This is an extract of our Loan Transfers document, which we sell as part of our Debt Finance Notes collection written by the top tier of Cambridge And Oxilp And College Of Law students.
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Loan TransfersWhy Transfer: Risk management (i.e. exposure limits exceeded) - creditcommittee limits Capital adequacy - may need to transfer loans to free up capital?
Basel III: cushion amount will increase Does not suit portfolio?
Not profitablePrestige of initial involvement/agency feesMay 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 shortSmall 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 toNL 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 ANDburden is transferred) Issues meeting capital adequacy requirements (method of transfermust 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 ofrecord Confidentiality - EL has express contract (LMA clause 36) andcommon 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 onmethod
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