Syndicated Lending Flashcards
What is a Syndicate?
Gathered by an Arranger and headed by an Agent, a Syndicate is a group of Lenders that collectively lend to a Borrower.
Textbook, P. 452.
What is Z’s Definition of a Syndicated Loan?
“A number of bilateral loans advanced on identical terms which are bound together by an embedded intercreditor agreement.”
Textbook, P. 454.
Z grounds his conception in the fact that Syndicates operate on an agreed-upon set of terms, namely those governing coordinated action, voting, creditor ranking, and securitiy ranking (amonst others), and how each of these terms emphasize, “the collective nature of a syndicated transaction.” This, however, can be juxtaposed with Lenders’ separate liability and separate rights against the Borrower.
What is the Purpose of Syndicated Lending?
To enable the making of larger loans than would otherwise be possible.
Textbook, P. 451.
What Difficulties does Syndication allow Individual Lenders to Overcome?
- Over-exposure to a single Borrower.
- Risk assessment and appetite.
- Capital adequacy considerations.
- Insufficient funding.
Textbook, P. 451.
Why is Syndicated Lending more efficient than the Making of Several Bilateral Loans?
It obviates, “a great deal of unnecessary duplication associated with separate bilateral lending by each bank,” as well as simplifies the set of terms the Borrower must observe.
Textbook, P. 452.
What is the Role of the Arranger (Lead Manager)?
To put together the transaction, i.e. to find willing Lenders and progress the facility to the contractual stage.
Textbook, P. 453.
What are the Steps involved in Arranging a Syndicated Loan?
- Information Memorandum: Create a ‘prospectus’ on the Borrower, including financial and business details.
- Guage Interest: Seek out interested Lenders and ask for an ‘In Principle’ commitment.
- Drafting and Negotiation: Draft the contract, negotiate terms with the Borrower, bring it before the Syndicate for comments, and repeat until all parties are satisfied.
- Execution: Have all the parties sign the contract.
What is the Information Memorandum (IM)?
Comprising a summary of what the Arranger regards as relevant, it is, “the basis upon which potential Lenders start their credit process,”
Textbook, P. 471.
Is it Reasonable for a Lender to assume that an IM contains all relevant information pertaining to a Borrower or Facility?
No.
Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland Plc. [2010] EWHC 1392 (Comm) at [92]-[93].
An IM should not be taken to contain, “everything that anyone might think relevant.”
Is an Arranger Liable to the Borrower if it fails to gather a Syndicate?
Not necessarily. The Arranger’s performance obligation and liability thereof will depend upon whether it has promised reasonable/ best efforts or to underwrite.
What is the Role of the Agent Bank?
To coordinate the facility, “once it has been formalized by the signing of documentation,” i.e. post-execution. Typically, it may also act as Security Agent/Trustee.
Textbook, P. 453.
This comes with the added benefits of maintaining a high status in the Syndicate and a strong relationship with the Borrower.
Lecture Notes.
May there be Multiple Arrangers and Agent Banks?
Yes. Indeed, this is almost necessary for very large syndicated loans.
Can a Member of a Syndicate transfer its Lending Obligations to another Bank?
Yes, either to another Member or to an outsider.
It is also possible for a bank to assume responsibility for the entire loan and sell off parts of it through secondary syndication.
What if a Security Agent is based in a Jurisdiction which does not recognize Trusts?
A parallel debt clause may be used in lieu, wherein the Borrower acknowledges, “a separate and additional debt owed by it to the Security Agent.”
Textbook, P. 453.
This separate debt would exist in parallel to the debt owed under the facility, and would, “equal… the amount owed by the Borrower to the Lenders at any time during,” the facility. Awarding this security in favor of the Security Agent, as opposed to the Syndicate, allows for loan transfers without the need to release and re-establish security. This arrangement, however, exposes the Syndicate further to credit risk.
Given the Separate Nature of Lenders’ Rights against the Borrower, can any One of them Unilaterally Accelerate its Loan?
No. Such a decision will, “usually require a decision… by the requisite majority of Lenders.”
Textbook, P. 455.
How are Payments made to the Lenders in a Syndicate?
The Borrower will pay the Agent, who will, “distribute [the payment] on a pro rata basis amongst the Lenders.”
Textbook, P. 455. LMA Standard Form, Cl. 28.
This arrangement will be reflected in the facility’s payment clauses.
What is a Sharing Clause?
One which requires a Lender who has recieved superfluous funds to return the surplus to the Agent so that it may amend the error.
Textbook, P. 455.
This provision applies exclusively to payments due under the facility, including set-off rights and enforcement of security, but not litigation or arbitration recoveries if the Syndicate declined the recipient Lender’s invitation to join proceedings earlier.
Azevedo v Importacao [2013] EWHC Civ 364, [2015] QB 1.
What is the Commercial Purpose of a Sharing Clause?
To maintain pari passu treatment between creditors as it pertains to the distribution of payments.
Textbook, P. 455.
Failing a Super-Majority, how may a Majority of Lenders force through an Amendment?
Using a Scheme of Arrangement, wherein a Lender(s) which owns ≥75% of the debt can make an amendment that binds all creditors, subject to court approval.
Companies Act 2006 – Part 26.
This mechanism can be used by non-English Borrowers provided that English law governs the facility.*
*Re Rodenstock [2011] EWHC 1104 (ch).
What is a Yank-the-Bank (YTB) Clause?
One which entitles the Borrower to replace a Lender that blocks a waiver or amendement that requires unanimous approval and would otherwise pass.
Textbook, P. 458.
What is a Snooze-You-Lose (SYL) Clause?
One which nullifies a Lender’s vote if it is not submitted before a specific date and time.
Textbook, P. 458.
Can the Borrower, its Group, or Lenders connected to either be Barred from Voting, and if so, Why?
Yes, so as to better safeguard the Syndicate’s interest.
Is it Mala Fide if a Lender votes in accordance with the Instructions of a Third Party?
No, but only if the Lender’s vote is in furtherance of a contractual obligation to the Third Party.
Textbook, P. 458; Carey Group Plc v AIB Group (UK) Plc [2011] EWHC567(Ch).
On Voting, are Lenders Liable for the Accuracy of the Information or Explanations they exchange with one another?
Yes, but only insofar as a reasonable duty of care thereto obtains.
Textbook, P. 458; Torre Asset Funding Ltd v Royal Bank of Scotland Plc [2013] EWHC 2670 (Ch).
If a Loan Agreement comprises Multiple Facilities, what is the Benefit of Segregating Voting Rights along the lines of Facilities?
Avoiding inter-creditor conflicts of interest.
Textbook, P. 459; Redwood Master Fund LTd. v TD Bank Europe Ltd. [2002] EWHC 2703.
From whence does Voting Power arise in a Syndicated Loan?
The inter-creditor agreement, which must stipulate the purpose, scope, rules, and thresholds involved in voting.
Textbook, P. 459; Hay v Swedish & Norwegian Ry Co. (1889) TLR 460.
Generally speaking, are the Majority empowered to outright bind the Minority?
Yes, and can do so in their own interets if that the vote is not tainted.
Textbook, P. 459; British America Nickel Corp Ltd. v MJ O’Brien Ltd. [1927] AC 369.
Can a Lender enjoy a Special Advantage in a Vote?
Yes, but it is only effective if disclosed.
Textbook, P. 459; British America Nickel Corp Ltd. v MJ O’Brien Ltd. [1927] AC 369; North-West Transportation Co. v Beaty (1887) 12 App Cas 589.
Can an Inducement that is Openly and Equally Promised amount to Bribery or Oppression?
Yes, but only if the effect of the vote passing would directly harm the minority.
Textbook, P. 460; Azevedo v Importacao [2013] EWHC Civ 364, [2015] QB 1.
Can the Court intervene on Grounds of Unfairness or Opression more broadly?
Yes, but only if such action was both deliberate and manifestly mala fide, which sets a very high standard of proof.
Textbook, P. 460; Redwood Master Fund Ltd. v TD Bank Europe Ltd. [2002] EWHC 2703.
Under Redwood, so long as the Majority is pursuing its own commercial interests, regardless of how discriminatory the side-effects, the court is unlikely to interefere. Coercion and intimidation, particularly when they are the sole or dominant function of an action, are however a textbook example of when it will grâce à mala fide.*
Assenagon Asset Management v Irish Bank Resolution Corp. [2012] EWHC 2090, [2013] 1 All ER 495.
Is a Syndicate a Partnership for Legal Purposes?
No. Lenders severally bear their own profits, losses, and liabilities, and can transfer their rights and obligations to other entities, all of which contravene the law and spirit of partnership.
Textbook, P. 461-464; Partnership Act 1980.
This would be a further undesirable arrangement because it would undermine the capital adequacy advantages of syndicated lending by leading regulators to, “each lender to have a commitment equal to the size of the entire loan,” and assess their balance sheets accordingly.
Lecture Notes.
Is each Lender in a Syndicate entitled to Accelerate the Loan under the appropriate circumstances?
No. Cl. 23.13 specifies that the Majority Lenders’ assent is required to accelerate.
Lecture Notes.
‘Majority Lenders’ is defined as those, “whose Commitments aggregate more than 66⅔ per cent of the Total Commitments,” or it Total Commitments equate to zero, “aggregated more than 66⅔ per cent of the Total Commitments immediately prior to the reduction).”
LMA Standard Form, Section 1.
Is a Syndicate a Collective Investment Scheme?
No, as it is exempt.
See: Financial Services and Markets Act (Collective Investment Schemes) Order 2001 – Para. 6 & 9.
What is the Mandate given by the Borrower to the Arranger?
An agreement to, “assemble and bring the transaction to fruition.”
Textbook, P. 469.
Described in the mandate, or the term sheet accompanying it, will be the proposed transaction and its principal terms and tthe arranger’s fees (amongst other things). Here, the Arranger will undertake to reasonably endeavor the transaction, thus creating a performance obligation, but the inclusion of either a MAC or Market Flex clause may allow it withdraw or amend the terms, respectively.
What is a Market Flex clause?
One which allows the Arranger to amend the terms of the agreement in the event of adverse economic changes which affect, “the financial markets and the availability of finance for the transaction.”
Textbook, P. 470.
What is the Commercial Purpose of a Market Flex clause?
To enable the Arranger to, if necessary, “sweeten the [deal], so as to make [it] more attractive to [Lenders].”
Textbook, P. 470.
Sweeting the deal usually entails making the financial terms more profitable for Lenders, but could extend to the inclusion of guarantees or security.
Are Market Flex clauses discretionary?
Yes. Subject to drafting, the Arranger has a, “considerable amount of discretion,” as to when it activates and to what extent the deal needs to be sweetened.
Textbook, P. 470.
When do Market Flex clauses expire?
Once the parties have executed the transaction.
Textbook, P. 470.
How may the Borrower best protect itself against an Overzealous Exercise of the Market Flex clause?
By specifically defining the cirumstances wherein it can arise, as well as restricting the extent to which terms can be amended.
Textbook, P. 470-471.
Other means, e.g. mandatory consultation prior to amendment or termination where the Borrowe is dissatisfied with the deal, may prove ineffective if the Borrower cannot afford to walk away.
What are the Arranger’s Legal Exposures?
A Claim by either the Borrower or Syndicate in:
- Breach of Contract.
- The Tort of Negligence.
- The Tort of Deciet.
- Fraudulent Misrepresentation.
- Negligent or Innocent Misrepresentation.
- Negligent Misstatement.
- Breach of Fiduciary Duty.
Textbook, S. 9.4.
Why would a Borrower Claim against the Arranger?
It may be unhappy with, “the performance of the tasks undertaken,” particularly if a syndicate fails to materialize.
Textbook, P. 473.
So long as the mandate or term sheet were well-draft and the Arranger acted, “competently and exercised reasonable care and skill,” the any such claims will likely fail.
Why would a Syndicate Claim against the Arranger?
The end transaction may unfold to be riskier than bargained for, especially in a way that leaves the Syndicate believing it was ill-advised.
Textbook, P. 473.
A Syndicate is the greatest threat to the Arranger because it is the most well-funded party in the transaction. Furthermore, it is an especially threatening force if the Borrower would otherwise provide poor recourse because it would become insolvent. Any claim would likely arise in tort, due to the lack of a contractual relationship pre-execution.
What is the Commercial Purpose of Claiming in the Tort of Negligence?
To, “recover for pure economic loss.”
Textbook, P. 475; Hedley Byrne & Co. Ltd. v Heller & Partners Ltd. [1964] AC 465.
What are the Elements of the Tort of Negligence?
- Existence of a Duty of Care;
- Scope of the Duty of Care;
- Breach of the Duty of Care;
- Reliance upon the Duty of Care;
- Causation of Loss arising from the Breach;
- Foreseeability of Loss arising from the Breach.
Textbook, P. 475.
In Determining whether a Duty of Care is present, what is the Court attempting to do?
“To discover what could reasonably be inferred from the defendant’s conduct against the background of all the circumstances of the case,” both as a matter of fact and of fairness and public policy.
Textbook, P. 476; HM Commissioners of Customs and Excise v Barclays Bank Plc. [2006] UKHL 28.
As laid out in Barclays Bank, what are the Three Tests for determining the Existence of a Duty of Care?
- The Assumption of Responsibility Test.
- The Threefold Test.
- The Incremental Test.
HM Commissioners of Customs and Excise v Barclays Bank Plc. [2006] UKHL 28.
What is the Assumption of Responsibility Test?
A test of, “whether the defendant voluntarily assumed responsibility for what he said and did vis-à-vis the claimant, or is to be treated by the law as having done so.”
Textbook, P. 477; HM Commissioners of Customs and Excise v Barclays Bank Plc. [2006] UKHL 28.
This test was championed in the cases of Spring v Guardian Assurance Plc., Henderson v Merrett Syndicates Ltd., and White v Jones. Lord Geoff based it off of Lord Devlin’s speech in Hedley Byrne.
What constitutes Voluntary Assumption of Responsibility?
“A conscious, considered, or deliberate decision on the part of the defendant.”
Textbook, P. 477 paraprhasing HM Commissioners of Customs and Excise v Barclays Bank Plc. [2006] UKHL 28 at [72].
For our Purposes, when does an Assumption of Responsibilty denote the Existence of a Duty of Care?
When the relationship it denotes possesses the equivalent characteristics of a contract, absent consideration, but this should not be taken too literally.*
Textbook, P. 477; E.g: Calvert v William Hill Credit Ltd. [2008] EWHC 454.
The Court in Barclays Bank stated that such was the position in Hedley Byrne, White v Jones, and Henderson v Merret Syndicates Ltd.. Interestingly, according to [184]-[194] of the lattermost case, the same paradigm could be upheld in cases where a tortuous claim is brought in lieu of one in contract.
*See: Smith v Eric S Bush; White v Jones; and Phelps v Hillingdon London Borough Council.
On what Basis is the Assumption of Responsibility Test to be Applied?
On an objective basis.
Textbook, P. 477; HM Commissioners of Customs and Excise v Barclays Bank Plc. [2006] UKHL 28 at [5].
What is the Threefold Test?
A test of:
- “Whether the loss of the Claimant it was a reasonably foreseeable consequence of what the Defendant did or failed to do;
- Whether the relationship between the Defendant and the Claimant was one of sufficient proximity; and
- Whether in all circumstances, it [is] fair, just, and reasonable to impose a duty of care on the Defendant towards the Claimant.”
Textbook, P. 478; Outined in Caparo Industries Plc. v Dickman [1990] 2 AC 605 at [617]-[618]; Approved in HM Commissioners of Customs and Excise v Barclays Bank Plc. [2006] UKHL 28 at [4].
What constitutes Sufficient Proximity?
“A measure of control over, and responsibility for, the situation giving rise to the loss.”
Textbook, P. 479; Sutradhar v Natural Environment Research Council [2006] UKHL 33 at [38].
In the same case, at [32], Lord Hoffman stated that the Three Fold Test is to be the standard framework for examining whether there exists a duty of care bewteen two parties.
When is it Unnecessary to demonstrate the ‘Fair, Just, and Reasonable’ criterion?
When it can shown that there has been a voluntary assumption of responsibility by the Defendant.
Textbook, P. 479; Henderson v Merret Syndicates Ltd. [1995] 2 AC 145 [180]-[181]; Echoed in Williams v Natural Life Health Foods Ltd. and HM Commissioners of Customs and Excise v Barclays Bank Plc. [2006] UKHL 28.
What is the Incremental Test?
An adjunctive test which states new legal categories of negligence should be developed, “incrementally and by analogy with established categories.”
Textbook, P. 480; Sutherland Shire Council v Heyman [1985] 157 CLR 424 at [481]; Approved in Caparo Industries Plc. v Dickman [1990] 2 AC 605 at [618].
Will an Arranger owe a Duty of Care to either Borrower or the Syndicate if it acts through an Agent?
Yes, and in addition, the Agent will likewise bear personal liability if it can shown, objectively, that it assumed responsibility towards a Claimant who reasonably relied on this assumption.
Textbook, P. 480; Williams v Natural Life Health Foods Ltd. [1998] 1 WLR 830 at [835]-[836].
How can the Scope of an Arranger’s Duty of Care be constructed?
Either narrowly, wherein reasonable care need only be exercised in specific tasks, or widely, wherein it need be exercised, “to ensure that the transaction was suitable for [the Lenders]… [or that they] were correctly appraised,” and the transaction well-investigated.
Textbook, P. 481-482; (Wide) Aneco Reinsurance Underwriting Ltd. v Johnson and Higgins Ltd. [2001] UKHL 51; (Narrow) Torre Asset Funding v RBS [2013] EWHC 2670 (Ch).
The consequence of a narrow construction is that it increases the likelihood of the Arranger escaping liability for negligence, or at the very least, paying a lower sum in damages.
