the law of multi-bank financing - gbvthe law of multi-bank financing syndicated loans and the...

THE LAW OFMULTI-BANKFINANCING

Syndicated Loans andthe Secondary Loan Market

AGASHA MUGASHA

LLB (HONS), DIPLP, LLM P H D

Professor of Law, University of Essex

OXJFORDUNIVERSITY PRESS

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: EarlyDifferences 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 certificates 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

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Contents

V. Multi-Bank Financing Contrasted with SimilarFinancing 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?


II. The Parties—Who Uses Multi-Bank Financing?A. The Borrowers

1. Who are the Borrowers?2. Regulation of the Borrowers

B. The Lenders and Investors1. Banks

a. Different types of banksb. Regulation of banks

2. Non-Bank Financial Institutionsa. Hedge fundsb. Pension fundsc. Insurance companiesd. Collateralized debt obligationse. Building societiesf. Equity fundsg. Mutual funds and prime rate fundsh. Finance companiesi. Islamic financej . Vulture fundsk. International Finance Corporation1. Credit unions (cooperative credit associations)

III. Components of the Financial Market—WhereMulti-Bank Financing OccursA. Domestic MarketB. Foreign Market

2.022.022.022.062.072.082.082.122.152.162.192.202.212.222.232.242.252.262.272.282.29

2.302.312.32

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C. International Financial Market—the Euromarket1. The Concept and Origins of the Eurocurrency2. The Development of the Eurodollar Market3. Characteristics and Advantages of the Euromarket

a. Regional markets

IV The Rationale—Why Parties Use Multi-Bank FinancingA. The Borrower

1. Advantages of Syndicated Loans2. Advantages of Loan Trading and Other

Secondary Loan Market MethodsB. The Banks

1. Advantages of Syndicated Loansa. The diversification of the risk of non-paymentb. Complying with regulationsc. Earning arrangement feesd. Increasing prestige and publicitye. Developing profitable relationships

2. Reasons for Secondary Loan Market Practicesa. Note on credit derivativesb. Sale considerationsc. Purchase considerations

2.332.342.352.362.38

2.392.402.40

2.432.442.452.462.472.482.492.502.512.522.532.62

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 3.53

/ c. Dealing with professional advisers 3.56: d. 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

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6. Misrepresentation 3.67a. Effective misrepresentation 3.68b. Materiality 3.71c. Inducement and reliance 3.72

7. Heads of Action—Specific 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 3.1149. Breach of Fiduciary Duty 3.115

10. Obviating Liability for Misinformation or Non-information 3.132a. 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 andSecondary Loan Markets


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 Creditfor its Own Account 4.13

2. One Bank Issues a DocumentaryCredit 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 Confirming Bank 4.234. Participations Granted by the Nominated Bank 4.26

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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. Specific 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 Borrowerand Lenders, and among Syndicate Lenders


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 Classifications 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. Definitions 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

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d. Payment of fees, costs, and expenses 5.41e. Payment of taxes 5.42

5. Security, Guarantees, arid Insurance 5.43a. Security 5.43b. Guarantees, indemnity, and support arrangements 5.47c. Insurance 5.51

6. Conditions Precedent 5.527. Representations and Warranties 5.56

a. Paripassu 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


6. Loan Participations: Legal Relationships Between theLead Bank and Participants, Participants and Borrower, and

. Among Participants! I. Introduction 6.01

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Contents

II. Lead Bank and Participant RelationshipA. The Legal Nature of the Participation Arrangement

1. Analysisa. Sale theory: assignor-assignee relationshipb. Debt theory: creditor-debtor relationshipc. Ownership in common or tenancy in commond. Partnership or joint venturee. Trustf. Agency

B. Economic Consequences of Characterization1. Borrower's Insolvency

a. Set-off by the lead bankb. Set-off by the participantc. Entitlement to collateral and other collections

2. Lead Bank's Insolvencya. Set-off by the borrowerb. Set-off and other claims by the participant

3. Participant's InsolvencyC. Form of the Participation Agreement

1. Oral Participation Agreements2. Written Participation Agreements

a. Conclusion of the contractb. Precedence of documentsc. Admissibility of extrinsic evidence

D. Contents of the Participation Agreement:Contractual Rights and Duties1. Credit Information

a. Allocation of the credit risk2. Initial and Subsequent Funding

a. Initial fundingb. Subsequent fundingc. Failure to fund the loan

3. Receipts, Collections, and Expensesa. Lead bank's duty to collect the loanb. Sharing and appropriation of collectionsc. Apportionment of costs and expenses

4. Servicing the Loana. The servicing functionb. Termination of servicing

5. Modifications and Waiver6. Default and Enforcement7. Risks and Standard of Care8. Assignment of the Loan9. Representations and Warranties

a. Conditions precedent

6.086.106.126.136.216.266.276.326.376.416.426.436.466.496.516.526.536.686.746.746.766.796.806.82

6.876.916.946.956.966.976.986.99

6.1006.1026.1046.1086.1086.1106.1116.1156.1206.1226.1256.127

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Contents

10. Breach and Non-Performancea. Elevationb. Subrogation

11. Miscellaneous Provisions12. Implied Terms

a. Presumptions about participation agreementsb. Fiduciary obligationsc. Duty of good faith and fair dealingd. Duty to use reasonable caree. Observations

III. Participant-Borrower Relationship

IV. Participant-Participant Relationship

V. Conclusion

6.1286.1296.1306.1316.1326.1336.1356.1366.1406.141

6.142

6.144

6.152

7. Loan Sub-participations: Legal Relationships Between theLead 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. Confidentiality 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. Confirmations by the Sub-participant 7.238. Undertakings by the Lead Bank 7.249. Administration of the Sub-participation 7.25

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Contents

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


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 LawPrinciples 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 8.47

^ 3. Loan Identification 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. Confidentiality 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

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Contents

D. Legal and Regulatory Issues1. Legal Issues

a. Mis-selling of productsb. Enforceability and interpretation of the contractual

documentsc. Transfer of property interests

2. Regulatory Issuesa. Provisioning for operational riskb. Are credit derivatives insurance business or insurance

contracts?c. Is a credit derivative a gaming or wagering contract?

IV. Collateralized Debt ObligationsA. A Description of CDOsB. Why CDOs are AppealingC. Types of CDOs

1. Underlying Assets2. Arbitrage versus Balance Sheet CDOs3. Cash versus Synthetic CDOs4. Static versus Managed CDOs5. Cashflow versus Market Value CDOs

D. Legal Issues1. Jurisdiction of the SPV2. Transfer of Assets

N a. Effective transferb. True sale opinionsc. Consent requirements

3. Set-off4. Lender Liability

8.748.748.75

8.768.798.808.80

8.828.85

8.868.868.878.888.898.908.938.978.99

8.1018.1018.1028.1028.1038.1048.1058.106

V. Conclusion 8.107

9. The Agent Bank in Syndicated Loans and Loan Participations


II. General Approach to the Agent Bank's Legal Status andFunctions 9.04A. True Agent or Special Agent Debate 9.06

1. Agent Bank as a True Agent 9.07a. True agent with fiduciary duties 9.07b. True agent disclaiming fiduciary duties 9.08

2. Agent Bank as a Special Agent 9.09B. Analysis 9.10

1. Meaning of the Word Agent' 9.11• 2. The Duties of the Agent Bank 9.12

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Contents

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. Specific 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 satisfied 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 9.47\ g. Calculating limits for availability, tranches,

fronting banks, and swinglines 9.48h. Calculating and requesting fees and general expenses 9.49i. Actihgas a conduit for information 9.50j . Monitoring financial covenants 9.51k. Acting as a conduit for payments 9.521. 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. Conflict of Interests 9.635. Additional Remuneration 9-656. Use of Confidential Information 9.667. Reimbursement and Indemnification of the Agent 9-678. Termination and Replacement of the Agent Bank 9.69

IV. Conclusion 9.72

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10. Syndicated Loans and Borrower Insolvency: Winding-upand 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 companys 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


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11. The Regulation of Syndicated Loans and the SecondaryLoan Market Practices


II. Regulation of Capital AdequacyA. Introducing Basel IIB. Three Approaches to Measuring Credit Risk

1. Standardized Approach2. Internal Ratings-based Approaches—Foundation

and AdvancedC. Calculation of Minimum Capital Requirements

1. Regulatory Capital2. Risk Weighting

a. Claims on sovereignsb. Claims on banksc. Claims on securities firmsd. Claims on corporatese. Higher risk categoriesf. Off-balance sheet items

3. Credit Risk Mitigationa. Collateralized transactionsb. On-balance sheet nettingc. Guarantees and credit derivatives

4. Securitization FrameworkD. Regulating Capital Adequacy in the United Kingdom—

Implementation of Basel II1. Exposure Reclassification2. Asset Management Techniques—Generally

a. Transfer of loan assetsb. Novationc. Assignmentd. Declaration of truste. Sub-participationf. Undrawn commitments

3. Commitments to Lend4. Credit Risk Mitigation Techniques

a. Financial collateralb. Non-Financial collateralc. Guarantees and credit derivativesd. Netting of financial obligations

III. Regulation of Large Loan Exposures

11.0211.0211.0811.09

11.1011.1211.1311.1411.1611.1711.1811.1911.2011.2111.2211.2311.2411.2511.26

11.2811.3111.3311.3411.3611.3711.3811.3911.4011.4111.4211.4311.4411.4511.46

11.49

IV Regulation of Debentures 11.51

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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 (MirandaProjects/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

xxiv