Loan Transfers Notes

LOAN TRANSFERS

For a loan transfer question in the exam, take this approach:

1. What are Existing Lender’s key objectives?

1. RCF or term loan (fully drawn down)?

• Does EL have further obligations?

2. Is there security and if so, what will happen to it?

• Where are assets held?

• What is needed to transfer benefit of security (if at all)?

3. Does EL needs funds or just to deal with internal credit issues?

• Risk participation does not put EL in funds.

4. Commercial relationship issues

• Is borrower consent needed/will borrower be notified?

5. Withholding tax/increased costs issues with NL

2. Consider each of the transfer methods in turn, linking back to the key objectives and applying the law to the facts.

3. Which method is the most suitable for EL to achieve its key objectives?

Reasons for loan transfers

1. Risk management (internal credit committee controls)

2. Capital adequacy (external controls)

3. Portfolio management

• E.g. bank may want prestige and initial involvement or initial agency fees, but does not consider the interest rate on the loan to be high enough to keep the loan on its books

4. Non-performing loans (cutting losses and selling the loan to firms which specialize in distressed debt)

5. Syndication (may not be possible for a complete syndicate to be put together in time for signing; loan transfers achieve the secondary syndication)

Transfer objectives

1. Non-payment risk (will the method of transfer replace the risk of non-payment of borrower with non-payment of NL or remove the risk altogether?)

2. Availability of funds (for investing in new projects – EL must be put in funds)

3. Obligation to lend further amounts (must ensure that both rights and obligations assumed by NL and does not leave EL at risk for further amounts)

4. Regulatory concerns

5. Rescheduling risk

Practical issues

(a) Borrower’s consent

• Borrower’s consent will ordinarily be required for novation or assignment.

• Under the LMA, the Borrower consents in advance to:

1. any assignment (LMA-style) or transfer to another Lender or Affiliate of a Lender; or

2. any assignment or transfer made at a time when an EoD is continuing.

• Provisions making it easier for EL to assign/novate:

  • Under the LMA, the Borrower implicitly consents to the use of ‘Transfer Certificates’ instead of full novation agreements.

  • The Borrower must not unreasonably withhold or delay consent to an assignment or transfer.

  • The Borrower will be deemed to have given its consent five Business Days after the EL has requested it.

  • The Borrower cannot withhold consent to an assignment or transfer solely because the assignment or transfer may result in an increase to the Mandatory Cost.

• Provisions protecting the Borrower:

• Under the LMA, the Borrower will not be liable for any increased costs which arise because of the novation/assignment on a secondary market loan transfer (note that primary syndication can occur after the loan agreement has been signed!)

• This protects the buyer from having to pay more by way of increased costs or gross-up to the NL than the EL would have been entitled to. However, it may make it harder for EL to find a NL willing to take on the loan.

(b) Relationship

• It may be important for EL to remain the ‘lender of record’, especially if its main purpose in entering the loan in the first place was to establish a relationship with the borrower.

• Hence, it may be important to select a loan transfer method which allows the EL to continue to be the lender of record, even if it transfers the loan behind the scenes.

  • Can borrower’s consent be avoided?

  • Can confidential information be released to prospective NLs without borrower consent? [see below]

(c) Confidentiality

• EL will have given an express confidentiality undertaking to the borrower. However, it will also wish to disclose confidential information to prospective NLs to market the transfer. It may not be able to do so without the consent of the borrower. HOWEVER, this would negate any benefit of not requiring borrower’s consent for certain transfer methods!

• Provisions making it easier for the EL:

  • The LMA allows the disclosure of confidential information as the EL considers appropriate in the case of transfers or potential transfers, subject to NL entering into a confidentiality undertaking. This provision is not always included, so check every loan agreement!

(d) Secured loan

• If a loan is secured, this will influence the method of transfer chosen as security is dealt with differently under the various methods of transfer

TRANSFER METHODS

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