The Terms of the Syndicated Loan

In order to advise Alpha, Bigbank and Delta Bank it is necessary to examine the situation in which they are placed, commencing with the final line of the scenario, “that the terms of the syndicated loan contract are void under Ruritanian law as between Alpha and the other parties and that Gammas’ legal opinion which states the contrary opinion is manifestly incorrect.” Given that Ruritania was a fictional country created by Anthony Hope in his novels written 1894-1898, technically Gammas’ undertakings would not be valid in any recognised jurisdiction, other than the fact that the name Ruritania is regularly used as a hypothetical country when abstracts are required in academic discussions. Using this as a hypothesis and given that the scenario is a hypothetical case, the legislation concerning the syndicated loan agreement can be recognised within the European and US fiduciary law.

A syndicated loan is a complex facility created by several financial institutions, including banks, which is preferable to a straightforward bilateral loan which unites the borrower and the lenders under one contractual agreement providing for funds to be drawn down when necessary and may be for specific or multiple purposes. In this scenario there was, initially a single purpose, Alpha’s purchase of Comma. The syndicated loan is usually provided with a variable rate of interest attached to its repayment and linked to either, LIBOR, London Interbank Offered Rate or EURIBO Eurodominated Interbank Offered Rate. Given the scenario interest rates are likely to be linked to the latter. The advantage of this type of loan includes the fact that it has a multi-currency facility, which given the hypothesis could be of significance, given Alpha’s location and the possibility of differing financial institutions opting into the agreement, from differing countries. This facility allows the borrower to change the currency of the loan relating to fluctuating interest rates. The LMA standard facility agreement uses these sources by accessing Reuters screen rate. “The matched funding assumption underlies a number of the provisions found in a ‘eurocurrency’ loan agreement. One such provision is the alternative interest rate (or, as in the LMA Agreements, ‘market disruption’) provision which would apply if there were a breakdown in the usual interest rate fixing procedures.” [1] It is significant that the agreement was produced in LMA, format, as this was produced in 1999 to attempt to standardise the formats.

The crux of the problem, taking Delta Bank’s complaints, lies with the actions undertaken by Bigbank, who were nominated to act as the Agent for the loan. This would have following their appointment as the Arranger for the transaction. This is not an unusual situation with the Arranger being a lender with whom the borrower is familiar and who would have initiated the process.

In this capacity, Bigbank would have a responsibility to Alpha, though the agent bank is officially the agent of the banks and the responsibilities and variety of relationships between the Agent, lenders and the borrower are considerable [2] and would include outlining the various loan options available and then undertaking the negotiations to accommodate the facility.

Bigbank should not have had any capital interest which clearly appeared once Alpha was unable to pay the interest on the bilateral loan as this could have been seen as a conflict of interests and could have been liable to negligence proceedings as cited in cases [3] and [4] plus making decisions relating to the loan and its structure, including: “any decisions of a material nature (for example, the granting of a waiver) must usually be taken by a majority, if not by the whole syndicate.” [5] Given this situation, as the scenario states, the syndicate consisted of a group of other lenders including Delta, it would be reasonable for Bigbank to contact all of the lenders, other than Delta, the former who had clearly contributed a greater proportion of the loan and, therefore, apparently have a greater interest, and as a result Bigbank would have their situations more pressing than that of Delta. The question of equinity relating to the agreement will be looked at later.

It is apparent that Bigbank have done nothing untoward in this particular action as, “whilst the Agent carries the standard duties and responsibilities of any agent under English Law, the facility agreement will contain a number of exculpatory provisions to limit the scope of the Agent’s relationship with the syndicate lenders and with the borrower” [6] , thus enabling Bigbank to make such decisions, fully protected within the terms of the agreement.

Additionally, the Loan Market Association suggest that, “by delegating some of the decision-making, the mechanics of the loan are able to work more effectively than if each and every member of the syndicate had to be consulted and subsequently reach unanimous agreement on every request from the borrower.” [7]

This aspect is reflected in English Law, supported by European Union legislation, plus the American Restatement on Agency.

Thus, Delta Bank may have been legitimately excluded from the discussions, effectively having a ‘Chinese Wall’ put into place. These “are arrangements designed to ensure that confidential information is insulated.” [8] This could be done by Bigbank and the other members of the syndicate clearly evidenced in the following cases. [9] This facility was developed by the FSA [10] to prevent abuse of confidentiality.

Whether the inability to pay the interest would have actually affected the syndicated loan repayments, is not detailed, though Bigbank, evidenced by, the ‘intense negotiations’ resulting in the waiver letter, saw the use of the additional €30m was more expedient. Any suggestion from Delta that Bigbank had not made sufficiently detailed investigation and did not ‘know their own customer’ is actually unlikely, given that Bigbank initiated the intense discussions from which the waiver letter and amendments emerged. “The agent may take some discreet soundings from a representative sample from the syndicate to assess the syndicate’s likely response.” [11]

From this the amendment could be made, though this needs to be made before the breach of contract occurs. [12]

Bigbank was clearly aware that Alpha wished to purchase Comma, was unable to raise sufficient funds, hence the need for the syndicated loan agreement, to provide €150m to enable this purchase to go ahead for €100m, leaving €50m in abeyance.

Delta’s objections to contributing €5m of their €10m loan, upon the basis of misinformation given by Bigbank in the Standard Form Information Memorandum provided for the syndicated loan agreement. To ascertain whether or not this is accurate, the Arranger, through a Mandate or Commitment Letter provides:

“ i. an agreement to ‘underwrite’ or use ‘best efforts to arrange’;

ii. titles of the arrangers, commitment amounts, exclusivity provision;

iii. conditions to lenders’ obligations;

iv. syndication issues (including preparation of an information memorandum,

presentations to potential lenders, clear market provisions, market flex

provisions and syndicate strategy); and

v. costs cover and indemnity clauses.” [13]

This is then distributed to all interested parties who wish to become involved in the syndicate. This memorandum precedes the creation and formalisation of the syndicate and contains details relating to the borrower’s needs, company potential and future development, ability to repay, and a detailed analysis of the borrower’s accounts, all of which are incorporated into the due diligence process at the drafting stage.

Within this is included the disclosure of confidential information, which any member of the potential syndicate may disclose relating to the borrower on condition that the information is regarded as confidential, noting that many of these disclosures are not within the public domain prior to their ratification and any ‘leak’ would be a violation of the confidentiality agreement.

The information Memorandum will include the Conditions Precedent in which all aspects of the loan agreement will be detailed. These have to include all documentation for and from the banks, or in this case from the Agent representing all parties in the syndicate, including all details of the borrower, particularly security documentation and agreements which would include details of the bilateral loan agreed between Bigbank and Alpha. One clause which could have been included in the agreement would be a ‘snooze you lose’ clause which would enable Bigbank to remove Delta’s voting right in connection with any specific amendment or waiver particularly if the lender has not responded to specific requirements from the Agent. Given that Delta are clearly not one of the bigger players in the scenario, a small company might have inadvertently overlooked the inclusion of such a clause, or been unaware of its implications.

As the nominated Agent, Bigbank has the authority to act on behalf of another person or persons and this role is enshrined within a legally binding contract. In order for this situation to arise, those who have created Bigbank’s Agency status, therefore, must have agreed to the contractual agreements, either in writing or through a verbal agreement, except in British Colombia where all Agency agreements have to be in writing. Suggestions that, in some cases, “the agent is not party to the contract but only a mere mediator,” [14] may occur in some situations, but in this scenario is not applicable, as Bigbank is very much so an involved and major player. The power of such players has been clearly evidenced. [15]

At this juncture it is worth dwelling on the issues relating to the agreement and the Agent relationship within the agreement. As the intermediary, Bigbank is placed in a situation which could result in a conflict not only of their own interests but also of those between the co-lenders within the syndicate. However, the Agent actually has to place the interests of the syndicate as paramount and accordingly will ensure the inclusion of clauses showing, “the Agent shall have the same rights and powers hereunder as any other bank and may exercise the same as though it were not the Agent” [16] thus protecting their interests.

Relating to the disclosure of confidential information particularly, as previously mentioned, that provided by either the borrower or other lenders, in confidence, then the Agent could find this to be a source of dispute, as with Delta Bank. To make sure they are protected in this situation, Bigbank will need to include clauses in the agreement for their own protection, such as, “the Agent shall have no responsibility for any action taken or omitted to be taken in connection with this agreement… save for actions arising out of gross negligence or wilful misconduct.” [17]

Within the requirement to divulge information it is the Agent’s duty to inform the lenders of Alpha’s financial situation, this should, therefore include the bilateral loan agreement, which it would be difficult to conceal, as they are to provide in the information memorandum with all financial details of the borrower, for the lenders’ perusal. If this is not disclosed, then it could, as in this scenario become the source of conflict between the Agent, borrower and lenders which could result in a default of payment, as with Delta. Aspects relating to the essential understanding of this document should be examined in conjunction with the Unfair Contract Terms Act, 1977, Misrepresentation Act 1967 and Companies Act 2006 s 750 and related to international comparisons. Such information is pertinent to Bigbank, being Alpha’s banker should they be seen as putting their own interests first. [18]

Such action would allow the other lenders to take appropriate action, including the suspension of further borrowings, or increasing the rate of repayments for the loan. Therefore, it is in the interests of all parties that such information is disclosed as it is not in Bigbank’s interest as either a lender or as the Agent to withhold it, give rise to a conflict, except if the information regarding the bilateral loan was given in confidence, as requested by Alpha. Here, Bigbank’s rôle would be in conflict with the interest of the other lenders and would have to have been covered by clauses pertaining to this situation, within the agreement, exempting Bigbank from such disclosures. In this situation Bigbank may have been faced with a major dilemma, though the actual details of the syndicate agreement are not available, therefore which pertinent clauses protecting their interests are not available to scrutinise. Included could be a clause insisting that the banks and all other parties should do their own research including credit checks, checks relating to the company’s viability thus not relying totally upon the Agent’s information. This would have ensured that Delta would have been aware of the bilateral loan. [19]

The main areas of the syndicate agreement usually make it possible for the Agent to accommodate the interests of the majority of participants and the Agent is usually only required to make decisions, primarily administrative. However, in situations, such as in this scenario, where it would appear that the lenders and the borrower are located within different countries, it would be advisable for Bigbank to have an additional clause to ‘accelerate’ the loan if required. “If an event of default occurs, the agreement states that the bank may immediately accelerate outstanding loans plus accrued interest and cancel its commitment to make further loans.” [20] 21

Where conflicts have arisen and have resulted in a payment default, a default clause should be included. This will not only protect the Agent from any liability but also be able to claw back any outstanding monies. In Delta’s case the decision to withhold the payment of the €5m would normally have fallen into this category and the inclusion of a default clause would protect all parties. “The liability of the bank for failure to lend is often material… if the borrower is in difficulties and it is unclear whether the bank is obliged to lend. Under English law, a borrower cannot obtain specific performance if the bank fails to lend : South African territories v Wallington [1898] AC 303, HL. The borrower’s remedy is solely for damages.” [22] Clauses may also be included to ensure that liability is either removed or limited to a fixed amount, financially and could be drafted along the following lines:

“Neither the Agents nor the managers would be responsible to any bank for the execution, genuineness, validity, enforceability, collectibility or sufficiency of the loan agreement.” [23]

Default clauses can be contentious and defaults include, non-payment of monies to the lenders, by the borrower, apparent breaches of the contract, cross-default, insolvency of any of the parties and any other change to any of the parties, which may be considered to be adverse to the terms of the agreement. The knock on effect of any of these occurring can result in a change in the terms of the agreement, the cancellation of the facility, or the requirement for all debts to be repaid immediately, referred to as accelerated.

Usually default arises from Cross-default/ Material Adverse Changes (MAC), the former which regularly pertains to syndications in Europe and will result in the lenders requiring accelerated payments, particularly when the default is caused by a breach of contract or non payment. This is pertinent to this scenario as the need for the alteration of the agreement was triggered by Alpha’s inability to repay the interest on the bilateral loan which then resulted in Delta Bank’s breach of contract with the refusal to honour the €5m loan. The scenario does not give information relating to the response of the other lenders to this situation other than the negotiations resulting in the waiver, or whether they have required an accelerated payment from Alpha, leading to their discomfort with the syndicate agreement. However, given that the waiver letter was issued in order to avoid Alpha falling into the cross default this appears unlikely. “Borrowers commonly object that this clause converts a term loan into a demand loan and this removes the objective of lending.” [24] 25

A change to the terms of the agreement requires two thirds of the lenders to be in agreement and will be facilitated through the Agent and covered through clauses dealing with the equinity of parties in the syndicate.

Alpha’s inability to pay the interest due on the bilateral loan could fall into the category of Material Adverse Changes as these include the ability to repay finances cited within obligations, however, given the requirements of this scenario it should be noted that the Loan Market Association forms do not have guidelines for this aspect and therefore any clause inserted would have to be constructed under specialised legal guidelines. Gammas would therefore, have to produce documentation to satisfy all parties and, given the Ruritania concept, this would mean at an internationally accepted level.

Should Delta be a lender from a different country, there could be difficulties relating to the forms of international legislation, relating to the agreement and therefore clauses need to be inserted to accommodate this situation. Though most countries will permit the lender, Delta Bank, to litigate on a foreign judgement it could prove a contentious issue enforcing such judgements. Reciprocal arrangements do exists, but should be examined prior to inclusion within the agreement. Hopefully Gammas have examined the Lugano Convention on Jurisdiction and Enforcement of Judgements in Civil and Commercial Matters, 1988.

When problems occur dispute remedies are available. “The great majority of international syndicated loans contain provisions for the resolution of disputes in the courts….provision falls within paragraph 4 of Article 17 of the 1968 Brussels Convention ( incorporated into English law by the Civil Jurisdiction and Judgements Act 1982)” [26] Given that the scenario revolves round potential breaches, remedies can include “ An express event of default, acceleration of the loan and cancellation of the commitment s to lend; Suspension of new loans under the conditions precedent clause; Injunction… to restrain a threatened breach.. Specific performance and Damages, but generally this will not ad to the claim fort eh loan itself and is usually irrelevant in practice .” [27]

Faced with the facts that Alpha now has purchased Comma, and, hopefully this has enhanced the prospects of its trading capacity providing an increased profit with which they will be able to repay not only the bilateral loan but also the €130m drawn down.

Bigbank need to examine all loan agreements, both the syndicate and the bilateral, having factored in the time for the payment of the bilateral loan in a month’s time, coupled with the terms of the waiver agreement, now that the former loan will be paid.

The options open to Delta Bank are more varied, including the ability to opt out of the agreement, should they be able to argue successfully that a cross default had occurred and therefore this negated the agreement.

Of the options available to all parties a possible ‘set-off’ arrangement could be considered. In such an agreement Alpha’s outstanding liabilities, to each of the lenders, whether or not banks, could be set-off with a comparable matching sum as a deposit. This would act as a surety for the syndicate members. One example of how the set-off works is clearly demonstrable in the situations facing landlords who have borrowing facilities, often from several sources. Often these have payments made as with mortgages on interest or capital, irrespective of the set-off, which is frequently in terms of property or cash payments. Such debts may be sold off by banks without any communication with the borrower, therefore each party should ensure that contracts, whether as a bilateral or syndicated agreement, have clauses carefully prepared to protect the interest of the borrower, and for the new lender, should the debt be sold on.

Alpha could have had included a ‘yank a bank’ clause “enables the borrower to replace a lender who refuses to agree to an amendment or waiver which a defined majority of the lenders have agreed to.” [28] Alpha Limited could have bought out Delta’s final loan of €5m by drawing down that amount from the remaining €20m from the original syndicated loan agreement. This option is feasible, as by refusing to forward the sum and by Delta not accepting the terms of the waiver, nor the changes to original syndicated loan agreement Delta’s remaining proportion of the loan could be purchased by Alpha Limited.

Delta Bank wish to opt out of the syndicate and therefore the renegotiated agreement needs to be in place and satisfy all parties. Priority should therefore be given to the new precedent conditions, engaging a legal advisor in a capacity more appropriate than that of Gammas, whose syndicated agreement clearly lacked many essential clauses for it to function effectively for all parties.

The new agreement needs to include a clause defining equality apportioned to all of the assignees. Hughes notes that “Issues can arise if lenders do not have a pro rata share in each facility (although) the LMA primary documents do not require the lenders to take a pro rata share” [29] This is noted as a ‘sharing clause’ through which a single bank, possibly Bigbank as not just the Agent, but also a major player, which will handle all payments, equitably, according to the rank of the signatory lenders. In this situation all aspects of the loan can be dealt with, including any set-off arrangements and manage direct payments from the borrower. This clause effectively prevents domination by larger banks to the detriment of the lesser players in the syndicate. The level of equitability can be supported with the inclusion of a clause ensuring a level of democracy [30] within the syndicate. This was clearly not included in the original syndicate agreement as Delta Bank clearly had no real voice in the decisions being made, or at least felt that way.

As the concept suggests it enables parties to vote on proposals and motions, with a reasonable outcome, however the minority should not be able to hold sway, to the detriment of the whole syndicate, therefore votes need to be apportioned appropriately. This is of particular importance when issues including amendments, waivers, changes in financial situations and suggestions could include that required majorities for approving motions could be through a two thirds majority required for an absolute majority. This would also enable the Agent to continue to function effectively making decisions on the day to day running without having to take details from an hundred percent approval, for reasons stated earlier.

The options open to Delta Bank are greater and could involve the effective release from the agreement or actually the selling of their part of the loan. The first option open to them could be to transfer the loan. [31] In this possibility Delta Bank could sell their loan to any of the other parties in the syndicate agreement, or any other financial institution. However, this could only be done if, in the original agreement, there must be provision for such loan transfers, which again, returns to the questions raised regarding the clauses included in the original documentation.

Before this route can be travelled the agreement must provide for pre-emptive rights which are the rights for the others in the syndicate to be offered the chance to the share, prior to any other buyers. This applies to either all of the loan or to a part share of it. the importance of this option is that it gives the other syndicate members the option to purchase, thus preventing the break up of the original syndicate by bringing in a new or additional party. A fine balance needs to be struck when this clause is drafted as it will need to be sufficient to retain the syndicate, but at the same time attractive enough to draw in other prospective buyers for banks or financial institutions outside the syndicate.

The second possible option is novation. This is the most secure way in which Delta Bank can transfer all of its loan, together with all contractual obligations. This option fits well with the LMA form as the format usually contains an attachment which acts as a schedule which acts as a transfer certificate, operating a novation. In this situation the only parties which need to be involved would be Bigbank, as the Agent, the new lender and Delta Bank.

Another option would be an assignment in which Delta Bank could transfer their rights to a new lender, but this option means that the new lender would simply recoup the debt and Delta Bank would be left with the legal obligations of providing the finance. This could also take the form of an equitable assignment in which the new lender would join with Delta Bank. The only advantage of this is that Alpha Limited would not be informed of the arrangement.

The options of a funded participation and risk participation, though available would not appeal to Delta Bank as it would mean that they mean retaining a significant involvement.

In conclusion it should be noted that the crux of the problem lies around the legal framework of the initial agreement, however, as noted by Hughes the legal role is relatively minor. “Apart from the syndicated loan market itself (and the resulting secondary market) acquisition finance and project finance are important areas where a (complicated) syndicated loan agreement is one of the core documents. There are relatively few reported cases which concern syndicated loan agreements, partly, no doubt, because the underlying legal issues are for the most part neither difficult nor obscure. It is market practice and commercial terms of the deal, rather than legal considerations, which dictate the form and content of a loan agreement.” [32] With this in mind, all parties have cause for concern regarding the legal advice offered by Gammas and therefore a new agreement needs to be drafted with a specialised firm with experience in this area thus providing Alpha Limited, Bigbank and Delta Bank with a viable solution to their problem.