SGS 5 (Transfers) Flashcards
Why is novation quick and cheap?
Use of transfer certificates avoids administrative burden of the novation agreement having to be executed by all parties (no need for Borrower’s signature, only EL, NL and Agent)
Nb borrower consents to use of certificates in LMA agreement.
What does ‘put in funds’ mean?
How can one link to LMA?
EL receives principal amount from NL under the loan, allowing it to invest in new projects.
‘We are told that the LMA Agreement has been used so we know B will be subject to increased costs clause…’
What does capital adequacy refer to?
require banks to maintain a sufficient proportion of capital, compared to the amount lent by the bank, to protect depositors in the event that the loans are not repaid.
Describe how an increased costs clause works?
protects borrower on secondary market loan transfer against liability for increased costs (capital adequacy, regulatory costs in making the loan) attributable to novation or tax gross up.
B need only pay out under the clauses to NL if would have had to do so to EL.
EXCEPT for primary syndication, B has to pay increased costs / gross up regardless.
What is novation?
NL & B agree with EL that NL will assume identical rights and obligations to those of EL
What is the issue with assignment under common law?
How does LMA assignment get around this problem?
Obligations cannot be transferred.
Parties, in addition to assigning rights, make a contractual agreement that EL releases its obligations and the NL assumes equivalent obligations
What is sub-participation?
EL and NL agree that NL will pay EL the principal amount of the loan being transferred in return for EL passing on payments of principal + interest if and WHEN it receives from borrower.
What is risk participation?
EL and NL enter into an agreement whereby NL will pay EL to the extent that the Borrower does not pay the amount it owes to EL in full.
Akin to a guarantee
Swaps risk of non-payment of borrower for non-payment of NL.
Is Borrower consent required for novation and / or LMA assignment?
Both require consent but given in advance for EL syndicate member or affiliate in LMA agreement.
Does LMA Assignment and Novation put the EL in funds?
Yes for the principal amount novated / assigned.
Therefore amount removed from EL’s balance sheet / capital adequacy ratio.
What is the balance sheet position for LMA assignment?
Copy of assignment agreement sent to borrower, who is NOTIFIED, removes assigned loan from EL’s balance sheet for capital adequacy purposes.
What are the issues with security in a novation context?
Novation replaces existing obligations with new ones.
Restarts hardening periods during which security could be set aside as a preference or transaction at undervalue.
Re-dating security could cause it to lose priority over other security.
Ensure security trustee appointed and holds benefit for lenders from time to time.
How is security dealt with in LMA assignment?
Not automatically assigned so a separate agreement in writing to transfer benefit is required.
Useful alternative to novation where jurisdiction does not recognise concept of security trusteee.
Who signs the agreements for Novation LMA Assignment Sub-participation Risk participation?
Agent, EL and NL
EL, NL, Agent (countersigns), nb addressed to Agent AND borrower (thereby notifying the borrower).
EL and NL
EL and NL
Describe the risk transfer in sub-participation?
NL takes repayment risk for drawdown amounts.
NL usually required to match EL’s future lending obligations in SP agreement. El takes a credit risk on NL until B’s requests for further drawdowns are funded by NL.
