When things go wrong, people often look for someone to blame. When syndicated loans go wrong, lenders may first point the finger of blame at the borrower and its management. But they may soon turn their attention to the agent, asking, “Has it been doing its job properly?” and “If not, what can we do about it?”.
When lenders enter into a syndicated facility, they appoint an agent to act for them in connection with the loan. Often, what lenders expect their agent to do, or to have done, is not reflected in the terms of the agent’s appointment. Even if the agent has not been fulfilling its (limited) duties properly, it is likely to benefit from a wide exclusion of liability clause in the facility agreement. It is therefore dangerous for a lender to treat a syndicated facility as a “passive” commitment, which the agent manages for it. The mechanics of a syndicated facility are different from those in a bilateral transaction, but in many ways a lender in a syndicated facility should take as active a role in the facility as it would if it were making the loan to the borrower under a bilateral facility.
In most syndicated facility agreements under English law, the terms setting out the role of the agent follow the Loan Market Association’s recommended form. These terms stretch to several pages, and they are mostly concerned with limiting the role, and the liabilities, of the agent. The most important points are as follows:
- the agent’s duties are solely mechanical and administrative;
- each lender is solely responsible for appraising and investigating the risks involved in its commitment;
- the agent is not responsible for the adequacy or completeness of any information delivered, or any document entered into, in connection with the facility;
- the agent is not liable for any action taken by it unless caused by its gross negligence or wilful misconduct.
Limited nature of agent’s duties
In general, the agent acts on the instructions given to it by the “Majority Lenders” (usually lenders holding between them at least 66 2/3 per cent of the loan commitments). In the absence of any instructions from the lenders, an agent is only likely to be genuinely non-performing if it has failed to carry out one of the mechanical or administrative duties the facility agreement states it must perform. These would include:
- passing information, requests and other notices between the lenders and the borrower;
- transferring funds between the lenders and the borrower;
- performing specific administrative tasks relating to drawdown, currency conversion rates (in multicurrency facilities), conditions precedent and transfers of lenders’ commitments;
- notifying the lenders if it becomes aware of a payment default.
Some agents in syndicated facilities do assume a more extensive role. When they forward information to the syndicate, they may provide commentary and analysis on it. They may suggest particular courses of action to the syndicate, having taken legal advice and liaised with the borrower. They may chase up missing information as soon as it is overdue. But they do not generally have to do so.
Options for lenders
Most facility agreements do give the Majority Lenders the power to remove the agent, whether it has breached its duties or not, and appoint a new agent in its place. But if a lender wants to take legal action against the existing agent, this is likely to be less straightforward. Even if the agent has failed to perform one of its (few) express duties, a lender will need to show that it has suffered a loss because of this failure in order to make a successful claim against the agent.