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DF SGS 5 Consolidation Part 2
- Module
- Debt finance
Comprehensive exam notes on SGS 5 debt finance based on the learning outcomes and small group session activities at BPP. These notes are a continuation of Part 1.
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Loan Transfers: ScenariosScenario 1 – Key Objectives
- The existing lender Bank A (‘EL’) was the arranger of the loan and the arrangement fee was low.
- EL wants to preserve its’ relationship with the borrower and its’ reputation as an arranger of syndicated loans.
- EL needs to transfer all of its’ participation due to internal credit committee (‘ICC’) requirements (not re borrower concerns)
- This is not necessarily due to any concerns regarding the financial condition/prospects of the borrower as the borrower is still
- Loan is not secured
Novation [not suitable]
Advantages Disadvantages
1. would satisfy EL’s main objective of complying with its ICC 1. B’s consent required (assuming none of the existing
requirements syndicate lenders or their affiliates are interested in taking
2. Cz EL wld no longer be taking any credit risk on the on EL’s participation)
downgraded borrower (i.e. a true “clean break”) 2. Compromise relationship with borrower
3. EL = put in funds for the full amount of the facility 3. Damage their reputation and market profile
4. Facility = excluded from EL’s balance sheet for capital -> EL was sole Arranger plan to bail-out = first sign of trouble
adequacy purposes -> if it becomes public knowledge -> shows lack of trust
5. Transfer = quick and easy to document ( transfer certificate) (decrease EL’s profile in Arranger market.
can be used (LMA)
LMA assignment[not suitable]
Advantages Disadvantages
1.LMA assignment = similar effect to novation; SAME ADVANTAGES 1.B’s consent is required.
2.LMA assignment (vs. common law) -> NL agrees to assume all of the 2.LMA assignment = same
obligations under the loan agreement but: relationship/reputation issues in respect of
On facts: loan is fully drawn down term loan => NO FUTURE LENDING novation above.
OBLIGATIONS
3.B notified of assignment cz: copy of assignment agreement -> sent to the
borrower (LMA)
4.Loan would be excluded from the EL’s balance sheet so satisfying EL’s ICC
requirements (key consideration)
Sub-participation
Advantages Disadvantages
1. Reputation & relationship: B’s consent not required + won’t know re sub- 1.EL to pay a fee to NL if the margin on the loan is
participation insufficient to induce NL to enter into the sub-
2. LMA - requires an express confidentiality undertaking in favour of B participation (i.e new lower credit rating &
However LMA allows the disclosure by EL of info re B to potential sub- increased risk re B).
participants provided they enter into a “back to back” confidentiality 2. EL retains the rescheduling risk.
undertaking 3. EL may have to negotiate w/t B
Therefore confidential information re B can be passed to NL w/o B being if unable to agree to waivers/ deferrals of
aware of the sub- participation payments w/o NL’s consent -> existence of the sub-
ensures relationship w/t B & reputation of EL is not compromised participation may then become apparent to B &
3. No credit risk on EL: satisfies EL’s ICC impact its relationship w/t EL
-> EL will be put in funds for the full amount of the loan immediately (bcs it’s a
fully drawn down term loan)
-> risk of borrower default will be passed to NL.
Risk-participation
Advantages Disadvantages
1. Reputation & relationship: consent not required + won’t know 1. EL not placed in funds (can’t ‘reinvest’)
re participation 2. Loan will remain on EL’s balance sheet for capital adequacy
2. EL will retain credit risk although on NL (not B!) calculations.
3. EL will have to pay a fee to NL
Conclusion: sub-participation is likely to be the most suitable option followed by risk- participation -> allow sEL to meet both commercial
objectives of complying with their ICC requirements and protecting their relationship/reputation.
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