Arranger in the primary syndication processQUESTION 1Explain the role and legal responsibilities of the Arranger in the primary syndication process.SECTION 1: ARRANGEMENT OF THE SYNDICATED LOAN1) Initiate process of the syndicated loan? Borrower initiates the process by an appointment with arranger.Mandate letter where they agree basic terms and conditions of the loan, and identify obligations of the arranger.Arranger wants to limit implied obligations. Ex: not is a legally binding offer in the mandate letter.? Potential participants targeted by arranger and sent term sheets with details of borrower amount and type of loan, details of repayment, interest and prepayment?? Borrower and arranger prepare information memorandum with annual financial statements for at least 3 years, management accounts, business plans?Information memorandum subject to a confidentiality agreement.2) Distinction between roles of the arranger and the agent? Arranger acts on behalf of syndicate to negotiate loan documentation, so seeks to avoid onerous duties and obligations to the syndicate.? So arranger`s duties: no conflict with interest of syndicate, no profit not received by syndicate, due care and skill in negotiating documents.? Role of arranger complete following execution of loan agreement: when loan signed.? Agent responsible for day-to-day management of the loan on behalf of syndicate since execution.Functions of the agent: monitoring obligations, receive and distribute payments from the borrower.SECTION 3: LEGAL CONCERS OF THE PARTIES TO THE SYNDICATED LOAN1) Legal concerns for the arranger? Within information memorandum, possible liability for any inaccuracies:1) fraudulent misrepresentation: where arranger knows statement is false or is reckless as to truth of statement (can`t be excluded).2) negligent misstatement: where special relationship of trust and confidence between arranger and participating bank + participating bank suffers foreseeable loss as a result of reliance: ?Hedley Byrne and Co Ltd v Heller and Partners Ltd? 1964.A court considers the effect of a disclaimer in favour of the arranger: ?Natwest Australia Bank v Tricontinental Corporation Ltd? 1993, and ?IFE Fund SA v Goldman Sachs International? 2007.3) negligent misrepresentation: no need for a duty of care, just need that the claimant have relied on the statement.(negligent misstatement and misrepresentation can be excluded if reasonable, in order to protect against the liability for inaccurate information).QUESTION 2Wulfrun Bank plc (?Wulfrun?) is a member of syndicate that has agreed to provide ?100m to music retailer LP3 Limited by way of a 10 year term loan. Wulfrun?s total commitment is ?20m. At present LP3 Limited has drawn down ?50m of the total facility.Wulfrun wants to diversify its lending portfolio and plans to leave the syndicate in order to raise cash to reinvest in a different sector.Consider the different legal methods by which Wulfrun could transfer its interest in the syndicated loan and the benefits and disadvantages of each.CHAPTER 6: SECONDARY SYNDICATION? Secondary syndication: loan debt can be sold to other lenders on the secondary loan market.? Selling a participation to realise capital, or to crystallise a loss, or stop the risk management.So, the selling bank could to remove asset from its balance sheet.? To sell participation, ensure it is in accordance with the underlying loan documentation.? Secondary market: market of transferable participations for corporate investors.? 5 forms of transfer: novation, legal and equitable assignment, funded and risk participation.SECTION 1: NOVATION? Substitution to the rights and obligations of the selling bank.So new contract with identical terms between buying bank and other parties to the original loan.And end of contractual relationship between selling bank, borrower, and syndicate members.? Requires consent of all original parties.Collins MR ?Tollhurst v Associated Portland Cement Manufacturers? 1900: debtor can`t relieve himself of his liability to his creditor by assigning the burden of the obligation to somebody else.? However, parties can agree in advance to novation, because possible that offer made to the public at large without knowing identity of the incoming party: ?Carlill v Carbolic Smoke Ball Co? 1893, confirmed by ?Argo Fund Ltd v Essar Steel Ltd? 2005.? Borrower engaged if consent not given within 5 working days.Australian case ?Goodridge v Macquarie Bank Ltd? 2010: method of prior agreement invalid, but criticised by English Court of Appeal case ?Habibsons Bank Ltd v Standard Chartered Bank Ltd? 2010.? Novation completed by a transfer certificate between seller and buyer.And security will need to be retaken.SECTION 2: LEGAL ASSIGNMENT? Transfer of rights and benefits, not obligations.? Legal assignment must comply with provisions of s.136 Law of Property Act 1925: absolute assignment (on entire debt of lender) by writing under the hand of the assignor of any debt (could be a part of the term loan). And express notice in writing given to the debtor to be effective.? ?Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd? 1994: original loan agreement may prevent assignment or require borrower`s consent.? ?Dawson v Great Northern and City Railways Co? 1905: debtor should not be disadvantaged by the assignment.? Buyer able to bring action against borrower directly, and can discharge the debt.? Assignment completed where: buyer and seller sending signed assignment agreement to the agent, and agent executing assignment once it is satisfied all obligations complied with by buyer.SECTION 3: EQUITABLE ASSIGNMENT? Where doesn`t satisfy all of conditions of s. 136 LPA 1925. Exs: doesn`t assign the whole debt, not in writing or signed, debtor not given written notice of assignment.? Until notice given to borrower, borrower continues to pay interest and make repayments to the original lender.Assignee only has beneficial interest, so doesn`t have rights of legal owner (right to bring legal action, so need to join assignor to any action against the borrower).? Principle: ?Dearle v Hall? 1828: subsequent assignee may gain priority if it doesn`t have notice of a prior assignment and gives notice to the borrower first.But Exception: s. 136 LPA: Legal assignments are ?subject to equities having priority over the right of the assignee?. And such action would be a fraud by the original lender.SECTION 4: FUNDED PARTICIPATION? Participant underwrites all or part of the lender`s obligations to the borrower under a loan. (ex: provides part of funds borrowed to the borrower).In return, repayments and interest payments paid by lender to the participant.? Original lender can remove sums advanced from its balance sheet.? Separate contractual arrangement between lender and participant. Thus, original lender maintains contractual relationship with borrower.So, payments and receipts to borrower, then agent, then lender, then participant.And original lender still liable to contribute if participant fails to deliver.? Non recourse for the participant. So original lender not required to make payments to the participant, unless they are received from the borrower.?Lloyds TSB Bank plc v Clarket and Chase Manhattan Bank Luxembourg SA? 2002: unsecured creditor for the debt if the original lender insolvent.? For participant: o proprietary rights in the facility + double credit risk for the participant: lender + borrower.SECTION 5: RISK PARTICIPATION? Participant agrees to put the original lender in funds in specified circumstances (ex: payment default by borrower). So, like a guarantee or insurance policy for the original lender.In return, participant will charge a fee.? Original lender retains contractual relationship with borrower and liability to pay sums.And participant doesn`t have direct recourse against the borrower.!
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