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LPC Law Notes Finance and Capital Markets Notes

Transfer Banks Rights Events Of Default Subordination Notes

Updated Transfer Banks Rights Events Of Default Subordination Notes

Finance and Capital Markets Notes

Finance and Capital Markets

Approximately 204 pages

A collection of the best Capital Markets and Loans* 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 Capital Markets and Loans notes available in the UK this year. This collection is...

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

BDF – WS7 – TRANSFERRING A BANK’S RIGHTS, EVENTS OF DEFAULT & SUBORDINATION

WHY SELL A LOAN?

  • When a bank disposes of their loan = asset sale (i.e. the Loan is an asset of the bank which can be sold or bought)

  • Under E-Law contractual rights can be freely transferred (unless contract states contrary) but transfer of obligations require consent of all the P’s. Thus selling a loan requires borrower to agree to any changes in the bank’s obligations

  • The most basic aim of a bank in selling an asset (i.e. a loan) is to remove the risk associated with it

REASON EXPLANATION
Risk management

  • Too much emphasis on one type of loan or one type of borrower carries risk (concentration)

  • A bank may sell some existing loans to allow it to make others to spread its risk (diversify)

  • The most basic aim of bank in selling an asset (i.e. a loan) is to remove the risk associated with it

Realising capital

P.121

  • Realising capital in long term loans will help improve bank’s liquidity

  • Could enable bank to take advantage of new lending opportunities which may give better returns.

  • If bank want to concentrate on a particular market, may sell loans outside of that market
Balance sheet

  • A bank’s ability to lend is subject to internal & external requirements to retain a % of its capital as cover for its loans (‘regulatory capital requirements’ i.e.), thus,

  • If bank’s capital is entirely allocated, can’t participate in new loans (unless they carry a zero risk weighting)

  • Unless bank can raise more capital, it must sell some existing loans to release capital for backing new ones.
Profit

  • A bank may see an opportunity to make some short-term profit by selling a loan.

  • E.g. if interest rates start to fall, an existing fixed interest loan might become very marketable.

  • Conversely, if a borrower has defaulted or is performing badly, a lender may choose to sell its participation at a discount to crystallise any loss (see p4 ’types of assets sold’).
Prestige

  • Bank may want an initial involvement in a facility because it is high profile or important.

  • It may sell some or its entire share of the loan once it has derived any benefit to its market profile.

  • Some forms of asset sale will allow a bank to keep its name to a loan but to lay off the lending risk.
Syndication

  • A bank may, either alone or with a small group of banks (Lead Arrangers), sometimes provide the full amount of a loan but bring in other banks to form a syndicate ‘post-closing’.

  • This ‘postponement’ of syndication allows large loans to be made quickly.

¿What are the BORROWER’s CONCERNS?

  • Will there be increase costs provisions? (new bank may have higher costs)

  • Will they lose their current good relationship with the existing bank?

  • Complete prohibition on sale of the debt in the facility agreement would push up fees.

ADVANTAGES & DISADVANTAGES Of NOVATION
ADVANTAGES DISADVANTAGES

Moving obligation

- Novation is only proven method of moving contractual obligations as well as rights.

- This allows existing bank to dispose of a loan which has an unutilised commitment (eg, under an RCF). In RCF the obligation to pay B is renewed, so Novation is useful as the obligation is cancelled. Assignment would be a useless method for RCFs.

- Conversely, new bank achieves a relationship with borrower as if it were a party to facility agreement.

Consent

  • Need consent of all parties involved in original loan doc, incl. ga’tors (giving borrower a strong bargaining position (unless advanced consent or transfer certificates were used in the facilities agreement))

  • May be Difficult to get whole Syndicate to sign the necessary docs to effect novation

  • Solution = use a ‘transfer certificates’ clause in the loan agreement. Facility agreement will contain clause stating parties agree in advance that bank can novate any or all of its commitment.

  • To accept offer, new & existing bank must execute a transfer certificate (may need borower’s consent in some circumstances (see borrower’s perspective p5-?).

  • Pro-forma certificate usually a schedule to facility participation and/or its commitment.

  • Goodridge v Macquarie Bank Limited (Australian) held that a prior agreement to novate in loan agreement was invalid & simply an ‘agreement to agree’.

  • CoA in Habibsons Bank Ltd v Standard Chartered Bank (Hong Kong) Limited criticised Goodridge

  • Habibsons = obiter, but shows that properly drafted transfer certificates should still be effective.

  • A system similar to the transfer certificate is the transferable loan certificate (TLC). Uncommon.

  • Significant difference = TLC operates through agent bank issuing certificates & keeping a register of transfers.

Risk transfer

Novation can fully remove a loan (including any undrawn commitments) from existing bank’s Balance Sheet & so exclude it from any regulatory capital requirements. A clean break for the leaving bank.

Secured loans

  • Novation replaces existing with new obligations thereby restarting hardening periods for transactions at undervalue, preferences (ss238-241 IA 86) & floating charge avoidance (s245 IA)

  • Unlikely a liquidator will use these provisions

  • If security is re-dated at the time of novation, could lose priority

  • Solution (at common law) = appoint a security trustee to hold any security granted under loan on trust for the banks. Beneficiary banks may change with the security remaining.

  • Civil jurisdiction = ‘parallel debt’ structure.
ADVANTAGES OF NOVATION DISADVANTAGES OF NOVATION

Easy syndication

If original facility agreement includes transfer certificates (see disadvantage ‘consent’), existing (& any subsequent) bank can take on large commitment without delay of putting an underwriting syndicate together, knowing that it will easily be able to sell all/part of its commitment

Disclosure

For obvious reasons, it is difficult to hide the identity of a transferee bank using novation.

Sub-participation

...
ADVANTAGES OF SUB-PARTICIPATION

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