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LPC Law Notes Debt Finance Notes

Loan Transfers Notes

Updated Loan Transfers Notes

Debt Finance Notes

Debt Finance

Approximately 80 pages

A collection of the best LPC Debt Finance notes the director of Oxbridge Notes (an Oxford law graduate) could find after combing through dozens of LPC samples from outstanding students with the highest results in England and carefully evaluating each on accuracy, formatting, logical structure, spelling/grammar, conciseness and "wow-factor". In short these are what we believe to be the strongest set of Debt Finance notes available in the UK this year. This collection of notes is fully updated f...

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The following is a more accessible plain text extract of the PDF sample above, taken from our Debt Finance Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Loan Transfers

  • Why Transfer:

    • Risk management (i.e. exposure limits exceeded) - credit committee limits

    • Capital adequacy - may need to transfer loans to free up capital

      • Basel III: cushion amount will increase

    • Does not suit portfolio

      • Not profitable

      • Prestige of initial involvement/agency fees

      • May even be able to make a profit on the sale of a loan

    • Non-performing - distressed debt

      • Cut its losses when borrower in difficulty - sell at a discount

    • Post-closing syndication

      • E.g. where amount of loan is very large or time available is very short

      • Small group sign up to the primary syndication with the intention of syndicating further.

  • Transfer Objectives of existing lender (EL):

    • Transfer non-payment risk (can just swap the risk from borrower to NL but this may not always be appropriate - e.g when trying to limit exposure in certain country)

    • Free up capital (ensure EL is actually put in funds)

    • Obligation to lend further amounts (ensure both benefit AND burden is transferred)

    • Issues meeting capital adequacy requirements (method of transfer must take the loan off the balance sheet)

    • Rescheduling risk (negotiating with borrower in financial difficulty - does EL wish to bear this risk or pass it on)

  • Practical issues

    • Borrower's consent - is it needed? Will borrower agree?

    • Relationship - EL may want to remain the borrower's lender of record

    • Confidentiality - EL has express contract (LMA clause 36) and common law obligations of confidentiality to the borrower.

      • Borrower's consent may still be needed to release confidential info even if it was not needed for the execution of the transfer.

      • LMA clause 36.2(b)(i) & (ii) allows disclosure where appropriate in the case of transfers

    • Benefit of terms - will they pass to NL?

    • Secured loan - how security is dealt with will differ depending on method

Methods of Transfer

Novation Assignment/LMA Assignment Sub-participation Risk participation

  • 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.
Novation Assignment Sub-participation Risk participation

  • 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...

Buy the full version of these notes or essay plans and more in our Debt Finance Notes.

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