Transferability is an important element of syndicated lending. It gives an existing syndicate lender the option to sell its commitment in an undrawn facility or its participation in an outstanding loan, whether as part of its risk/portfolio diversification strategy, to satisfy regulatory capital requirements, or to crystallise its losses in distressed situations. There are various ways in which lenders can effect such transfers. They include novation, assignment, funded or risk participation and through credit default swaps. This article seeks to highlight some key documentation issues affecting transferability which lenders should consider when negotiating their loan agreements.
- Identity of transferees
The Asia Pacific Loan Market Association (APLMA) prescribed form loan agreement provides a reasonably lender-friendly transfer provision. It allows an assignment or transfer to “another bank or financial institution or to a trust, fund or other entity which is regularly engaged in or established for the purpose of making, purchasing or investing in loans, securities or other financial assets”. The class of permitted transferees is therefore very broad and would, in addition to banks and financial institutions, also include hedge funds, insurance companies and pension funds. It is not unusual for commercially-savvy borrowers to negotiate for restrictions to such rights by imposing further criteria on the transferees (e.g. by requiring a proposed transferee to have a minimum credit rating from recognised ratings agencies such as Standard & Poors, or by creating a list of “acceptable transferees”, which could sometimes be by way of excluding their competitors or transferees from certain industries or sectors). In evaluating any such proposals by borrowers, lenders must consider whether the proposals will severely impede their ability to transfer by reducing the pool of available investors. A list which may be amenable to the lenders today may not be the case in the future, especially in a liquidity crunch where the composition and number of “potential” investors may change or reduce, respectively.
- Borrower’s Consent
While the ideal starting point for lenders is to exclude any requirement for a borrower’s consent in relation to any proposed transfer or assignment, this may not be accepted by borrowers in all transactions. Pricing and liquidity issues aside, a strong investment grade borrower will want to control the composition of the syndicate lenders (often confining it to banks with whom it has a pre-existing relationship) to avoid potential pitfalls or challenges from non relationship banks, for example, in the context of any requests for waiver/amendment of obligations etc under the loan documents.
Lenders in such cases should nevertheless ensure that their transfer provision includes a clear timeframe for borrowers to respond (e.g. by including a “deemed consent” provision where consent is automatically given after a certain period if the borrower does not respond) and expressly provide that such consent must not be unreasonably withheld or delayed. In addition, lenders should consider making such consent requirement inapplicable when an event of default has occurred and/or is continuing. This is particularly important for lenders who may consider transferring their loan under a credit default swap, which generally requires an unconditional transfer.
The confidentiality provision is an important one in any loan agreement and should not be neglected. Lenders should ensure that in addition to the usual “disclosees”, their ability to disclose information relating to any obligor, the borrower’s group of companies and/or the loan documents is wide enough to extend to all the potential transferees contemplated in the transfer provision. For example, where disclosures to sub-participants or counterparties of credit default swaps are contemplated, lenders should consider adopting the APLMA wordings allowing disclosure to “any person….with (or through) whom [that Lender] enters into (or may potentially enter into) any sub-participation in relation to, or any other transaction under which payments are to be made by reference to, the [Facility], this [Agreement], any [Obligor] or any member of the [Group]”. In cases where disclosure of the occurrence of an event of default to the public is a pre-condition to lenders triggering a “credit event” under their credit default swaps, such lenders may have little choice but to try to negotiate the same requirement into their loan agreements.
Lenders should also pay attention to attempts by borrowers to negotiate provisions into the loan agreements which seek to limit the amount that lenders can transfer, or which require the original lenders to retain a certain minimum amount of the loan or which seek to impose hefty transfer fees on the transferees. Where the transaction involves multiple tranches, lenders should also take note of any condition which requires them to make a pro rata transfer between the tranches. All these restrictions may hinder the ability of lenders generally to transfer a loan, particularly in difficult market conditions.