A more recent version of these Offloading Risk Crib Sheet notes – written by Cambridge And Oxilp And College Of Law students – is available here.
The following is a more accessble 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:
Offloading Risk 1) Why may a bank wish to sell a loan?
a. Realise capital in order to improve its liquidity b. Distortion of loan portfolio c. Release capital to meet working capital requirements d. Short-term profit e. Prestige f. Postponement of syndication to allow large loans to be made quickly 2) Assignment a. Transfer of rights NOT obligations b. To be legal it must comply with 136 LPA 1925 b.i. In writing and signed by assignor b.ii. Absolute b.iii. Notified in writing to any person against whom the assignor could enforce the rights c. Advantages c.i. Can transfer rights under a credit agreement without the borrower's consent (equitable) c.ii. On receiving the notice of an assignment, the borrower is obliged to pay any monies due under the assigned loan to the new bank c.iii. 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 c.iv. For equitable assignment a bank can assign part of an outstanding loan c.v. Can be confidential d. Disadvantages d.i. Cannot transfer the assignor's obligations d.i.1. Existing bank cannot assign any undrawn commitments without the borrower's consent, which makes assigning a revolving credit facility problematic d.ii. 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 d.iii. May attract Stamp Duty d.iii.1. Exemptions for transfer of loan capital under 79(4) & 99(5)(a) FA 1986 may be able to be used d.iv. 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 a. 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 a.i. Cancels an existing contract and replaces it with another b. Borrower's promise to perform its obligations in favour of the new bank is consideration for the existing bank releasing the old debt c. Advantages c.i. Moves contractual obligations as well as rights c.i.1. Allows an existing bank to dispose of a loan which has an unutilised commitment c.ii. Fully removes a loan from the existing bank's balance sheet c.ii.1. Excludes it from any regulatory capital requirements d. Disadvantages
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