Syndicated Lending

Question 1

In Finance, what is a Syndicate?

Answer 1

A group of Lenders who come together to lend to a Borrower.

P. 452.

They are usually gathered by an Arranger and represented by an Agent.

Question 2

What is the Commercial Purpose of Syndicated Lending?

Answer 2

For Lenders:
* Risk Diversification: Lenders can spread their credit exposure across multiple parties or circument capital adequacy requirements.
* Co-Lending Expertise: Different Lenders can leverage one another’s expertise, leading to superior decision-making.
* Access to Trophy Borrowers: Syndication affords Lenders access to Trophy Borrowers and the opportunity to build relations therewith.

For Borrowers:
* Greater Debt Quantum: Multiple Lenders can aggregately issue sums greater than would otherwise be possible for any one of them.
* Efficiency: Instead of negotiating with each Lender individually, the Borrower can deal with all of them, on the same terms, at once.

For Lenders and Borrowers:
* Reputation: Merely participating in a syndicated loan is a sign of rank.
* Efficiency: Syndication obviates the duplication involed in separate bilateral loans and simplifies the set of terms the Borrower must observe.

P. 451.

Reputational considerations are also relevant for both Lenders and Borrowers, as simply participating in a syndicated loan is a sign of rank.

Question 3

Why may a Borrower prefer a Syndicated Loan to a Bond Issuance?

Answer 3

• Confidentiality.
• Access to funds in multiple currencies.
• Insufficient reputation in capital markets.
• Ability to nest multiple facilities in one transaction.
• Access to a revolving structure with short-term advances.

P. 452.

Question 4

What is the Textbook Definition of a Syndicated Loan?

Answer 4

A series of substantially identical bilateral loans that are, “bound together by an embedded intercreditor agreement.”

P. 454.

There is an inherent paradox in Syndicated Lending — the Lenders act collectively regarding the loan’s formation, administration, and enforcement, but ultimately bear separate rights and liabilities against the Borrower.

Question 5

What is the Intercreditor Agreement?

Answer 5

The document that governs how the Lenders will administer, and if necessary enforce, the loan.

P. 459.

Question 6

Are Lending Obligations in a Syndicated Loan transferable?

Answer 6

Yes, subject to limitations.

At times, no or very few limitations will be placed because the Borrower understands its Lender will assume responsibility for the entire loan, and afterward, sell off parts on the Secondary Market.

Question 7

What is the Arranger?

Otherwise known as the Lead Manager.

Answer 7

The party that organizes the transaction by finding willing Lenders and progressing matters to execution.

The Arranger is usually, although not necessarily, also a Lender.

P. 453.

A single transaction can have multiple Arrangers.

Question 8

What Governs the Legal Relationship between the Arranger and the Borrower?

Answer 8

The Arranger-Borrower Mandate, which is an agreement to, “assemble and bring the transaction to fruition.”

P. 469.

Question 9

Is the Arranger Liable to the Borrower if it fails to gather a Syndicate?

Answer 9

Not necessarily, based on whether it agreed to exercise reasonable efforts, best efforts, or to underwrite.

In increasing order of severity for the Arranger.

Lecture Notes.

Question 10

Regarding the Arranger’s Liability to the Borrower, what are the distinctions between Reasonable Efforts, Best Efforts, and Underwriting?

Answer 10

For each of the following, in fulfilling its duties, the Arranger must:°
* Reasonable Efforts: Do all that is commercially reasonable.
* Best Efforts: Do all that is considered possible.
* Underwriting: Do all that is considered possible, and if it fails, assume the obligation to lend the remainder.°°

° Makdessi v Cavendish [2015] UKSC 67.
°° Re Lehman Brothers [2013] EWHC 2997 (Ch).

Question 11

What are the Steps involved in Arranging a Syndicated Loan?

Answer 11

1. Information Memorandum: Create a ‘prospectus’ on the Borrower, including financial and business details.
2. Guage Interest: Seek out interested Lenders and ask for an ‘In Principle’ commitment.
3. Drafting and Negotiation: Draft the contract, negotiate terms with the Borrower, bring it before the Syndicate for comments, repeat until all parties are content.
4. Execution: Ensure all parties sign the contract.

Lecture Notes.

Question 12

Regarding Efforts, how much does the Arranger usually agree to apply itself?

Answer 12

Reasonable, rather than best, efforts, let alone underwriting.

P. 472.

Question 13

In Syndicated Lending, what is the Information Memorandum?

Otherwise known as the IM.

Answer 13

A detailed summary of what the Arranger regards as legally, commercially, and financially relevant to the Syndicate’s calculus.

P. 471.

Question 14

Should the Syndicate assume that the IM contains all Relevant Information regarding the Borrower or Facility?

Answer 14

No. It should not be taken as containing, “everything that anyone might think relevant.”

Accordingly, claiming misrepresentation will prove quite difficult.

Raiffeisen v RBS [2010] EWHC 1392 (Comm) at [92]-[93].

Question 15

What is a Market Flex Clause?

Answer 15

A provision that allows the Arranger to amend the draft terms in case of adverse market changes that decrease the availability of finance.

P. 470.

Question 16

What is the Commercial Purpose of a Market Flex Clause?

Answer 16

To enable the Arranger to discretionarily sweeten a deal for the Syndicate if market conditions worsen, thereby allowing it to meet its obligations.

P. 470.

Question 17

What Qualifies when and how much the Arranger can sweeten the deal for the Syndicate?

Answer 17

• Express limits exacted by the Borrower regarding when the Market Flex activates and which terms it pertains to.
• Good faith and commercial reasonableness.°

P. 470.

° Golden Belt v BNP Paribas [2019] EWHC 257 (Comm)

Question 18

What is a Yank-the-Bank Clause?

Answer 18

A provision that allows the Borrower to replace a Lender which blocks a waiver or amendement that requires unanimous approval and would otherwise pass.

P. 458.

Question 19

What is the Commercial Purpose of a Yank-the-Bank Clause?

Answer 19

To provide the Borrower with greater flexibility and control over its financing arrangements.

Question 20

What is a Snooze-You-Lose Clause?

Answer 20

A provision that nullifies a Lender’s vote if it’s not submitted before a specific date and time.

P. 458.

Question 21

What is the Commercial Purpose of a Snooze-You-Lose Clause?

Answer 21

To encourage Lenders to participate in decision-making and ensure decisions are made efficiently and with certainty.

P. 458.

Question 22

Can a Syndicated Lender cast its vote under the Instruction of a Third Party?

Answer 22

Yes, but only if it is to further a contractual obligation to that party.

Carey Group v AIB Group [2011] EWHC 567 (Ch).

Question 23

In a Vote, are Lenders liable for the Accuracy of the Information they exchange with one another?

Answer 23

Yes, but only if there arose a duty of care between the relevant parties.

Torre Asset v RBS [2013] EWHC 2670 (Ch).

Question 24

If a Loan includes distinct Facilities, do Voting Rights extend to all Lenders regardless of Class?

Answer 24

No, voting rights are similarly distinct, so as to avoid conflicts of interest between Lenders and classes of Lenders.

Redwood v TD Bank [2002] EWHC 2703 is a cautionary tale.

P. 459.

Question 25

In a Vote, must the Majority pay mind to the Interests of the Minority?

Answer 25

Yes. The Majority owes them a duty of good faith, which entails acting fairly and accounting for their legitimate interests.

BAN Corp. v MJ O’Brien [1927] AC 369.

Question 26

In a Vote, when may the Majority pursue its own Interests?

Answer 26

When, after acting farily and considering the Minority’s interests,° the Majority still finds a bona fide commercial justification for its actions.°°

° RBS v Highland Financial [2013] EWCA Civ 328.
°° Redwood v TD Bank [2002] EWHC 2703.

Question 27

Can a Syndicated Lender enjoy Disproportionate Voting Powers?

Answer 27

Yes, but only if it is transparent and freely negotiated by all parties.

Re Southern Pacific [2013] EWHC 2485 (Ch).

Question 28

When is an Inducement to Vote considered Legitimate?

Answer 28

If it:
* Is openly and equally promised to all Lenders; and
* Is not intended to unduly influence or unfairly advantage any one Lender or class of Lenders.

Re ST Property Investment Trust [2003] EWHC 2237 (Ch).

Question 29

When can the Court intervene in a Vote, or otherwise, on Grounds of Unfairness or Oppression?

Answer 29

If the relevant action is both deliberately and manifestly mala fide, although this is a very high bar to meet.

Assénagon v Irish Bank [2012] EWHC 2090 (Ch).

The bar is difficult to meet because of cases like Redwood, which tell us that if the Majority is pursuing a legitimate commercial interest, it will not suffer liability.

Question 30

Technically, is a Syndicate a Partnership, Joint Venture, or some other collaborative endeavour?

Answer 30

No.
* All Lenders severally bear their own profits, losses, and liabilities; and
* Can transfer their rights and obligations to other parties.

P. 461-464.

Indeed, Partnership would defeat the purpose of Syndication because it would consolidating credit risk and eliminate the capital adequacy advantages it brings.

Question 31

What is the Agent Bank?

Answer 31

The party that coordinates the facility once it has been executed. It usually also acts as the Security Trustee.

P. 453.

A single transaction can have multiple Agent Banks. The role of Agent bank is both highly reputable and allows the relevant party to build a strong relationship with the Borrower.

Question 32

Who is the Agent Bank appointed by?

Answer 32

The Syndicate, as their Agent, intermediary, and representative of their interests.

P. 520-522.

Question 33

What are the Duties of the Agent Bank?

Answer 33

To act as a payment and information conduit between the Syndicate and the Borrower.

Lecture Notes.

Question 34

If the Agent Bank fails to pass on funds to the Borrower, who is Liable to whom?

Answer 34

• The Syndicate is liable to the Borrower for the funds; and
• The Agent Bank is liable to the Syndicate for its losses.

Lecture Notes.

Question 35

What if the Security Trustee is based in a jurisdiction that does not recognize Trusts?

Answer 35

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 debt would exist in parallel to the facility, and would, “equal… the amount owed by the Borrower to the Lenders at any time during,” its existence.

Question 36

Why is Security awarded to a Trustee as opposed to the Syndicate itself?

Answer 36

It facilitates loan transferability, since otherwise, every transfer would require the release and re-establishment of security.

P. 453.

Question 37

Can a Syndicated Lender unilaterally Accelerate its commitment?

Answer 37

No. Syndicated loans typically include provisions requiring enforcement decisions to be supported by a majority of Lenders.

P. 455.

That said, if the Lender controls enough of the debt to constitute a majority by itself, then practically speaking, it can unilaterally accelerate.

Question 38

How does the Borrower pay a Syndicate?

Answer 38

Through the Agent Bank, who then, “distributes [the sum] on pro rata between the Lenders.”

P. 455.

Question 39

What is a Sharing Clause?

Answer 39

A provision that requires a Lender which has recieved superfluous funds to return the surplus to the Agent so that it may amend the error.

P. 455.

Naturally, this entails on obligation on the Agent Bank to gather funds from the Borrower and distribute them pari passu between the Lenders as a matter of course.

Question 40

What is the Commercial Purpose of a Sharing Clause?

Answer 40

To maintain pari passu treatment between Lenders regarding payment distribution.

P. 455.

Question 41

What is the Precise Scope of a Sharing Clause?

Answer 41

• It applies exclusively to payments received under the facility, including set-off rights and enforcement of security; however
• It does not apply to litigation or arbitration recoveries if the Syndicate is not party to the proceedings.

Azevedo v Importacao [2013] EWHC Civ 364, [2015] QB.

Question 42

How are Arrangements that subvert the Pari Passu Principle treated in law?

Answer 42

They are void.

§107, §328(3), & Rule 4.181 – Insolvency Act 1986.

Question 43

What are the Arranger’s Legal Exposures?

Answer 43

A Claim by either the Borrower or Syndicate in:

• Breach of Contract.
• Breach of Fiduciary Duty.
• The Tort of Deciet.
• The Tort of Negligence.
• Negligent Misstatement.
• Fraudulent Misrepresentation.
• Negligent or Innocent Misrepresentation.

Question 44

Why would a Borrower Sue the Arranger?

Answer 44

It may be unhappy with the Arranger’s performance, especially if a Syndicate has failed to materialize.

Textbook, P. 473.

Nonetheless, a well-drafted Mandate will protect the Arranger if it has acted competently and exercised reasonable care and skill.

Question 45

Why would a Syndicate Sue the Arranger?

Answer 45

It may find the final agreement transpires to be riskier than calculated, particularly in a way that suggests it was ill-advised.

Textbook, P. 473.

The Syndicate is the Arranger’s greatest threat because it is well funded, highly motivated, and more inclined to pursue the Arranger rather than the Borrower because it is likely the better capitalized between them.

Question 46

Will an Arranger owe a Duty of Care to either the Borrower or the Syndicate if it acts through an Agent?

Answer 46

Yes. The court disallows the delegation of duties of care in this respect.

P. 480; Williams v Natural Life [1998] 1 WLR 830, at [847].

Question 47

In what ways can the Scope of the Arranger’s Duty of Care be Construed?

Answer 47

Depending on the facts, contractual terms, and party relationships, either:
* Widely: It must, “ensure the transaction was suitable for [the Lenders]… [or that they] were correctly appraised,” and that the transaction was well-investigated.
* Narrowly: It must only excerise reasonable care regarding specific tasks.

P. 481; Springwell v JP Morgan Chase [2010] EWCA Civ 1221; Torre Asset v RBS [2013] EWHC 2670 (Ch).

An instance of a wide construction is Aneco Reinsurance v Johnson and Higgins [2001] UKHL 51. An instance of a narrow construction is Torre Asset v RBS [2013] EWHC 2670 (Ch). In both cases, the court’s conclusion hinged on the Arranger’s assumption of responsibility.

Question 48

Before Negotiation, who does the Arranger owe a Duty of Care to?

Answer 48

The Borrower, since it is acting solely as an agent on its behalf. This eschews personal liability, unless judged otherwise.

The latter point does not apply to the Tort of Deceit.

P. 487.

“Market practice is that Lenders have no claim against Arrangers since each Lender is treated as carrying out its own research and making its own credit decision, a position which is confirmed by the inclusion of disclaimers to that effect,” in the IM.

Question 49

During Negotiation and Drafting, who does the Arranger owe a Duty of Care to?

Answer 49

The Borrower, but considering its greater independence, potentially the Syndicate. Although, this is unlikely.

P. 488-489.

Even if a duty arose, the Lenders will have been given time to review the documentation, asked for their comments, and afforded an opportunity to renegotiate, demonstrating competence on the Arranger’s part. If it assumes a responsibility and acts incompetently, though, liability may well await. SeeSumitomo v Banque Bruxelles [1997] 1 Lloyd’s Rep 487.

Question 50

When will the Arranger be taken to owe a Duty of Care to the Syndicate?

Answer 50

When it assumes responsibility for the performance of a particular task or policy.

P. 489-491; NatWest v Tricontinental [1993] EWCA Civ 13.

In NatWest, a duty of care to provide accurate information because the Arranger accepted a specific query by a Lender. Importantly, the case is extraordinary because the Arranger possessed information that contradicted its response to the Lender (i.e. provided inaccurate information), made it appear as if the response was its own, and made no effort to limit its responsibilities beyond the IM.

Question 51

Can a Claim in Misrepresentation regarding the contract’s terms be brought against the Arranger if it is not a Member of the Syndicate?

Answer 51

No. Such claims require the Defendant to be privy to the same contract as the Claimant.

P. 495.

Taberna Europe v Selskabet (In Bankruptcy) [2015] EWHC 871.

Question 52

Is the Arranger a Fiduciary of the Borrower?

Answer 52

Unlikely. Due to the missing elements of trust and confidence, the relationship is more aptly classified as Agent-Principal.

P. 498-499.

Question 53

Vis-à-vis the Borrower, what would an Arranger typically Disclaim?

Answer 53

Responsibility for:
* The accuracy, completeness, or reliability of any information provided in connection with the loan.
* Providing advice or recommendations, recommending instead independent advice.
* The actions or omissions of the Syndicate.
* Third-party services or products used in connection with the loan.
* Loss or damage suffered due to unavoidable market or economic conditions.
* Representations and warranties, claiming the Borrower has not relied on any.

And the existence of a fiduciary duty.

P. 502.

Question 54

Vis-à-vis the Syndicate, what would an Arranger typically include in a Disclaimer?

Answer 54

Responsibility for:
* The accuracy, completeness, or reliability of any information provided in connection with the loan.
* Providing advice or recommendations, recommending instead independent advice.
* The actions or omissions of the Borrower.
* Third-party services or products used in connection with the loan.
* Loss or damage suffered due to unavoidable market or economic conditions.
* Representations and warranties, claiming the Syndicate has not relied on any.

And the existence of a fiduciary duty or duty of care.

P. 502.

Question 55

What are the Agent Bank’s Legal Exposures?

Answer 55

A Claim by either the Borrower or Syndicate in:
* Breach of Tort.
* Breach of Contract.
* Breach of Fiduciary Duty.

Question 56

Is the Agent Bank a Fiduciary of the Syndicate?

Answer 56

It depends on the facts:
* In principle, yes. Unlike the Arranger, the elements of trust and confidence obtain, and the obligation of loyalty is present;° however,
* Because it is not obliged to separate receivables from its own funds°° and the express disclaimers to the contrary,°°° it may well not.

P. 522;
° Titon Hardware v Viridian Housing [2011] EWHC 1367 (Ch), at [50].
°° Henry v Hammond [1913] 2 KB 515.
°°° Boardman v Phipps [1967] 2 AC 46, at [127]; Coomber v Coomber [1911] 1 Ch 723.

Question 57

To what extent can the Agent Bank limit or exclude its Fiduciary Duties?

Answer 57

While it cannot exclude them, it can limit their scope through express provisions, subject to the Reasonableness Test.

Cattles v Welcome Financial Services [2013] EWCA Civ 1111, at [91]; Torre Asset v RBS [2013] EWHC 2670 (Ch), at [301].

Question 58

How does an Agent Bank guard itself against its Legal Exposures?

Answer 58

Agency Clauses.

P. 529.

Question 59

What is an Agency Clause?

Answer 59

A clause:
* Specifying the nature and scope of an Agent Bank’s obligations, and specifically, their administrative and mechanical nature; so as to
* Minimize the substantive (discretionary) content of its duties.

P. 529.

The idea is that, by minimizing the amount of discretion it has to exercise, the Agent Bank likewise minimizes the number of things it can be held liable for.

Question 60

To what extent are Agency Clauses effective?

Answer 60

While they cannot exclude duties and obligations, they can more favourably define them, and thereby facilitating compliance therewith.

Torre Asset v RBS [2013] EWHC 2670 (Ch) at [196], [34], and [163(i)].

Question 61

How are Agency Clauses construed?

Answer 61

• Strictly, with reference to the words’ natural meaning; and
• Only allowing the limitation of liability when the terms are clear, unequivocal, and unambiguous.

P. 530; Armitrage v Nurse [1998] Ch 241 at, [255]-[256].

Question 62

What is Subordination?

Answer 62

The process wherein one Creditor agrees to subordinate its right to payment from a Debtor, partly or fully, behind that of another Creditor.

P. 963-964.

Subordinated Creditors are referred to as ‘Junior Creditors’, and their debt as ‘Junior Debt’. Those to whom they subordinate are referred to as ‘Senior Creditors’, and their debt as ‘Senior Debt’.

Subordination can also refer to the determination of how different security interests rank between Secured Creditors, but for clarity’s sake, such things will be referred to as ‘agreements as to priority’.

Question 63

What is the Commercial Purpose of Subordination?

Answer 63

Junior Debt is riskier than Senior Debt, but correspondingly more profitable, thereby allowing Syndicates to appeal to a greater variety of strategies.

P. 965.

Question 64

What are the Two Types of Subordination?

Answer 64

• Structural.
• Contractual.

Question 65

What is the Difference between Structural and Contractual Subordination?

Answer 65

• Structural subordination predetermines the priority of debt repayment by issuing various classes of debt; whereas
• Contractual subordiantion artificially creates these distinctions through negotiation and agreement.

Question 66

What are the Two Types of Contractual Subordination?

Answer 66

• Turnover Subordination (by Trust).
• Contingent Debt Subordination.

P. 966-967.

Question 67

What is Turnover Subordination (by Trust)?

Answer 67

The process wherein the Junior Creditor agrees to account for the Junior Debt’s benefits to the Senior Creditor under specific circumstances, e.g. insolvency.

P. 966.

This is usually arranged by means of a trust, called a ‘Subordination Turst’, since while use of a contract is also possible, it would leave the Senior Creditor potentially vulnerable to clawback during in insolvency proceedings.

Question 68

What is a Subordination Trust?

Answer 68

A trust wherein the Junior Creditor undertakes to hold its rights and any payment it receives from the Junior Debt on trust for the Senior Creditor.

P. 966; Re British and Commonwealth Holdings [1992] 1 WLR 672.

Question 69

Does a Subordination Trust constitute a Security by Way of Charge?

Answer 69

No.

P. 971; Re SSSL [2004] EWHC 1760, at [49]-[51].

Even if it was a charge, it would not be registrable if it were deemed a security financial collateral agreement, which a Subordination Trust may well could.

Question 70

What is Contingent Debt Subordination?

Answer 70

A process wherein, during an insolvency, the Junior Creditor is contractually restricted from receiving a payout until the Senior Creditors are made whole, if ever.

P. 967; Re Maxwell Communications [1993] 1 WLR 1402, at [23].

This is achieved through contract. The relevant clause may also prohibit the Junior Creditor from claiming against the Debtor while Senior Debt remains outstanding.

Question 71

Does Insolvency Set-Off between the Debtor and Junior Creditor obtain?

Answer 71

No.

P. 969; Re Lehman Brothers [2014] EWHC 704 (Ch), at [7].

Question 72

Does Subordination subvert the Pari Passu Principle?

Answer 72

No. This is because:
* The principle prevents the Debtor from creating arrangements that unequally benefit some Creditors, whereas;
* Subordination is an inter-creditor agreement in relation to the Debtor, and is therefore, consensual inequality.

P. 968; Re Maxwell Communications [1993] 1 WLR 1402, at [23].