Offloading Risk Crib Sheet Notes

Offloading Risk

1. Why may a bank wish to sell a loan?

   1. Realise capital in order to improve its liquidity

   2. Distortion of loan portfolio

   3. Release capital to meet working capital requirements

   4. Short-term profit

   5. Prestige

   6. Postponement of syndication to allow large loans to be made quickly

2. Assignment

   1. Transfer of rights NOT obligations

   2. To be legal it must comply with 136 LPA 1925

      1. In writing and signed by assignor

      2. Absolute

      3. Notified in writing to any person against whom the assignor could enforce the rights

   3. Advantages

      1. Can transfer rights under a credit agreement without the borrower’s consent (equitable)

      2. On receiving the notice of an assignment, the borrower is obliged to pay any monies due under the assigned loan to the new bank

      3. Any security, or bank’s right as beneficiary of any security sharing agreement may be assigned along with the debt, but is usually held by a Security Trustee or under a parallel debt structure

      4. For equitable assignment a bank can assign part of an outstanding loan

      5. Can be confidential

   4. Disadvantages

      1. Cannot transfer the assignor’s obligations

         1. Existing bank cannot assign any undrawn commitments without the borrower’s consent, which makes assigning a revolving credit facility problematic

      2. FSA imposes a number of requirements in order that a legal assignment is fully effective in removing a loan from a bank’s balance sheet for regulatory capital purposes

      3. May attract Stamp Duty

         1. Exemptions for transfer of loan capital under 79(4) & 99(5)(a) FA 1986 may be able to be used

      4. If equitable assignment is not notified to the borrower, it will not know the identity of the bank to which its debt has been assigned and is entitled to continue making payments through the existing bank
         

3. Novation

   1. Involves one party’s rights and obligations under a contract being cancelled and discharged whilst a third party assumes identical new rights and obligations in their place

      1. Cancels an existing contract and replaces it with another

   2. Borrower’s promise to perform its obligations in favour of the new bank is consideration for the existing bank releasing the old debt

   3. Advantages

      1. Moves contractual obligations as well as rights

         1. Allows an existing bank to dispose of a loan which has an unutilised commitment

      2. Fully removes a loan from the existing bank’s balance sheet

         1. Excludes it from any regulatory capital requirements

   4. Disadvantages

      1. Consent of all the parties involved in the original loan document is required, including any guarantors

      2. Logistical problems involved in organising the borrower, any obligors and all the syndicate members to sign the document necessary to effect a novation

      3. Replaces existing obligations with new ones so very likely to restart the time periods during which the security might be set aside as a transaction at an undervalue, or preferred transaction

         1. Security being re-dated to the time of each novation may result in it losing its priority over other security

      4. Difficult to hid the identity of a transferee bank using novation...

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