Loan transfers

Question 1

Why would banks transfer a loan?

Answer 1

• Manage risk
• Regulation (capital adequacy rules)
• Portfolio management (prestige + profit)
• Realising capital / improving liquidity
• Primary syndication
• Non-performing loans (distressed debt)

Question 2

LMA Assignment

Answer 2

Transfers EL’s existing rights to the NL
Does NOT create a new agreement
LMA overrides common law position - allows release and assumption of rights AND obligations

Question 3

Who is the ‘lender of record’?

Answer 3

Lender which the Borrower deals with day-to-day

Question 4

Assignment - common law position

Answer 4

Assign the benefit, NOT the burden of a contract
Benefit = rights
Burden = obligations

Question 5

What does being ‘put in funds’ mean? Why is this a transfer objective?

Answer 5

Important to ensure EL is put in funds
EL receives capital from NL
EL can invest in new loans

Question 6

Novation

Answer 6

NL assumes identical rights and obligations to those of EL under LA

Original LA is CANCELLED
Replaced with a new one

Question 7

Transfer objective - capital adequacy

Answer 7

Does the EL want the loan taken off the balance sheet?
Moved to NL’s balance sheet for capital adequacy purposes

Capital adequacy rules - protect bank’s creditors by ensuring the bank has sufficient capital to absorb losses from Borrower defaulting on their loans

Question 8

What is the difference between LMA Assignment and novation?

Answer 8

Assignment = actual transfer
Novation = original LA cancelled and replaced

Question 9

Sub-participation

Answer 9

EL and NL enter into a sub-participation agreement

NL pays EL drawn down amounts (when Borrower asks for next tranche, EL asks NL, NL gives to EL who gives to Borrower)

EL passes payments + interest when (and IF) it receives it from the Borrower

Question 10

Risk Participation

Answer 10

EL and NL enter into risk participation agreement

NL only pays EL to extent that Borrower does not pay full amount to EL

NL is basically a guarantor