#15500 - Loan Transfers - Debt Finance

• Original loan agreement between EL (existing lender) and the borrower is cancelled and replaced with a new loan agreement between NL (new lender) and the borrower

• All parties must agree to the novation

• NB LMA provides Transfer Certificates which need only be signed by EL, NL & Agent. But consent to use TC's is needed.

• EL pays fee to Agent to cover administrative expenses

• Existing security will be discharged and replaced with a new one in favour of NL.

• Security Trustee holding for benefit of "members as a whole from time to time" circumvents the problems of priority for younger securities. (may not work in overseas jurisdictions)

• Transfer of EL's existing rights to NL.

• Obligations cannot be assigned.

• Only EL & NL need to parties to agreement.

• Consent of borrower not required unless transfer will result in increased costs.

• Only a legal assignment if the requirements of s.136(1) Law of Property Act 1925 are satisfied:

  1. Absolute

  2. In writing and signed by EL

  3. Notified to borrower - important for NL in particular.

• Otherwise equitable assignment only.

• Priority according to date of notice to borrower (Dearle v Hall)

• Need separate security assignment if there is any security (may be only way if trust law not recognised in foreign jurisdiction)

• No transfer of rights - separate agreement.

• NL agrees to pay EL the principal amount of the loan being transferred, in return for EL passing on payments of principal and interest.

• NL may also charge a fee.

• Risk borne by NL - EL is only obliged to pay principal and interest to NL if EL has received the relevant amounts from borrower - double credit risk for NL.

• Sub-participation agreement between EL and NL.

• No borrower consent needed - borrower may not even know.

• Provide for NL to place EL in funds as and when further advances are made.

• EL remains lender of record AND entitled to any security.

• LMA = NL has no right of subordination.

• EL not agent/fiduciary

• EL must pass on security, interest etc.

• Separate agreement.

• NL will only pay EL to the extent that the borrower does not pay the amount it owes to EL in full.

• Like a guarantee or insurance - NL will make good any amount borrower fails to pay to EL.

• Risk participation agreement between EL and NL.

• No borrower consent needed - borrower may not even know.

• NL has no direct relationship with borrower, EL is under a duty to send to NL any monies EL recovers from the borrower.

• Risk participation does not pass the benefit of any security to NL.

• Right of subrogation at common law, but not under LMA.

• EL under duty to forward any monies from security pro rata to NL.

• Clean break – complete transfer of risk and benefits

• EL put in funds

• Removes loan from EL’s balance sheet

• Can transfer all or part of the loan

• Use of LMA Transfer Certificates = quick and cheap method

• Easy for security trustee to hold security for benefit of NL

• Borrower consent needed at common law

• LMA = consent in advance if transfer to existing lenders/their associates only, otherwise borrower consent needed

• Change in identity may trigger tax gross up/increased costs - borrower may refuse consent

• Borrower protections may exclude these costs but the NL may refuse to buy.

• Security trustee may not be recognised abroad

• EL will not be lender of record

• EL put in funds

• Removes drawn down amounts from EL’s balance sheet

• Consent not always needed from borrower and assignment agreement need only be signed by EL and NL

• Assignment transfers rights, not obligations – not an effective method where there are outstanding lending obligations

• Serious issues for NL if notice not given to borrower – borrower can make payments to EL so NL takes a double credit risk.

• Additional costs passed on to borrower

LMA Assignment

Release and assumption of obligations as well as assignment of rights.

Contractual agreement that EL releases its obligations and NL assumes equivalents.

Executed by EL & NL with Agent counter-signing

Receipt by borrower of copy = actual notice.

Strict consent requirements - like novation.

• Borrower consent not generally required – but agreement can vary this

• EL remains lender of record

• Once put in funds, EL’s risk is fully removed

• EL still bears risk of future advances until they are requested, then NL will put EL in funds

• Removes drawn down amounts from EL’s balance sheet

• EL takes risk on NL when it comes to putting it in funds before outstanding commitments are due to be complied with

• Confidentiality – NL will want borrower’s info. NB clause 36.2(b)(ii) LMA

• Reschedule risk – who will bear it? EL may not be able to amend agreement substantially without NL’s consent

• Benefit of terms are not transferred to NL – e.g. tax gross up

• NL is exposed to the double credit risk of borrower and EL

• Borrower consent not generally required – but agreement can vary this

• EL remains lender of record

• Although loan will remain on EL’s balance sheet, but risk participation may be enough to satisfy the internal credit committee

• NL pays nothing to EL unless and until the borrower defaults – EL cannot invest in other projects (not put in funds immediately)

• Does not get rid of risk altogether as EL still reliant on NL paying – exposure to borrower is simply replaced with exposure to NL

• Loan still on balance sheet