Minimum Statutory Requirements
In 1997 Parliament enacted the Banking Law, which includes provisions concerning syndicated loans. Bank syndicates are one of the main sources for financing international commercial transactions, large investments and debt restructuring. In granting such loans, banks use the standard instruments of ordinary loans (eg, term, revolving and stand-by facilities).
The size and number of syndicated loans is increasing annually. In 1999 banks granted syndicated loans amounting to Z6.2 billion and in 2000 the sum had increased to Z8 billion. The banks most involved in such loans were PKO BP, Kredyt Bank SA, BRE Bank SA and PKO Bank SA.
The main beneficiaries of syndicated loans are major Polish companies (particularly shipyards, and the telecommunications and energy industries). The majority of loans are granted in currencies other than the Polish zloty.
The regulation of syndicated loans was introduced in order to create a legal framework that enables the gathering of funds in order to finance large undertakings.
Usually the bank representing the syndicate (syndicate agent) is also responsible for the enforcement of security (security agent) and the distribution of received money to other banks.
The legislation provides limits on credit concentration. According to Article 71 of the Banking Law the sum of granted facilities, guarantees, letters of credit, purchased bonds and other receivables against a single entity or holding cannot exceed 25% of a bank's own funds. Moreover, the amount of receivables exceeding 10% of a bank's own funds against a single entity cannot exceed 800% of the entity's own funds. The National Bank of Poland must be informed of the granting of a loan that exceeds 10% of a bank's funds.
Consequently, banks intending to finance undertakings that require higher capital proportions must establish syndicates. The main advantages are that (i) the cost of the syndicated loan may be lower than an ordinary loan since the risk is lower (being dispersed among several banks), and (ii) the administration and enforcement are carried out by the agent.
According to Article 73 of the Banking Law on Credit Concentration:
- "In order to grant a credit jointly, banks may conclude an agreement on establishing a bank syndicate.In the agreement referred to, the banks shall determine the conditions for granting and securing a credit and appoint a bank authorized to conclude the credit contract.The banks referred to shall bear the risk connected with the credit granted, proportional to the amount of financial means contributed to the jointly granted credit."
Syndicated loans are transactions in which at least two banks jointly represent to make available a facility to the borrower. The syndicate agreement establishes the relationship between the members of the syndicate. The facility agreement establishes the relationship between the syndicate and the borrower. In the former, syndicate banks regulate relations between themselves as well as the basic elements of the facility agreement.
By virtue of Article 73 of the Banking Law the syndicate agreement is separated from the loan agreement. Usually, the problem of cross-referencing is solved by, for example, concluding a syndicate agreement as an attachment to the loan agreement. Generally, the agreements are separate and independent. In cases of a secret syndicate where the borrower is unaware of the existence of the syndicate and concludes the loan agreement solely with the bank-agent, the loan agreement does not contain any cross-reference provisions and there is no direct legal connection between the other members of the syndicate and the borrower.
The Banking Law establishes the principle of proportional risk and responsibility of banks according to their proportion in the granted syndicate facility. Consequently, the obligations of banks are not joint and several. However, this does not release the banks from having to perform their duties pursuant to the facility agreement, since a syndicate has no common property and does not conclude the relevant agreement as a uniform entity. Furthermore, the syndicate agent is liable for its proportion, although in practice the agent frequently takes over the liability to disburse the whole loan amount.
Regarding the borrower's liability, the common practice is to create a separate legal relationship between the syndicate banks, the syndicate agent and the borrower in which the latter is obliged to repay the agent bank.
The duties of the agent bank involve:
- representing all banks before the borrower;
- receiving and delivering all notices and requests;
- preparing the relevant security documentation (and ensuring its enforcement);
- taking responsibility for final disbursements; and
- distributing all sums received among the other banks.
This system appears to be contradictory. On the one hand, the responsibility of banks is proportional and the borrower cannot demand complete performance from one bank (or even one agent). On the other hand, the borrower is obliged to repay the whole debt to one bank/agent. A way around this is to retain the proportional responsibility of creditors, creating by virtue of contract a joint and several relationship between the banks in their position as creditor. Then repayment of the loan to any of the creditors has the same effect for all of the syndicate's members. In practice, syndicate banks usually establish fiduciary/trust relationships with the syndicate agent, the legal basis being the syndicate and loan agreements and security documentation. In such a situation the borrower or other entity is obliged to repay the loan and establish security to the syndicate agent, and the latter accepts the repaid sums and security in its own name but on behalf of all syndicate banks. The syndicate agent will enforce its rights according to the fiduciary rules as a trustee. Indeed, Article 4 of the Registered Plege Law provides that banks granting a syndicate loan can authorize one of them to act as a security. In such cases a pledgor can establish a pledge in benefit of the security agent to secure receivables under the loan agreement of all syndicate banks. The legal character of a trust relationship between banks and the security agent is difficult to determine; it has some elements of the mandate agreement under Polish civil law but is more akin to an unnamed agreement concluded according to the freedom of contracts.
Minimum Statutory Requirements
The essential conditions of a syndicate agreement are plurality of the creditor and the common intention to grant a loan together. The next requirement is an agreement between the banks as to the basic conditions of the loan and security. Also, the banks must agree on their internal relationship and authorize one of them to conclude the loan agreement.
There is concern as to whether a loan arising from two separate facilities granted in different currencies (and consequently different interest rates) is one syndicate loan or two separate loans. If the facilities constitute one loan, the syndicate can establish one package of securities and the Polish agent bank can represent foreign entities as a security agent. The statutory definition of the loan under Polish banking law provides that the amount and currency are essential parts of the loan agreement. Fortunately, the regulation does not contain any restriction on the number of currencies or facilities in the frame of a single loan, and according to the definition of 'credit' in the Banking Law different tranches in different facilities are still 'pecuniary value'. The fact of plurality on the creditors' side has no influence on the freedom to determine the currency of each facility. The same refers to the interest rate, repayment schedule and security.
According to Article 69 of the Banking Law, the necessary elements of a loan granted by a bank are as follows:
" In a credit agreement a bank shall assume the obligation to leave at the borrower's disposal, for a period specified in the agreement, an amount of financial means assigned for a specific purpose. The borrower shall assume the obligation to use said amount according to the conditions determined in the agreement, to return the amount of the credit used (together with interest) within specified time limits for repayment, and to pay a commission on the credit granted.
The credit agreement shall be concluded in writing and specify, in particular:
- the parties to the agreement;
- the amount and currency of the credit;
- the purpose for which the credit has been granted;
- the rules and time limit for repaying the credit;
- the interest rate of the credit and the conditions for changes therein;
- the type of security repayment of the credit;
- the scope of the banks's rights as to control of the use and repayment of the credit;
- time limits for, and the manner of, placing financial means at the borrower's disposal;
- the amount of provision (if provided for in the contract); and
- the conditions for making amendments to the contract and for dissolution thereof."
In summary, in order for a loan to be syndicated, the first requirement is the expression of the will to grant a loan in one document (which can be a syndicate agreement or a loan agreement with syndicate provisions). Second, banks must establish basic rules regulating relations between syndicate banks, including in particular each bank's commitment, representation and notices. The third requirement is agreement as to the conditions of the loan
It can be argued that the nomination of a syndicate agent and security agent are sufficient conditions to create a syndicate and establish a loan as a syndicate loan. Nomination establishes a common representation and indicates a common commercial goal and basic regulation for a syndicate.
For further information on this topic please contact Mateusz Toczyski at CMS Cameron McKenna by telephone (+48 22 520 5555) or by fax (+48 22 520 5556) or by e-mail ([email protected]).
The materials contained on this web site are for general information purposes only and are subject to the disclaimer.