markets’ in
Taylor and Sansone (n 16 above) 22.
1.19
1.20
25
changing interest rates. Thirdly, such loans are usually secured by the borrower’s assets and are further protected by covenants in the loan agreement. Covenant protection enables the lenders to monitor the borrower’s activities and reset con-ditions of the loan along the way if the covenants are breached. Collateral protec-tion enhances the chances of full recovery in case of default. As a result, leveraged loans are more attractive as investments than, for example, high-yield bonds.20
Middle market loans are generally a subset of leveraged loans, and are those made to companies whose smaller size limits their access to capital.21 These companies depend on bank loans as their primary fi nancing. The loans have their own attributes that set them apart from the larger leveraged loans. First, they are gener-ally smaller-size loans and attract less interest from the larger lenders. They thus tend to be less liquid and lack a broader following in the secondary market. They are also more likely to take the form of a club deal loan where a small group of relationship banks provide the loan.
Tables 1.8 and 1.9 show Global and EMEA syndicated loans split into the two categories of investment grade and leveraged lending. The tables show that most syndicated loans are made to investment grade borrowers, but the share of lever-aged lending is also signifi cant.
Table 1.8 Global syndicated loans—investment grade versus leveraged loans in 2006
Pos. Deal Type Deal Value ($) (m) No % share
1 Investment Grade 2,692,913.31 6,218 67.282 Leveraged 1,035,036.69 2,167 25.863 Highly Leveraged 274,884.31 1,042 6.87
Total 4,002,834.32 9,427 100
Source: Dealogic.
Table 1.9 EMEA syndicated loans—investment grade versus leveraged loans in 2006
Pos. Deal Type Deal Value ($) (m) No % share
1 Investment Grade 1,063,339.25 1,461 71.52 Leveraged* 423,775.59 696 28.5
Total 1,487,114.84 2,157 100
* Highly Leveraged not yet applicable for EMEA. If a deal is considered investment grade or leveraged depends on the rating of the borrower (IG vs non-IG). In the absence of a rating the pricing determines the status, with any deal priced 150bp and above considered as leveraged.Source: Dealogic.
20 ibid 23.21 Generally a mid-market loan is made to a borrower with EBITDA of US$50m or less and
with sales less than $500m. The loans tend to be less than $200m: Miller (n 16 above) 47; Vaky (n 17 above) 45.
Description of Multi-Bank Financing Transactions
1.21
1.22
Multi-Bank Financing: What It is and is Not
26
iii. Hybrid loan—bond facilities Some syndicated loans offer the greatest fl exibility to the borrower by providing several options in an omnibus package. Thus, a syndicated loan may combine some securities and lending methods in one package whereby a syndicate of banks underwrites a loan facility that is pri-marily funded by investors other than the syndicate banks. In such arrangements, the borrower/issuer initially aims at placing the notes (paper) in the market, usually through a tender panel, or to raise the money by the issue of bonds, or to get short-term single-currency or multi-currency advances. The syndicate banks are called upon to take up the notes that are not successfully placed or to fund the borrower to the extent that alternative methods do not succeed. In an alternative arrangement, the borrower simply has the option to borrow by way of bonds or by way of loan, without expressing at the outset which option will be the preferred one. In addition to the fl exibility obtained from the multiple options, the borrower obtains funds from diverse sources and at short-term rates. For the banks, lending at short maturities enables them to limit their exposure to risk and also maintain more liquid portfolios than would be the case with term loan facilities. The banks that are involved in placing the notes in the market earn a commission or make a profi t, and those that underwrite the facility earn fees for that commitment.
iv. Syndicated loans coupled with subordinated debt- mezzanine and high-yield fi nancing In some larger fi nancing transactions, the syndicated loan may be coupled with subordinated debt and other types of fi nancing in order to meet the needs of the borrower as well as potential lenders or investors. Increasingly, banks structure transactions depending on what the investors want, and will therefore include tranches with different risk/profi t profi les and tenors so as to appeal to different investors. For example, the fi nancial package would include the syndicated loan at one end, and equity fi nancing provided by the borrower’s sponsors at the other end. The proportion advanced by the syndicate lenders, who would often benefi t from security, is commonly referred to as senior debt and has the benefi t of being most assured of repayment of the loan. The equity providers enjoy the potential to benefi t from capital appreciation, but take the greatest risk as regards the borrower’s fi nancial situation. In between senior debt and equity would be subordinated debt or ‘intermediate capital’, which takes different forms. One common form, historically more prevalent in Europe, is mezzanine fi nancing,22 which typically benefi ts on a subordinated basis from the same security and guarantees as senior debt. The attraction of mezzanine fi nanc-ing is the contractual protections afforded to the lenders. Mezzanine has longer maturity, say ten years, attracts a high interest rate, for example LIBOR plus 8 to 10 per cent, and has some restrictions on pre-payment such that it attracts
22 Mezzanine is viewed as lying between debt and equity in terms of risk and return.
1.23
1.24
27
pre payment fees. The investors in mezzanine fi nancing tend to be banks which buy and hold debt instead of trading it. The alternative form of intermediate capital, historically more prevalent in the United States, is high-yield bond fi nancing. This is a bond facility and has the advantages of lower cost, greater covenant fl exibility, and liquidity. In practice, high-yield fi nancing is not very common any more, but its attractions are still utilized in some more popular structures. In recent years there has been a convergence of mezzanine and high-yield features, with the result that in Europe there are more high-yield bond structures that take advantage of the contractual protections given by mezzanine fi nancing.23 A more recent development that is still growing is second-lien fi nancing, which ranks after senior debt—but is not structurally subordinated—and above mezzanine debt. The tenor is typically shorter than mezzanine, say nine years, would have the same fi nancial covenants as senior debt, and attract a higher interest than senior debt, say Libor plus 5 per cent. Typically the buyers of second liens are funds and not banks. The legal aspects of these structures have not been tested and there is very little history of workout situations in Europe. They nonetheless present diverse opportunities for investors both in distressed and normal situations. Figure 1.2 illustrates a fi nancial package with tranches that include a syndicated loan, intermediate capital, and equity fi nancing.
Figure 1.2 Syndicated Loans and Intermediate Capital
v. Loans sold down as part of primary syndication A prominent feature of the syndicated loan market in recent years is that many large deals are underwritten by one bank or a small group of banks and sold down later as part of the primary syndication.24 The ‘purchaser’ institutions sign the original syndicated loan
23 DA Brittenham et al, ‘High-yield Financings: Recent Structural Developments’ in The Euromoney Syndicated Lending Handbook 2004.
24 It is important to avoid front running, which is a practice where a lender sells its commitment in the secondary market before the primary syndication is complete.
Description of Multi-Bank Financing Transactions
1.25
Multi-Bank Financing: What It is and is Not
28
documents and include different types of fi nancial institutions in addition to banks. Through this development and the secondary market practices, non-bank fi nancial institutions hold an increasing proportion of syndicated loans. This is a very important development that has signifi cant procedural, practical, and legal implications. First, the mandate and the documents that follow it need to anti-cipate a sell-down to different types of fi nancial institutions in the primary market. It may be necessary to obtain a rating for the loan because such is a require-ment for the investment by a number of non-bank fi nancial institutions. The loan structure may need to be delivered in tranches to appeal to a variety of investors, and the transfer language of the loan may need to be very fl exible from the outset so as to appeal to different investors. The participation of non-bank fi nancial institutions also increases the liquidity in the market. It also makes deals complete faster. Whereas the banks may need days or weeks to complete a credit assessment of a particular loan, some non-bank institutions can provide money in a much shorter time, thus presenting a direct challenge to bank fi nancing. The involve-ment of non-bank fi nancial institutions may also affect the character of lending generally. In cases where the borrower has diffi culties, the non-bank lenders may be less accommodating than the banks are known to be.
b. Niche-market syndicated loans
Some syndicated loans entail unique structures or arrangements because of the underlying business which they fi nance. Some examples in this category are loans used in mergers and acquisitions, project fi nancing, shipping, oil drilling, seafood production, and commodity and trade fi nancing. Two examples illustrate.
i. Syndicated loans used in mergers and acquisitions Each M&A deal is unique—their main general features are, however, complexity, speed, confi denti-ality, and the use of back-up facilities. The complexity arises due to a number of factors. The fi rst set of factors relate to the acquiring company, its business opera-tions, and the way in which it is funded. Often the acquiring company is a large conglomerate consisting of a group of companies with business operations in different geographical regions. It would often designate one of the entities within the group as the senior borrower and intending purchaser of the target company. The fi nancial interrelatedness between the group of companies would remain, however, with the group members giving one another fi nancial assistance, cross-guarantees, possibilities of set-off, and loan related possibilities such as cross-default. The second set of factors relate to the target company, its business operations, and the way in which it is funded. The target company itself may consist of a group of related companies with global operations and complex fi nancial arrangements. The acquiring company may take over all or only part of the target group of companies, and the standing fi nancial arrangements for the
1.26
1.27
29
target company would need to be streamlined to fi t into the acquisition model. The third set of issues arises from the fi nancial arrangements. First, it is a require-ment of mergers and acquisitions transactions that the intending acquirer should have concluded the fi nancial arrangements for the takeover. This is the ‘certain funds’ requirement, which obliges the intending acquirers to have committed funds, usually in the form of back-up facilities and the fi nancial readiness to com-plete the transaction if the commercial aspects should succeed. Secondly, the acquiring company needs to arrange term and revolving facilities, including overdraft facilities, guarantees, bonds and letters of credit to fi nance the takeover of the target company, and also needs to look at the post-acquisition stage to the fi nancing of the new merged entity. This could involve paying off some debt for the target company as well as working capital for the entire group. Finally, the fi nancial arrangements would need to be structured to meet the needs of the borrower as well as the different types of lenders and investors; and will therefore include senior loan facilities (including alphabet loans and revolving loans), second lien loans, and mezzanine or high yield loans. All of these arrangements would need to be put together confi dentially and with speed. The interplay of these relationship and facilities is illustrated by Figure 1.3 below.
ii. Syndicated loans used in project fi nancing In the category of syndicated loans used for project fi nancing, the fi nancing structure has unique features because of the way in which it relates to the borrower and other structures and the location and complexity of the project. While there is no uniform defi nition of project fi nancing, and the projects differ greatly in size and industry, ‘project fi nancing’ is understood to mean the fi nancing of long-term infrastructure, industrial projects, and public services based upon a non-recourse or limited recourse fi nancial structure where project debt and equity is used to fi nance the project and the lenders are paid back from the cashfl ow generated by the project.25 Common large projects include power generation, pipelines, transport systems, mining facilities, industrial and heavy manufacturing plants, and tele-communications infrastructure; and small projects include schools and health-care facilities.26
25 International Project Finance Association (IPFA) website at <http://www.ipfa.org>.26 According to the World Bank, fi nancial institutions provided US$969,432m in project
fi nancing between 1990 and 2005: <http://ppi.worldbank.org/explore/ppi_exploreRankings.aspx>.
Description of Multi-Bank Financing Transactions
1.28
Multi-Bank Financing: What It is and is Not
30
Figure 1.3 Syndicated Loans in Mergers and AcquisitionsSource: LMA website.
31
Project fi nancing is notoriously complex,27 usually involves sensitive issues,28 and is often in challenging locations. It has nonetheless fl ourished over the years as a distinct type of fi nancing because it has several advantages for all the parties.29 First, from the business viewpoint most of the projects, especially those in developing countries, have a state offtaker. Secondly, there are other economic reasons, such as tax advantages, protected margin, and off-balance sheet treat-ment, that justify long tenors of debt, ie average tenor is twenty to twenty-fi ve years.30 Perhaps most importantly, there is a comprehensive structure and risk allocation.31 The project ensures that the structure is in place, there is a product, and a taker of the product. The main advantage from the legal and docu-mentation angle arises from the non-recourse or limited recourse nature of project fi nancing. This feature is not inherent in project fi nancing but is a key attraction and therefore always contracted for. Non-recourse means that the repayment to the lenders is derived from and limited to the revenue generated by the project itself; while limited recourse means that the repayment obligation is limited to the
27 It is estimated that a large project fi nancing may involve about 15 parties and approximately 40 contracts. The contracts may include construction contracts, equipment contracts, labour contracts, independent feasibility studies, supervision agreements, power and water supply agree-ments, and insurance policies. The multiple participating entities are united by a common fi nancial interest, but they obviously have divergent interests that have to be carefully managed for the success of the entire project and for its whole lifetime. See eg B Esty, Modern Project Financing (Chichester: John Wiley, 2006) ch 1; J Dalhuisen, Dalhuisen on International Commercial, Financial and Trade Law (Oxford: Hart, 2nd edn, 2004) 95; RE Akbiyikli, D Eaton; and AL Turner, ‘Project Finance and the Private Finance Initiative (PFI)’ (2006) 12(2) Journal of Structured Finance; C Wright and A Rwabizambuga, ‘Institutional Pressures, Corporate Reputation and Voluntary conduct: An Examination of the Equator Principles’, (2006) 111(1) Business and Society Review 97.
28 eg environmental issues and social issues: see ch 11 below.29 The most visible parties in any deal are the following: (1) The host government: this is the
government of the country in which the project is being constructed. It usually has a keen interest in the success of the project in terms of providing some social or economic infrastructure. (2) The sponsors: these are the investors and managers of the project. They usually make an equity invest-ment, assume most of the risk, and stand to profi t if the project succeeds. (3) The lenders: they are usually fi nancial institutions, of which the most visible groups are the commercial banks. They lend funds and take security over the project assets. There may also be export credit agencies and multilateral institutional lenders. (4) The project entity: usually called the SPV or SPE.
30 In 2000, 26% of project fi nancing was for 15 years or longer. In 2006, 40% of project fi nancing is for 15 years or longer. In PPP and PFI it is 25 years or longer.
31 Any single project involves a number of risks such as completion risk, operation risk, revenue and price risk, political risk (interference or expropriation), environmental and social risk, and legal risk. The project sponsors and lenders identify, assess, and quantify such risks and allocate them to the party best equipped to manage the risk, thus improving the possibility for success of the project: See eg PR Wood, Project Finance, Subordinated Debt and State Loans (London: Sweet & Maxwell, 1995) 1–7; A Fight, Introduction to Project Finance (London: Butterworths – Heinemann, 2005)50; JD Finnerty, Project Financing: Asset Based Financial Engineering, (Wiley, 2nd edn, 2007) xx; D Blumental, ‘Sources of Funds and Risk Management for International Energy Projects’ (1998) 16 Berkeley Journal of International Law 271; W M Stelwagon, ‘Financing Private Energy Projects in the Third World’ (1996) 45 Catholic Lawyer 37; Akbiyikli, Eaton, and Turner (n 27 above); AO Vega, ‘Risk Allocation in Infrastructure Financing’ (1997) Journal of Project Finance 38; M Sorge, ‘The Nature of Credit Risk in Project Finance’ (December 2004), BIS Quarterly Review.
Description of Multi-Bank Financing Transactions
1.29
Multi-Bank Financing: What It is and is Not
32
project and certain identifi ed and usually limited assets rather than the sponsors.32 Thus, the lenders may neither sue the sponsors on the personal covenant to repay the debt nor look to the assets beyond the project assets. The lenders’ only remedy for non-payment of the project debt is the enforcement of the security,33 except where there has been a non-observance of the sponsor’s obligations in the project documents.34 The non-recourse feature of project fi nance loans is generally achieved by the establishment of a special purpose vehicle (SPV) or special purpose entity (SPE),35 which is created and designed to be separate from the project sponsor. The SPV is designed to construct, own, and operate the project. It holds all project assets and its business scope is usually limited to the project alone. The SPV enables the project sponsors to isolate the project from the sponsors’ other businesses, with the consequence that any failure or other fi nancial diffi culty of the project does not directly damage the sponsors’ fi nancial condition.36 In turn this enables fi nancial institutions to participate in high-risk transactions without diminishing their creditworthiness or fi nancial stability.
In a syndicated project fi nancing, the borrower will typically be the SPV. The total fi nance package may consist of the syndicated loan provided by the fi nancial institutions and credit extended by other creditors (for example trade creditors), as well as equity from the project sponsors. Many projects, particularly those in developing countries and challenging locations, also usually involve export credit agencies and multilateral institutional lenders. The syndicate lenders look for payment exclusively from the SPV, but also have the benefi t of security, guarantees and other structural enhancements (in the case of limited recourse loans).37 The simplifi ed diagram in Figure 1.4 illustrates the relative position of the syndicated loan in project fi nancing.
32 This distinguishes project fi nance from corporate fi nance, where the obligation to repay the loan is backed by a sponsoring company and its entire balance sheet.
33 The project is structured so that other creditors may not look to the project assets for the repayment of separate, non-project debt.
34 G Vinter, Project Finance (London: Sweet & Maxwell, 2nd edn, 1998) 111.35 SPV and SPE are interchangeable. SPE is more commonly used in the US while SPV is more
commonly used in the UK.36 Blumental (n 31 above) 270.37 N Nassar, ‘Project Finance, Public Utilities and Public Concerns: A Practitioner’s Perspective’
(2000) 23 Fordham International Law Journal 60.
1.30
33
Figure 1.4 Syndicated Loans in Project FinancingSource: Handbook of Loan Syndications.
2. Club Deal Loans
There is no fi nancing structure universally acknowledged to be the ‘club deal’ loan. The phrase denotes a ‘miscellaneous’ category similar to the syndicated loan. Club deal loans usually involve fewer banks—say two to fi ve—than syndicated loans, which usually have a larger number of banks—say twenty to thirty, although, on occasion, hundreds of banks have been involved.38 Alternatively a club deal may be categorized as such because of the smaller loan amount, say US $25 mil-lion to $100 million that is pre-marketed to a group of relationship banks.39 Sometimes the club deal is a bridge to a larger loan, whereby a few banks, with which the borrower has an existing relationship, arrange bridge fi nancing. At other times the club deal loan is all that is contemplated. The borrower may itself arrange the club loan.
Taking a global view, there are two common meanings of a club deal. According to one meaning, a club deal is essentially the same as a syndicated loan except that there is no general syndication of the loan. The few banks that obtain the borrow-er’s mandate, or those that are put together at the outset, sign the same syndicated loan agreement, provide the funding, and hold on to their loan commitments.
38 One cannot over-generalize: a typical syndication in London would consist of 20–30 banks; the Eurotunnel project involved 220 lenders.
39 See eg Taylor and Sansone, (n 16 above) 49.
Description of Multi-Bank Financing Transactions
1.31
1.32
Multi-Bank Financing: What It is and is Not
34
It is similar to a private placement in this respect.40 Tables 1.10, 1.11, and 1.12 below show comparative fi gures for club deals for the years 2004–06 in three respects: (1) club deals as a proportion of total global syndicated loans; (2) club deals as a proportion of total syndicated loans in EMEA; and (3) the top countries for club deals.
Table 1.10 Club deal loans—proportion to global syndicated loans, 2004–2006
Club Deals Total % of Clubs
Credit Date by Year Deal Value $ (m) No Deal Value $ (m) No Deal value $ No
2004 210,776.00 503 2,620,185.84 6,716 8% 7%2005 250,610.24 587 3,456,330.03 8,649 7% 7%2006 259,645.57 574 4,002,834.32 9,427 6% 6%Total 721,031.81 1,664 10,079,350.19 24,792 7% 7%
Source : Dealogic.
Table 1.11 Club deal loans—proportion to EMEA syndicated loans, 2004–2006
Club Deals Total % of Clubs
Credit Date by Year Deal Value $ (m) No Deal Value $ (m) No Deal value $ No
2004 171,426.17 313 951,739.11 1,752 18% 18%2005 190,513.01 345 1,426,518.65 2,143 13% 16%2006 200,931.79 340 1,487,114.84 2,157 14% 16%
Total 562,870.97 998 3,865,372.59 6,052 15% 16%
Source : Dealogic.
Table 1.12 Top countries for club deal syndicated loans, 2004–2006
Pos. Deal Nationality Deal Value ($) (m) No %share
1 United Kingdom 149,826.55 225 20.782 France 95,389.67 68 13.233 Spain 73,459.19 175 10.194 Australia 71,379.44 199 9.95 Netherlands 34,720.82 44 4.82 Subtotal 424,775.67 711 58.91
Total 721,031.81 1,664 100
Source : Dealogic.
40 T Rhodes (ed), Syndicated Lending: Practice and Documentation (London: Euromoney, 4th edn, 2004) 198.
35
The second meaning of a club deal loan, less common in the United Kingdom and the United States,41 is one in which the banks act in a loose association to make parallel bilateral loans simultaneously to the borrower. Each loan is a discrete, single-lender transaction, even though the borrower commonly negotiates the loans on the basis of a single loan document. A borrower opts for a club deal facility usually because it already has established relationships with several banks and would like to borrow from them separately. Sometimes the borrower hopes to negotiate more favourable terms if it approaches the banks separately, or hopes to get a cheaper loan by playing the banks against one another.42 Figure 1.5 illustrates this type of club deal.
Figure1.5 The Club Deal Loan (Alternative Meaning)
The banks that agree to lend by way of the second type of club deal typically make it a condition of their loans that there should be an inter-creditor agreement providing for cooperation in several areas that are important to them. In particu-lar they agree to receive payment from the borrower in proportion to the loans advanced, and to share rateably any proceeds realized from the loans in other ways such as set-off or the realization of collateral. They also agree to a set procedure to be followed before making a demand on the loans or realizing collateral, and to exchange information concerning the borrower. In addition, they agree among themselves not to assign an interest in the loan to a person who has not agreed to be bound by the inter-creditor agreement.43 The cooperation provisions of an inter-creditor agreement are very similar in form and substance to those found in syndicated loans; they emphasize collective action and the avoidance of competi-tion in making collections from the borrower. The mindset in a club deal loan is different, though. The banks involved deal closely with each other and have to agree on every material thing. This contrasts with the syndicated loan where the
41 At least in the past this meaning applied in Canada and Australia.42 JA Levin, ‘Multi-bank Financings’ in Negotiating and Drafting Commercial Bank Documents
(Toronto: Insight, 1987) TAB IV, 2; PH Harricks, ‘Legal Aspects of Multi-lender Financing’ (1991) 8(3) National Insolvency Review 40, 43.
43 Levin (n 42 above) 2–9; Harricks (n 42 above) 44–5.
Description of Multi-Bank Financing Transactions
1.33
1.34
Multi-Bank Financing: What It is and is Not
36
majority rules, and the banks on the periphery may not get much say in the loan documentation or, later on, the crucial decisions.
B. Secondary Loan Market Practices
Secondary loan market practices are those where the original syndicate member passes to another party an interest in its loan, or engages in any subsequent transaction in relation to the loan interest.44 Through this market, the syndicate member/lender or investor is able to sell the whole or part of a loan to other lend-ers or investors, or may engage in other transactions in relation to the same loan. Any lender or investor is also able to buy or acquire interests in other loans to supplement its existing portfolio. The traders, investors, and lenders who acquire interests in the secondary market provide capital, thereby performing an impor-tant function of adding liquidity in the overall loan market.45 The continuous development of this market means that trading or other dealing in syndicated loans is now a common feature of the fi nancial markets. Borrowers have increas-ingly accepted that their loans will be assigned or transferred, and increasingly the loans are acquired as investments by institutional investors46 and a vast array of fi nancial institutions. Secondary market practices are legally effected by nova-tion (which is the method primarily used in England), assignment (in this book also called loan participation), declaration of trust, and sub-participation. These methods are considered in detail in chapter 8 below.
The secondary loan market has existed since the 1980s (even though not neces-sarily under that label), and has evolved from occasional transactions negotiated and sold on an ad hoc basis to commoditized transactions sold on the basis of standard documents. To date, the most common secondary market practices in London are sub-participation, loan trading, credit derivatives, and collateralized debt obligations. They were preceded by practices that have all but disappeared in London but are used in some form or other in other parts of the world.47 A brief study of some of the earlier practices illuminates current efforts at standardization, and brings home the message of continuous development of fi nancial practices.
44 The wider expression ‘secondary debt market’ includes bonds, loans, letters of credit, and promissory notes.
45 Accord, Argo Fund Ltd v Essar Steel Ltd [2006] 2 All ER (Comm) 104, 120 (CA) per Rix LJ.46 In the US, institutional investors have held 40–50% of syndicated loans since at least the turn
of the century. In Europe at the turn of the century they held only a 2–3% share of the loans, but in 2006 their share in addition to that of hedge funds is estimated to be approaching 50%: See G Tett, ‘Hedge Funds move on Corporate Loans’ Financial Times, 11 May 2006.
47 Transferable loan instruments (TLIs), transferable loan certifi cates (TLCs), revolving under-writing facilities (RUFs), transferable revolving underwriting facilities (TRUFs), etc. Rhodes (n 40 above) 17; earlier editions of the book carried detailed analysis of these disappearing practices.
1.35
1.36
37
It also puts in context the harmonization efforts of the LMA, LSTA, APLMA, and bodies with similar aims.
1. Loan Participation and Loan Sub-participation: Early Differences between New York and London Practices
A bank can grant a participation in its loan and thereby engage in a secondary loan market practice. While this is the simplest secondary loan practice, the preferred method of going about it has traditionally been different in New York and London. In the early phases of the secondary loan market in the United States,48 the domi-nant method by which banks transferred interests in their loans to other banks was by way of a sale or assignment of the debt.49 In most instances the assignment was not notifi ed to the borrower and was for only a part of the loan.50 The conse-quence was that the initial lender remained the lender of record and there was no direct legal relationship between the borrower and the participant. A further progression of this practice was the assignment and acceptance agreement,51 by which the original lender relinquished its rights and obligations under the loan and a direct legal relationship was created between the borrower and the partici-pant. The assignment and acceptance agreement is now the favoured secondary market method among the dominant and most frequent users of loan trading in New York. In England, on the other hand,52 the early phases of the secondary market did not use the assignment of loans because of the constraints of the assignment method. The main reasons were that fi rst, assignments attracted stamp duty,53 and secondly the major borrowers successfully objected to the assignment of their loans. As a result, the original lenders used sub-participations, whereby they accepted deposits in their own names from other fi nancial institutions and promised repayment by reference to a cashfl ow received from the borrower. In due course, the London international fi nancial market developed two methods for transferring large loans: the transferable loan instrument, which was based on the principle of assignment; and the transferable loan certifi cate, which was based on the principle of novation. The concepts of these two methods, particularly the transferable loan certifi cate, are the predecessors of the modern secondary loan market method of loan trading, which is based on the principle of novation.
48 The same was true for Canada, Australia, and South Africa.49 In England these transactions would have been accomplished under the Law of Property
Act 1936 which provides for the conditions of the legal assignment.50 Under English law this would be an equitable assignment.51 New York law does not have the concept of novation as English law does. The effect of a
novation is achieved by a legal transaction called an assignment and acceptance agreement.52 The same was true for New Zealand.53 This no longer applies.
Description of Multi-Bank Financing Transactions
1.37
Multi-Bank Financing: What It is and is Not
38
2. Loan Sub-participations54
A sub-participation is a popular method of raising funds by the lead bank. It is a back-to-back loan whereby the sub-participant lends to the lead bank on terms that the sub-participant will be repaid only if the lead bank is repaid by the under-lying borrower.55 The lead bank grants to the participant rights over, or an interest in, the loan. This involves the creation of new rights and obligations between the lead bank and the sub-participant, rather than the transfer to the participant of the lead bank’s rights and obligations vis-à-vis the borrower. The sub-participant does not become a party to the loan agreement, and cannot therefore enforce or get the benefi t of the terms and conditions of the loan agreement. As such, the sub-participation is a limited recourse funding to the lead bank, which obtains funds from the participant but is not obliged to repay the loan until it has received payment from the underlying borrower. The same arrangement may alternatively be seen from the sub-participant’s angle as the placement of funds with the lead bank in return for an undertaking to receive a stream of income that is meas-ured by reference to the funds that the borrower repays the lead bank. Such a scheme is legally valid because the law allows loan contracts that are repayable on the happening of a contingency.56 However, the sub-participant is exposed to a double credit risk. First, the borrower may default to the lead bank, and secondly, the lead bank may default to the sub-participant. Figure 1.6 illustrates the sub-participation.
54 In some other literature these are called ‘participations’ or ‘funded sub-participations’.55 Lloyds TSB v Clarke [2002] 2 All ER (Comm) 992, 997 (PC) per Hoffmann LJ;
Interallianz Finanz AG v Independent Insurance Co Ltd [1997] EGCS 91 (Ch), D Warne and N Elliott, Banking Litigation (London: Sweet & Maxwell, 2005) 160; PR Wood, International Loans, Bonds and Securities Regulation (London: Sweet & Maxwell, 1995) 110–11; GA Penn, AM Shea, and A Arora, The Law and Practice of International Banking (London: Sweet & Maxwell 1987) 147; M Allen, ‘Asset Sales—An Analysis of Risk for Buyers and Sellers’ [1987] 1 JIBL 13, 14; M Bray, ‘Developing a Secondary market in Loan Assets’ International Financial Law Review, October 1984, 22, 23.
56 See eg Waite Hill Holdings Ltd v Marshall [1983] 133 NLJ 745 (QB).
1.38
39
Figure 1.6 The Loan Sub-participation
Since the loan agreement between the borrower and the lead bank is entirely separate from that between the lead bank and the sub-participant, the sub-participant does not acquire any legal or benefi cial interest in the underlying debt and, consequently, does not have any enforceable rights against the borrower.57 The sub-participant merely has an unsecured contractual claim against the lead bank, but cannot maintain a legal or equitable claim against the underlying borrower. This, in turn, means that the sub-participant runs a double credit risk—that either the lead bank or the underlying borrower will not be able to pay when it is required to. Moreover, the sub-participant generally does not acquire the right to participate in the management of the underlying loan.58 However, if it sub-participates in the whole loan, then it usually negotiates for and obtains some control of the loan. A sub-participation is particularly appealing where the loan agreement between the lead bank and the borrower restricts the lead bank’s power to assign the loan. A sub-participation does not infringe such a restriction since the lead bank borrows from the sub-participant, and does not grant to the sub-participant any interest in the underlying loan. It can, therefore, be used to liquefy the lead bank’s loan asset while, at the same time, keeping the transaction between the lead bank and the sub-participant a private matter between themselves.
57 Lloyds TSB v Clarke (n 55 above) 997 (PC) per Hoffmann LJ; Warne and Elliott (n 55 above) 160; Wood (n 55 above) 110–11; Allen (n 55 above) 14.
58 Bray (n 55 above) 23.
Description of Multi-Bank Financing Transactions
1.39
Multi-Bank Financing: What It is and is Not
40
3. Loan Participations59
a. General description
In a loan participation, as it is generally understood in USA, Canada and Australia, a bank transfers undivided interests in its loan (or the commitment to lend) to other banks.60 The borrower’s loan contract is only with the original lender. This lender, the lead bank, then acts in its own interest and on its own behalf to induce other banks (the participants) to acquire interests in undivided parts of the loan. Only the original lender holds legal title to any security taken for the loan, even though the lenders that subsequently acquire portions in the loan own equitable interests in the security.61 Figure 1.7 below, illustrates the participation arrangement:
Figure 1.7 The Loan Participation
b. Differentiation between types of loan participation
A review of the practices that have been called participations reveals different sub-categories. Understanding the different sub-categories is important because current practice evolved from the various sub-categories and their study illustrates the different legal relations intended by the parties. Because participations and the underlying loans take place between parties with widely varying interests, there are many sub-categories62 which refl ect the diversity in business deals. This sec-tion will discuss some factors that can be used to differentiate between loan participations.
59 This is also called ‘asset sale’, ‘assignment’, the ‘participation syndicate’, or ‘indirect participation’.
60 This would be an equitable assignment under English law. See eg US cases on loan participa-tions in ch 6 below. Re Canadian Commercial Bank; Canadian Deposit Insurance Corporation v Canadian Commercial Bank [1986] 5 WWR 531, 533ff. (Alberta QB).
61 AL Armstrong, ‘The Developing Law of Participation Agreements’ (1968) 23 Business Lawyer 689, 692–3.
62 D Scholl and TL Weaver, ‘Loan Participations: Are they “Securities”’? (1982) 10 Florida State University Law Review 215, 225.
1.40
1.41
41
i. Method of transferring an interest Loan participations may be differenti-ated on the basis of the legal method by which the lead bank transfers an interest in the loan to the participants. This is of paramount importance in determining the legal relationship between the parties involved, ie between the borrower and the banks, and between the banks themselves. For instance, a transfer that is effected by an assignment will result in legal relations that are different from those that result from a transfer effected by a novation. Where an assignment is used, the lead bank assigns its rights, but not its obligations, to the participants. The lead bank thus remains responsible for performing the loan obligations, such as fund-ing the loan, towards the borrower. In contrast, a novation results in a substitution of the participant for the lead bank vis-à-vis the borrower for both the rights and obligations of the loan.63 In such a situation, the participant would be responsible for funding the loan as well. These distinctions are further discussed in chapter 8 below.
ii. True versus quasi participations The distinction between ‘true’ and ‘quasi’ participations was made in North American practice a few decades ago and it could be that a parallel development has recently occurred in Europe. The distinction depends on the point in time at which the participants join the arranger or lead bank in making the loan. In the ‘true’ participation, which comprises the majority of cases, the lead bank, acting alone and in its sole interest, makes a loan to the borrower, and later transfers all or a portion of the loan to other banks. In the ‘quasi’ participation, the lead bank forms the participation group after identifying the borrower but before making the loan.64 In the quasi participation, the lead bank acts more or less like the participants’ agent. The participants may have a say on the loan structure and documentation, even though the borrower deals only with the lead bank. The distinction between ‘true’ and ‘quasi’ partici-pations may have important implications, for example, for the relationship among the banks. For instance, in ‘quasi’ participations, there can possibly be an argument that the lead bank is an agent for the banks.65 These arguments do not carry much weight in ‘true’ participations.66 The parallel development in Europe is one where the bank underwrites a loan and later sells it down as part of the pri-mary syndication.67
63 The legal features of assignment and novation are presented in ch 8 below.64 WC Tompsett, ‘Interbank Relations in Loan Participation Agreements: From Structure to Work
Out’ (1984) 101 Banking Law Journal 31, 32; EG Behrens, ‘Classifi cation of Loan Participations following the Insolvency of the Lead Bank’ (1984) 62 Texas Law Review 1115, 1120, n31.
65 Another, less plausible argument, at least in the UK context, is that the banks are engaged in a joint venture. See JD Hutchins, ‘What Exactly is a Loan Participation?’ (1978) 9 Rutgers-Camden Law Journal 447, 475.
66 J Ziegel, ‘Characterization of Loan Participation Agreements’ (1988) 14 Canadian Business Law Journal 336, 340–2.
67 On loans that are sold in primary syndication, See 1.25 above.
Description of Multi-Bank Financing Transactions
1.42
1.43
Multi-Bank Financing: What It is and is Not
42
iii. Funded versus risk participations In a funded participation, the participant places with the lead bank its proportionate share of funds (the participation) either at the time it acquires an interest in the underlying loan, or contemporaneously with the lead bank disbursing the funds to the borrower.68 In a risk participation, on the other hand, the participant contractually commits itself to bear part of the loss if the borrower defaults in repaying the lead bank. It is only after the borrower’s default that the lead bank obtains the participant’s funds.69 The partici-pant’s obligation may take the form of a guarantee or an indemnity that runs in favour of the lead bank.70 Whereas the participant earns a participation fee in both funded and risk facilities, it is required immediately to contribute funds in a funded facility. In contrast, it is only required to give a contractual commitment to pay in the case of a risk facility. Risk participation is the basis for syndications of letters of credit and some types of bank guarantees.
iv. Recourse versus non-recourse participations Though the distinction is not made in practice in England today, it is important to note that participations may be sold with or without recourse to the lead bank.71 In the recourse situation, the lead bank adds its own undertaking to pay the participant even if the borrower does not make any payments. Participants that have rights of recourse essentially have the lead bank’s guarantee that they will recoup their outlay from the partici-pation relationship. Even though such a guarantee is only as good as the bank that gives it, it is usually substantially better than the non-recourse situation. In the non-recourse situation the participant solely relies for payment on the borrower’s repayments to the lead bank. The ability of the participant to have recourse to the lead bank may be of some signifi cance, particularly where the legal nature of the relationship between the lead bank and the participant is in issue. A participation sold with recourse to the lead bank arguably points to a relationship whereby the lead bank can be deemed to have borrowed from the participant in order to fi nance the underlying borrower. See further chapter 6 below on the debt theory: debtor-creditor relationship.
Participations may be sold with or without extensive representations and warran-ties given by the lead bank and this raises the question of whether the lead bank guarantees payment. The representations and warranties are normally made in order to induce potential participants to acquire interests in the loan. The lead
68 Norton Rose, ‘Selling Loan Assets Under English Law: A Basic Guide’ (May 1986) IFLR 27.69 ibid.70 ibid.71 Because the regulatory and accounting treatment of loan transfers is crucial to banks,
participations (in the sense of a sale of a loan) with recourse are nearly extinct. Most banks would be looking to achieve off-balance sheet treatment for capital adequacy purposes and a sale with recourse does not achieve that objective. The effect of a participation with recourse, however, is to equate the transaction to a borrowing by the lead bank.
1.44
1.45
1.46
43
bank may make extensive representations that, for example, it has good title to the underlying obligation and any collateral securing the same and has the right to sell and assign its interest therein. The question that arises is whether such extensive representations give the participants a basis for recovering against the lead bank if the participants should lose money from entering into the loan. Arguably, some of the representations and warranties are drafted in language that is broad enough to make the lead bank the guarantor for the participants’ funds.
v. Participations in the loan versus proceeds of the loan The lead bank may transfer to the participant different interests depending on what it intends to accomplish. The lead bank usually transfers ‘an undivided’ or a ‘fractional’ interest in the loan, or the note or certifi cate evidencing the loan. Such a transfer gives the participant an interest in the chose in action embodying the lead bank’s legal rights. If the loan is secured, the transferee of an interest in the loan would have some rights in the collateral for the loan. Alternatively, the lead bank may transfer to the participant only the proceeds of the loan. The transferee of only the proceeds of the loan would not have rights in the collateral for the loan.
vi Participations in different loan assets Participations may also be distin-guished on the basis of the loans that have been the subject of participations. The subject of many of the participations has been a single loan already made by the lead bank to the borrower. Where there is an on-going participation relationship between the lead bank and the participant, the latter acquires an interest in one loan at a time. In other instances, however, the lead bank may grant a participation in several specifi c loans, or in a pool of loans that are not individually identifi ed to the participant. These differences may result in different risks of loss to the participant and also different legal consequences. For example, a participant that acquires an interest in diverse loans normally faces a lesser risk of loss than one that acquires an interest in only one loan. Participations in pools of loans have developed into more complex secondary loan market arrangements.
vii. Active versus inactive participants The participants may have widely varying powers in relation to the underlying loan. On the one hand, they may have very limited powers right from inception whereby they may not have the information or the means to verify the information supplied by the lead bank. This situation may subsist for the entire duration of the participation relationship in which the participants have very little access to information regarding the borrower and no active role to play in the underlying loan. On the other hand, the participants may have extensive powers such as the right to require that the lead bank must seek their consent before the lead bank modifi es any of the terms of the loan or before it accelerates the loan or forecloses on the security. The typical participation agreement leans heavily in favour of lead bank control of the underlying loan. It is advisable, however, for the participant to negotiate for
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some control, especially where it has participated in a substantial proportion of the loan.
4. Transferable Loan Facilities—A Historical Note
Syndicated loans were initially traded as predominantly bank-to-bank transac-tions. Many syndicated loans in the London fi nancial market contained an in-built mechanism that enabled the original lender to transfer all or part of the loan to another lender or lenders. Transferable loan instruments (TLIs) and transfer-able loan certifi cates (TLCs) were the mechanisms that carried out the transfer.
a. Transferable loan certifi cates
TLCs were based on the principle of novation. The standard TLC was a certifi cate that was appended to a loan agreement that contemplated a transfer by a member of the syndicate to another bank within or outside the syndicate. Legally, it was an agreement to effect a future novation.72 It provided that a transfer would be complete if the certifi cate was signed on behalf of the transferor and the transferee and delivered to the agent bank, which was pre-authorized by the borrower and the other banks to accept it and consummate the transaction by recording it in the register kept by the agent for the purpose. The certifi cate could alternatively be premised on the idea that the agent bank was authorized to sign on behalf of all the parties and to complete the novation by entering it in the register.73 The result was to substitute the transferee for the transferor bank as the member of the syndicate with corresponding rights and obligations vis-à-vis the borrower and the other banks.
b. Transferable loan instruments
TLIs transferred an interest in a syndicated loan using the principle of assignment. The TLI was a free-standing document that contained the rights and obligations of each bank that was privy to the syndicated loan, and the corresponding rights and obligations of the borrower. A bank could obtain separate TLIs for each repayment period or the loan maturity date. The TLI was transferred by complet-ing an attached form, with the transfer completed when it was recorded in the register by the agent bank.74 Thereafter, the assignee assumed the rights of the assignor as provided for by the underlying loan agreement. Because the TLI was conceptually an assignment, it could only legally transfer the rights but not the obligations of the lenders. This limited its optimum operation to cases where
72 Norton Rose,(n 68 above) 28.73 AC Cates, ‘Development in International Syndications’ in JJ Norton (ed) Prospects for
International Lending and Reschedulings (New York: Matthew Bender, 1988) para 22.04[2].74 Cates (n 73 above) para 22.04[1]; Norton Rose (n 68 above) 28.
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the loan was fully drawn such that the assignor did not have further obligations to the borrower.75
c. Current practices
A lender is able to transfer its interest in a loan either physically or in synthetic form. The transfer can be made to another bank or fi nancial institution. This is what is called the secondary loan market and there is exponential growth in the overall market even though the particular techniques used may experience differ-ent growth rates. Chapter 8 below focuses on the secondary market. Brief intro-ductory remarks on the current secondary market methods follow.
5. Loan Trading
In loan trading, the bank sells the loan asset and disposes of its entire interest in the loan to another bank or fi nancial institution. Initially, most secondary loan trading involved distressed debt (trading at less than par); the 1990s saw growth in par debt trading,76 and nowadays trade is common for both distressed and par loan trading.77 The market document for effecting a transfer is a transfer certifi -cate and it is based on the legal concept of a novation. A copy of such a document is reproduced in the schedule to Appendix 1 below.78 Since the late 1990s, indus-try bodies, parti cularly the LMA and LSTA, have promoted loan trading and have been instrumental in developing standardized documentation, codes of conduct, commoditized loan products, professionalism, and the integration of secondary loan practices in the general capital markets.79 (See further chapter 8 below.)
6. Credit Derivatives
Credit derivatives offer an alternative way for a fi nancial institution, such as a bank, to transfer credit risk to another party in the same way as a loan sub-participation does. They also offer potential investors an opportunity to obtain credit exposure to a borrower to whom a loan has been made. A credit derivative is a transaction where one party agrees to transfer, and another party agrees to assume, the credit risk referable to a loan, security, or other fi nancial obligation or in reference to a particular reference entity or obligation. Credit derivatives take
75 Cates (n 73 above) para 22.04[2]; Norton Rose (n 68 above) 28.76 D Rule, ‘Risk Transfer Between Banks, Insurance Companies and Capital Markets:
An Overview’ Financial Stability Review, December 2001, 137, 139 (Bank of England 2001) Issue No 11, available at <http://www.bankofengland.co.uk/publications/fsr/2001/fsr 11 cont.pdf>.
77 In Europe, two-thirds of the trade in loans is for par or near par: R Cartledge, ‘A Year in Review’ in Euromoney Seminars, 3rd Annual Syndicated Loans Conference, March 2001, London, UK.
78 Because the transfer certifi cate is based on the principle of novation, it is similar to the earlier transferable loan certifi cate.
79 D McGrath, ‘Foreword’ in Euromoney Syndicated Lending Handbook 2004.
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the form of swap or option contracts, where one party pays either a swap payment or premium in return for a compensatory payment when the credit event occurs against which it seeks protection.80 Where the derivative is in respect of a loan transaction, the lender buys protection against the risk that the borrower will default on its loan.81 Indeed, the most common type of credit derivative is the credit default swap, through which a bank seeks protection against the risk of the borrower’s default. A credit derivative involves the transfer of economic risk, rather than legal or equitable title to the assets.82 Like other derivatives,83 any single credit derivative transaction consists of a set of promises whereby the parties undertake to exchange future payments contingent upon the future behaviour of a well-defi ned variable. The credit derivative seeks to avoid or mitigate credit risk, ie the risk that the borrower might not be able or willing to repay the loan.84 Credit risk may be counterparty risk, settlement risk, political risk, or sector risk.85 The credit risk assumed may be for the same duration or tenor as the fi nancial obligation, or for a shorter period. Similarly, a credit derivative may effect a transfer of all or only part of the credit risk.86
The facts and decision in the case of Nomura International plc v Credit Suisse First Boston International87 illustrate the general principle in credit derivatives. Nomura held bonds issued by Railtrack (a public limited company) at 3.5 per cent and due in 2009. It wanted to hedge its loss on the bonds, particularly the credit risk of the issuer. It thus bought from Credit Suisse First Boston (CSFB) as ‘protection seller’ protection referable to Railtrack plc in a principal amount of US $10 million. Nomura paid 0.47 per cent of US$10 million per annum for the protection. The agreement between Nomura and CSFB identifi ed the credit events upon which the compensatory payment would be made; namely, in relation to the reference
80 See further ch 8 below.81 A credit derivative is functionally similar to an insurance contract, but is not one: see 8.82
below.82 Financial Services Authority, ‘Cross-sector Risk Transfers’, Discussion Paper (May 2002)
para 3.16.83 The most common derivatives are based on interest rates, exchange rates, commodity prices,
bond prices, and equity indices. See A Hudson, The Law on Financial Derivatives (London: Sweet & Maxwell, 2002); Rule (n 76 above) 140; A Mugasha, ‘The Developing Law of Financial Derivatives: Citibank Canada v. Confederation Life’ (1998) 13 Banking and Finance Law Review 297–316.
84 Any term loan, for instance, a foreign currency loan, inherently includes a bundle of risks, such as interest rate, currency, credit, funding, prepayment, and legal risks. See S Das, ‘Credit Derivatives—Products’ in S Das (ed) Credit Derivatives and Credit Linked Notes (Singapore: John Wiley & Sons, 2nd edn,) 3–5; Rule (n 76 above) 139.
85 KA Horcher, Financial Risk Management: A Guide For Financial Managers (Scarborough, Ontario: Carswell, 1995) paras 1-4 – 1-5; Rule (n 76 above) 139.
86 PU Ali, ‘Unbundling Credit Risk: The Nature and Regulation of Credit Derivatives’ (2000) Journal of Banking and Finance Law and Practice 73, 74.
87 [2003] 2 All ER (Comm) 56 (QB). See also Eternity Global Master Fund Ltd v Morgan Guaranty Trust Co of New York 2002 US Dist Lexis 20706 and 2003 US Dist Lexis 12351.
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entity (Railtrack plc), bankruptcy, failure to pay, repudiation/moratorium, and the like. A bankruptcy credit event occurred in relation to Railtrack plc while the protection was in place and Nomura sought to cash in on its protection by obtaining a compensatory payment in exchange for the bonds. CSFB resisted the demand on the ground that the bonds in question did not meet the technical requirements specifi ed in the agreement,88 but the Court held that Nomura was entitled to succeed. The above transaction (which is a credit default swap)89 can be presented in diagram form as shown in Figure 1.8 below.
Figure 1.8 Credit Default Swap
Credit derivatives differ from alternative methods of managing risk, for example syndicated loans and loan trading, because they allow the holders of fi nancial assets to unbundle or detach the credit risk from those assets and deal separately with the credit risk.90 A holder may thus lay off credit risk as if it were a discrete commodity by transferring the fi nancial asset or disposing of the asset to a third party, which is different from the holder of the credit risk; whereas in each of the alternative instances of loan syndication, participation, or trading, the credit risk remains bundled with the fi nancial obligation, ie the relevant transferee acquires an interest in the fi nancial obligation as well as assuming the credit risk in respect of that obligation.
88 The issue was whether the bonds in question were ‘not subject to any contingency’ as required by the agreement and the ISDA defi nitions.
89 See also paras 8.60–8.64 below.90 Ali (n 86 above) at 74–75, Rule (n 76 above) 139.
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7. Collateralized Debt Obligations
Collateralized debt obligations (CDOs) as a fi nancial technique offer fi nancial institutions, such as a bank, an alternative avenue to engage in dealings concern-ing loan assets, either as sellers or buyers of interests in loans. CDO is a generic term that refers to a securitization structure in which the portfolio transferred by the bank to the investors could consist of loans, bonds, or both.91 A key feature of CDOs is the tranching of the risk so as to appeal to different investors. The risk of the portfolio in the SPV is sliced into different classes and the SPV issues various classes of notes, each with different rights to payment. The lowest or fi rst loss tranche, structured as debt but commonly referred to as equity, is unrated and bears the greatest risk. This tranche is akin to a share in that the investor (who may as well be the originating bank) is not guaranteed a return but rather shares in any profi t or excess that remains after paying higher-ranked securities.92 In contrast, the senior tranche, which makes up the bulk of the transaction (70 to 90 per cent), is very highly rated with minimal probability of loss. The senior notes are paid in priority to other investors, and are entitled to priority payment in case of default and enforcement.93 The layers between fi rst loss and senior tranches are called mezzanine and bear moderate risk of loss.94
In the early development of these structures, a distinction was made between CDO structures in which the portfolio consists of bonds and were therefore called collateralized bond obligations (CBOs), and those in which the portfolio con-sisted of loans, and were therefore called collateralized loan obligations (CLOs).95 Over time, the structures and documentation of the two types converged, and the traditional distinction between CBOs and CLOs became blurred. ‘Current ter-minology focuses instead on the purpose for which the CDO was set up and the method of generating the profi t, rather than merely the type of underlying asset.’96 CDOs have grown phenomenally since the mid-1990s. They are popular because they raise funds for the originator, remove loans from the originator’s balance
91 See B Ratner, ‘Collateralised Debt Obligations (CDOs)’ in Euromoney Seminars, 3rd Annual Syndicated Loans Conference, March 2001 London, UK, 3; Rule (n 76 above) 140. Another similar structure is the collateralized investment obligation (CIO), where the bank securitizes its equity investments.
92 G Fuller and F Ranero, ‘Collateralised Debt Obligations’ (2005) 09 JIBFL 343.93 The payment would rank after priority expenses, such as trustees fees and the fees of other
service providers.94 Financial Services Authority, ‘Cross-sector Risk Transfers’, Discussion Paper (May 2002)
paras 3.9 – 3.12.95 J Benjamin, Interests in Securities: A Proprietary Law Analysis of the International Securities
Market (Oxford University Press, 2000) 284; P Ali and M Tisdell, ‘Collateralised Debt Obligations, With an Overview of the CONDOR Securitisation Programme’ (2000) 18 Company and Securities Law Journal 371.
96 Fuller and Ranero (n 92 above) 343.
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sheet and thereby reduce its regulatory capital, while ensuring that investors are exposed only to the transferred assets.97 They have been accepted as investment vehicles to increase assets under management and diversify portfolio type and quality.98 For a study on bank loans, the relevant sub-category is the CLO. (See further chapter 8 below.)
As noted in the US case of Re Fitch, Inc, American Savings Bank, FSB v UBS Painewebber, Inc:99 ‘[A] CLO is created by aggregating large numbers of commer-cial debt obligations, dividing the rights to the repayment stream into many subdivisions, and selling those subdivisions as tradeable securities.’100 As such, a CLO is an asset-backed security and is usually supported by a variety of assets, including whole commercial loans, revolving credit facilities, letters of credit, bankers’ acceptances, and other asset-backed securities.101 Loans are a desirable asset class for a CDO because they provide diversity and quality.102 Like other securitization deals, the assets are transferred from the originator to a vehicle, company, or entity, which then issues securities to investors backed by the assets in the vehicle, company, or entity. These transactions, however, require the oversight of an asset manager, unlike self-liquidating vehicles such as other asset-backed securities.103 The CDO can be illustrated in diagram form as shown in Figure 1.9 below.
Figure 1.9 Collateralized Debt ObligationSource: Financial Services Authority.
97 Rule (n 76 above) 140. 98 Ratner (n 91 above) 4. 99 2003 US App Lexis 9806 (2nd Cir 2003).100 ibid 5–6.101 A Scheerer, ‘Credit Derivatives: An Overview of Regulatory Initiatives in the US and Europe’
[2000] 5 Fordham Journal of Corporate and Financial Law 149, 183.102 Ratner (n 91 above) 22; Ali and Tisdell (n 95 above) 371.103 Ratner (n 91 above) 4. There are, however, CDOs that are not actively managed.
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V. Multi-Bank Financing Contrasted with Similar Financing Techniques
A. Introduction
There are some fi nancing arrangements that look like multi-bank fi nancing while, in fact, they are not. This section contrasts multi-bank fi nancing arrangements with arrangements that are similar. In so doing, it further describes, by a process of exclusion, multi-bank fi nancing arrangements.
As a result of the phenomenon of globalization, competition among fi nancial institutions and the liberalization of the fi nancial environment by regulators, the modern fi nancial market is characterized by the increasingly sophisticated requirements of bank clients and intense innovation by fi nancial institutions. This has resulted in diverse practices and instruments that are similar to those encountered in syndicated loans and secondary loan market practices. The same trends have also introduced some modifi cations to existing syndications and secondary loan market practice. One such effect is the current trend to transform loan assets, including syndicated loans, into more liquid securities, which is usually done by adopting capital market structures such as securitization and transferable certifi cates. This enhances the liquidity that enables the generation of further loans. Furthermore, fi nancial institutions routinely provide new products and services in order to serve their customers’ needs better while at the same time reducing costs and enhancing returns for themselves. These developments have resulted in many innovations and particular techniques such as securitization which share many similarities, and at the same time some differences with, syndi-cated loans and secondary loan market practices. In the wider context, the trends illustrate that syndicated loans and related methods of fi nancing are not isolated fi nancial practices but part of a broad range of techniques for sharing or disposing of credit risk.
B. Multi-Bank Financing Contrasted with Equity Syndications and Participations
Syndicated loans and loan participations are credit facilities and do create debt, and the recipients of the funds are borrowers. The words ‘credit’ and ‘loan’ in this context extend beyond the narrow meaning of direct loans of money to include other forms of fi nancial accommodation.104 Debt refers to a sum of money that is
104 For a broad defi nition of loan, see Liberty National Bank v Travellers Indemnity, 58 Misc 2d 443, 295 NYS 2d 983 at 986 (Sup Ct 1986) and Looker v Wrigley (1882) 9 QBD 397, 402. In practical terms, however, credit means a sum of money that is at a person’s disposal.
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advanced to the borrower.105 It creates a debtor-creditor relationship between the parties, ie there is a legal obligation on the part of the borrower to repay the debt and a correlative right on the part of the creditor to enforce payment.106 Debt normally earns interest which is the charge for using somebody else’s funds and is the remuneration to the one advancing the funds.107 In contrast, there are ‘syndications’ and ‘participations’ that take the form of equity fi nancing. These constitute money that is invested more or less on a permanent basis; and as equity, there is no legal obligation to repay the investor. However, the investor obtains a proprietary interest in the fi nanced enterprise and is entitled to dividends and capital appreciation.
C. Multi-Bank Financing Contrasted with Capital Market Methods
Capital market methods, when contrasted to bank fi nancing, are debt facilities where an intending borrower raises funds by way of instruments in negotiable form which are issued to a large number of investors who thereby provide the necessary funds to the borrower/issuer. The debt instruments or securities include eurobonds, securitization notes, commercial paper and medium term notes, and derivatives. In the past, syndicated loans and capital methods were clearly alternative ways for raising debt funding. A potential borrower in need of funds would choose whether to obtain a bank loan or borrow by way of bonds (capital market instruments). The two alternatives remain clear and intact, but there is now regular interaction and signifi cant convergence between them such that sometimes the distinction is blurred. For example, a borrower may obtain a syndicated loan with the clear intention that such a loan will be repaid by borrow-ing by way of bonds and that the same group of banks will assist the borrower in attaining both types of borrowing. Alternatively, a borrower that sets out to borrow by way of bonds may fi rst put in place a back-up loan facility. Furthermore, in the secondary market for loans, what starts as a bank loan may end up being held by investors as a note, which is a capital market instrument.
105 See Webb v Stenton (1883) 11 QBD 518, 528 (CA) per Lindley J. Debt is a species of property, even if it requires litigation to reduce it into possession: Ellis v Torrington [1920] 1 KB 399, 411 per Scrutton LJ. As property, therefore, debt can be assigned: Camdex International Ltd v Bank of Zambia [1998] QB 22, 32 and debt can be traded: Argo Fund Ltd v Essar Steel Ltd [2006] 2 All ER (Comm) 104 (CA).
106 Mathew v Blackmore (1857) 1 H & N 763, 157 ER 1409.107 On interest, see AC Gooch and LB Klein, Annotated Sample Revolving Credit Agreement
(Washington, DC: ILI, 3rd edn, 1999) ix, xi.
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D. Multi-Bank Financing Contrasted with International Bonds/Eurobonds
Bond issues constitute an alternative to syndicated loans as a means of raising fi nance. Bonds are long-term debt securities issued by the borrower to a large number of investors. They are contractual arrangements in which the original creditor (the bondholder) extends credit to the borrower (the issuer) who agrees to repay the debt with interest within a stipulated time. A bond, like a loan agree-ment, will spell out the rights and obligations of the parties over the life of the bond. Unlike a loan agreement, however, the bond is negotiable.108 The investors in a bond issue may be limited in number or, as is usually the case, they may be the public at large. A borrower that wishes to raise fi nance by way of bonds issues a large number of debt instruments denominated in small face values, for example US$1,000, together totalling the aggregate amount of the required fi nancing. The instruments are in bearer form and have identical terms, thus allowing the investor to transfer them with ease at a later date. The investors in the bond market include banks, insurance companies, pension funds, hedge funds, and wealthy individuals.109 Bond issues are characterized by the large number of investors that are usually involved in a single bond issue, some of whom may not be in a position to evaluate the credit risk and value of the debt securities involved. The law, therefore, signifi cantly regulates bond issues by subjecting them to the registration requirements of the securities laws, unless an exemption is utilized. This means that in the majority of the cases, the issuer is required to prepare and distribute a formal prospectus.
From the issuer’s perspective, the choice between raising fi nance by way of a bond issue or a syndicated loan is determined by a variety of factors, such as the overall cost of the fi nancing, tax considerations, the relationship and fl exibility the bor-rower wants with the lenders/issuers, and whether the issuer is eligible to obtain funding by way of international bonds.110 Where the issuer/borrower wishes to have some fl exibility with the fi nancing facility, the better choice would be a syndicated loan which can be tailored to its specifi c needs. Bond issues tend to be fairly rigid in their procedures because of the complex marketing procedures and the requirements of the capital markets.111 Furthermore, the bond market is an exclusive market that tends to demand a higher level of creditworthiness than banks. Bonds cannot be used where the requirement for fi nancing is fl uctuating, a role that is best suited for revolving facilities. In contrast, many borrowers can borrow by way of syndicated loans but the same borrowers cannot issue bonds
108 See generally, ‘Bonds: Financing the Future’, available at <http://www.estrong.com/strongweb/strong/jsp/learn/fl oor/bd-future.jsp>.
109 Tennekoon (n 13 above) 145.110 Tennekoon (n 13 above) 146.111 Wood Law of International Finance (New York: Clark Boardman, 1989), para 9.01[1][c].
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in the international bond market. Compared to bond fi nancing, bank fi nance is advantageous to the borrower because the banks can provide rescue money to a borrower in fi nancial diffi culty, which bond holders cannot do if the borrower has borrowed by way of bonds. It is also advantageous to the ultimate lenders (the savers) because banks are better able to monitor the borrower compared to bond-holders. Bonds also have advantages over bank loans. They are tradable, and hence more liquid, and that makes them more attractive to investors than loans. Secondly, bonds are more fl exible on the term for which they are available. They range from one year to thirty or more years.
Eurobonds, which are a sub-category of bonds, are the parallel instrument to euroloans. They have certain features,112 some of which are similar to and others different from those of euroloans. First, they are issued in a country other than the country in whose currency the bond is denominated and the country of the borrower’s residence. Secondly, eurobonds are almost always issued in bearer form and sold simultaneously in various jurisdictions. Thirdly, many eurobonds are listed on a stock exchange, usually the London or Luxembourg exchanges. Fourthly, eurobonds are usually unsecured instruments. Fifthly, eurobonds are usually underwritten by a group of fi rms before they are issued. Finally, eurobonds are seldom issued to the public. The investors tend to be large fi nancial institutions. The last two features are similar to those of euroloans.
E. Multi-Bank Financing Contrasted with Commercial Paper Programmes
Commercial paper is one type of instrument in the broad category of capital market securities alongside bonds, medium-term notes, and certifi cates of deposit. Commercial paper, broadly construed, consists of promissory notes or bills of exchange that are issued to raise money in the money market. Most commonly, commercial paper consists of short-term (less than one year) unsecured promis-sory notes in bearer form. It represents the issuer’s direct obligation to the bearer to pay a specifi c amount on a specifi c date.113 Normally, the commercial paper is not directly linked to any trade transaction.114 The commercial paper is issued in the money market by highly rated borrowers on the strength of their own credit. The notes have minimum principal amounts of £100,000 and are intended to raise funds for general operations. Short-term interest rates apply because the
112 See F Graaf, Euromarket Finance: issues in Euromarket Securities and Syndicated Eurocurrency loans (Amsterdam: Kluwer, 1991).
113 C Paul and G Montagu, Banking & Capital Markets Companion (London: Law Matters, 4th edn, 2006) 223.
114 See eg the classic case of Goodwin v Robarts (1875) LR 10 Ex 337, affi rmed (1876) App Cas 476 (HL).
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maturity period is typically up to one year.115 Commercial paper programmes are normally structured to permit rollovers at each maturity. If such is the case, the issuer of the commercial paper obtains medium- or long-term fi nance, with inter-est fi xed only in respect of each rollover period. The purchasers of the commercial paper are investment professionals, who are persons whose ordinary activities include acquiring, holding, managing, or disposing of investments for the pur-pose of their business or who may reasonably be expected to undertake those activities with investments for the purpose of their business. They normally include banks, corporations, pension funds, and insurance companies. The banks’ involvement is that of investors. Banks may also act as the issuer’s agent in placing the commercial paper with the investors or they may act as advisers in structuring the issue. However, the banks do not formally commit themselves to purchase (underwrite) all the issuer’s commercial paper.
There are some noteworthy similarities between commercial paper programmes and loan syndications and loan participations. The procedures and documenta-tion generally used in commercial paper issues are similar to those found in syndi-cated loans. In particular, the issuer’s commercial paper is sold by one bank or a small group of fi nancial institutions to a bigger group of investors. The docu-ments used include an agreement between the issuer and the investors, and an information memorandum is distributed to provide information about the issuer. This practice differs from that followed with respect to syndicated loans, where it is common to issue information memoranda which are less formal than prospectuses.116 It is also common to exempt syndicated loans from the disclosure and registration requirements of the capital markets.117
F. Multi-Bank Financing Contrasted with Securitization
The topic and structures of securitization have sometimes appeared in discussions dealing with syndicated loans or loan participations. This is because securitization involves procedures and legal issues similar to those found in syndications and participations.118 Furthermore, the reasons why banks engage in securitization are similar to those that underlie syndicated loans and participations in loans.
115 Galloway, ‘New Canadian Commercial Paper Financing Techniques’ in Commercial paper Transactions (Toronto: Insight, 1987) TAB VII, 4; and generally, JS Elder and CE Baker, ‘Securities Law Aspects of Commercial Paper Transactions’, in Commercial Paper Transactions (see above) TAB III, 2.
116 The practice followed in respect of syndicated loans is discussed in ch 3 below.117 Wood compiled a table comparing syndicated loans and bond issues. See Wood (n 55 above)
ch 9.118 For procedural similarities between syndication and securitization, see R Weir, ‘Profi le of a
Specialist Mortgage Lender’ in Bonsall (ed), Securitisation (London: Butterworths, 1990) 74–5. See also J Burrows (ed), Current Issues in Securitisation (London: Sweet & Maxwell, 2002); J Deacon,
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Securitization has been described as the fi nancing or refi nancing of income-yielding assets (receivables) by repackaging them together with suitable enhance-ments into tradeable securities with the securities being both secured on the assets and serviced from the cashfl ows which they yield.119 In the context of banks, it involves the pooling of loans or other assets such as derivatives and using such pools to raise money from investors who thereby become entitled to receive the loan proceeds. This popular method of fi nancing is, as such, based on or backed by previously existing fi nancial assets such as loans; and this accounts for the designation of ‘asset-backed securities’. Virtually all the banks and the major investment dealers are active in creating new securitization products and issues. Securitization is attractive to the banks, borrowers, and investors alike because they all derive distinct advantages. For the banks, securitization means that receivables are turned into cash thereby improving liquidity. Furthermore, this improves their capital adequacy position because the securitized assets are written off the books of accounts, resulting in the requirement that there be less equity.120 The investors’ primary attractions are the opportunity to acquire a safe and liquid investment in diversifi ed assets, which provides predictable cashfl ows and low default rates.121 The instruments are also liquid and transferable. The arrangement also normally results in borrowers paying lower interest rates. The securitization of assets is accomplished mainly by the use of two legal structures:122
(1) the traditional sale structure;(2) the sale of assets to the trustee of a receivables trust.123
1. Traditional Sale Structure
In the predominant securitization method used in English practice, the bank or investment dealer (the originator) creates an SPV or SPE,124 which is a new
Global Securitisation and CDOs (Chichester, UK: Wiley, 2004); M Fisher and Z Shaw, Securitisation: for Issuers, Arrangers and Investors (London: Euromoney, 2003).
119 FSA Rulebook, BIPRU TP; S Curtis, ‘A Practical Guide to the New FSA Rules for Securitisation and Loan Transfers’ (1999) 14 J Int B L and Reg 260.
120 See 11.26 below. See GM Girvan ‘Developments in Financing Techniques–Securitization of Financial Assets’ (1987–88) 2 BFLR 61, 63ff for advantages that necessarily follow.
121 See DC Bonsall, ‘Legal Aspects and Considerations’ in Bonsall, Securitisation, (n 118 above) 22 and K Cox, ‘Introduction and Overview’ in Bonsall, Securitisation (n 118 above) 4. See also the authorities mentioned in n 118 above.
122 A third method of securitization utilizes the secured transaction model and is essentially a charge over future receivables rather than a sale. For this method, see eg, X Zhang, ‘Trends and Developments in Cross-Border Securitisation, Part 2: Legal Structure of Project-Backed Securitisation’ (2000) 8 JIBFL 318.
123 Paul and Montagu (n 113 above) 420; X Zhang, ‘Trends and Developments in Cross-border Securitisation, Part 1: Legal Structures and Analysis’ (2000) 7 JIBFL 269.
124 Where the originator seeks off-balance sheet treatment, it will create an ‘orphan’ SPV spe-cifi cally for the transaction and the shares of the SPV will be owned by a charitable trust. Where off-balance sheet treatment is not sought, the SPV may be a subsidiary of the issuer.
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and independent legal entity (a corporation or a limited partnership, but usually a trust—the SPV) to which the loan assets and the accompanying collateral or the applicable credit enhancement devices are transferred.125 In the traditional struc-ture, the assets are sold to the SPV and it is important that legally it is a true sale126 (rather than a secured loan) so that title to the assets passes to the SPV. A sale can be effected by a novation, legal assignment, equitable assignment, or declaration of trust.127 The SPV exists solely for the purpose of the securitiza tion and it is of utmost importance that it is bankruptcy remote. Tradeable securities are created and the SPV issues them to investors who thereby obtain a benefi cial interest in the SPV and become entitled to the payments made by the underlying borrowers.128 A security trustee is appointed to hold the assets as collateral for the investors. This arrangement may be illustrated as shown in Figure 1.10 below.
Figure 1.10 Securitization (Traditional Sale Structure)Source: Banking & Capital Markets Companion.
125 FSA Rulebook, BIPRU TP.126 A transaction is not a regarded as true sale if it is a sham: Snook v London and West Riding
Investments Ltd [1967] 2 QB 786; or is recharacterized as a secured loan: Welsh Development Agency v Export Finance Co Ltd [1992] BCLC 148 (CA).
127 These legal methods have different attributes, with the fi rst two being the most secure against the whole world.
128 See BIPRU TP and the authorities in n 118 above.
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2. Sale of Assets to a Trustee of a Receivables Trust
The ‘sale to trustee’ structure is illustrated in Figure 1.11 below. The second method of securitization is by way of the sale of assets (for example loans or receivables) to a trustee of a receivables trust. The trustee is set up as a bare trust, with instructions to deal with trust assets strictly in accordance with the trust deed and without any discretion. The originator of the assets services the trust assets and pays the proceeds to the trustee. The benefi ciaries of the receivables trust would be the originator and the issuer, and they would have an undivided frac-tional benefi cial ownership interest in the underlying loan or receivables assets. The overall effect of the arrangement is similar to an equitable assignment of the assets to the issuer. The issuer would be a separate entity from the trust, and would issue securitized bonds to investors and would thereby obtain the funds to make payments to the trustee.
Figure 1.11 Securitization (Receivables Trust Structure)Source: Banking & Capital Markets Companion.
Securitization has matured into a distinct method of fi nance that is different from syndicated loans. It is, however, at the centre of mainstream secondary loan mar-ket practices. From the business point of view, securitization enables a lender to raise capital on the strength of its assets in the same way as secondary loan market practices. In fact, some practices, such as collateralized debt obligation, are essen-tially securitization. The legal methods for transferring or securing loan assets
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are the same in secondary loan market practices as they are in securitization.129 Similarly, the same group of fi nancial institutions invest in both securitization and the secondary loan market. However, securitization has unique features that distinguish it from syndicated loans and loan sub-participations. Probably the strongest distinguishing factor is the quality of the banks’ fi nancial contribution. In securitization, the banks contribute funds as investors.130 In loan syndication or loan participation, however, the banks act in their capacity as lenders. Furthermore, there are intermediate parties, such as the SPV and the trustee, between the originating bank and the ultimate investors. Finally, while securitiza-tion normally involves a pool of loans, the typical participation arrangement is based on a single loan in each case.131 In conclusion, despite the striking simi-larities between securitization on the one hand, and syndicated loans and loan participations on the other hand, securitization is not multi-bank fi nancing, even though syndicated loans may be securitized (CDOs) and even though banks do invest in notes issued by securitization vehicles.
The debt obligation in a securitization is evidenced by commercial paper or a bond. The commercial paper used in securitizations differs signifi cantly from traditional commercial paper because it is secured by a pool of loans or other assets. Secondly, the issuer may be an SPV whose credit standing is rated inde-pendently of the ultimate user of the funds raised from the fi nancial market. Thirdly, the banks’ role in securitizations extends beyond distributing and invest-ing in the commercial paper to include back-up facilities.132
VI. Conclusion
As contractual arrangements, syndicated loans and secondary loan market practices have been developed incrementally, resulting in diverse and sometimes complex transactions that need to be closely examined to ascertain their place in the law. The common denominator for all multi-bank fi nancing transactions is that a number of fi nancial institutions commit themselves in their capacity as lenders to fi nance a single borrower. The diverse techniques of multi-bank fi nanc-ing fall into either of two categories. Either they are part of a primary transaction where the banks act together from the outset in making a loan to a borrower, or
129 For this reason the FSA does not distinguish between securitization and other asset transfer methods, such as loan participations. See Prudential Statement, ch SE.
130 Sometimes the banks provide back-up facilities, liquidity facilities, and credit enhancement.131 But see eg Re Canada Deposit Insurance Corp and Canadian Commercial Bank (1987) 46 DLR
(4th) 518 (Alberta QB) where participations were sold in pools of loans.132 AMS White, ‘Structuring the issue: A Banker’s view’, in Commercial Paper Transactions:
New Directions in the Money Market (n 115 above) TAB II, 1–2.
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they are part of a secondary transaction where a bank transfers an interest in its loan to another fi nancial institution. The reality that multi-bank fi nancing is done across geographical boundaries requires that the analysis, regulation, and supervision of these methods should be viewed in the wider global context. This may entail or even necessitate similar approaches to problems that are similar even though the actual instruments and methods used in the regulation and analysis may vary.
Conclusion
