The Law relating to syndicated loan agreements and its application in commercial practice

Author:Norman Mugarura
Position:Garadi Ltd, Barking, UK
Pages:177-196
SUMMARY

Purpose The purpose of this paper is to articulate the law relating to syndicated loan agreements and what legal experts and parties need to safeguard against inherent pitfalls in its usage and practice. The research design of this paper has two strands: an examination of generic issues relating syndicated loan agreements and the process; and the mechanisms for transferring proprietary rights and interests should parties want to do so. Design/methodology/approach The paper was written on the basis of evaluating primary and secondary data sources to gain insights into commercial experiences of harnessing syndicated loan facilities as an alternative form of raising finance for development projects. It has examined case law which reflects the law and practice of syndicated loan markets both in common and civil law jurisdictions. Particular attention has been paid to the credibility of source materials and its relevance to usage and practice of syndicated loan agreements. The core element of this methodology has been an evaluation of generic issues which underpin syndicated loan agreements, analysis of academic literature and evaluation of cases and policy documents. The paper has drawn examples in both common and civil jurisdictions to gain insights into the law which governs syndicated loan markets and its practical application. There has been an uptake in syndicated loan... (see full summary)

 
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The Law relating to syndicated
loan agreements and its
application in commercial practice
Norman Mugarura
Garadi Ltd, Barking, UK
Abstract
Purpose – The purpose of this paper is to articulate the law relating to syndicated loan agreements
and what legal experts and parties need to safeguard against inherent pitfalls in its usage and practice.
The research design of this paper has two strands: an examination of generic issues relating syndicated
loan agreements and the process; and the mechanisms for transferring proprietary rights and interests
should parties want to do so.
Design/methodology/approach – The paper was written on the basis of evaluating primary and
secondary data sources to gain insights into commercial experiences of harnessing syndicated loan
facilities as an alternative form of raising nance for development projects. It has examined case law
which reects the law and practice of syndicated loan markets both in common and civil law
jurisdictions. Particular attention has been paid to the credibility of source materials and its relevance
to usage and practice of syndicated loan agreements. The core element of this methodology has been an
evaluation of generic issues which underpin syndicated loan agreements, analysis of academic
literature and evaluation of cases and policy documents. The paper has drawn examples in both
common and civil jurisdictions to gain insights into the law which governs syndicated loan markets and
its practical application. There has been an uptake in syndicated loan markets not only in United
Kingdom but also globally. While there has been a growing body of literature on syndicated loan
markets, mechanisms for transferring proprietary rights and interests of contractual parties have not
been given proportionate attention. The paper addresses a gap in the law of syndicated loan markets
and the varied ways in which they are harnessed in international commercial practice. It addresses
existing gaps in the law and practice of syndicated loans, not only in the UK but also in other
jurisdictions where examples have been drawn. The research design of this paper has two strands: an
examination of generic issues relating loans and the process in which they are constituted as nancial
products; and the mechanisms for transferring proprietary rights and interests.
Findings – The ndings underscore the fact that much as syndicated loans offer huge advantages to
commercial parties, there are also intricacies which parties need to keep in mind and guard against. Like
in other forms of commercial agreements, parties to a syndicated loan agreement have the power to
nominate the governing law not necessarily from jurisdictions where they do business but as they may
see t. In practice, effective contractual terms in syndicated loans are to be applied slightly differently
to other form of commercial agreements in English contract law. For example, representation and
warranties are grouped together and constitute statements by the borrower, which the lender considers
should be true at the inception of the loan agreement. As a syndicated loan involves the participation of
many banks (obviously some foreign banks), there is the potential for conict of laws. As such,
arranging a syndicated loan should be governed by the relating to international commercial contracts
to address the challenge posed by conict of laws. This is essential to ensure proprietary transfer of
rights in the asset are properly constituted and effective. The loan should be carefully structured to
reect important technical issues which relate to duties and obligation of contractual parties.
Research limitations/implications – This was largely a theoretical paper undertaken on the basis
of evaluating primary and secondary data sources, some of which were not able to corroborate. It would
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
Syndicated
loan
agreements
177
Journalof Financial Regulation
andCompliance
Vol.24 No. 2, 2016
pp.177-196
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-09-2015-0051
have been better to corroborate some of the data sources used with nancial institutions (which
specialise in syndicate loans and related products) to mitigate the potential for bias the data used were
generated.
Practical implications – It is important that legal practitioners and policy markers have access to
requisite data on different types of loan markets not only in the UK but also other jurisdictions. One of
the most important implication is that unlike bond markets (which are sought in response to an uptake
in market risks), the foregoing environment tends to negatively correlate in syndicated loan markets.
Lending institutions such as banks tend to be cautious when there are instabilities in the market as
demonstrated in the aftermath of the recent global nancial crisis (2010-2014). There is a converse
relationship between loan markets and syndicated loans, which is explained by the fact that the higher
the risks, the more cautious lenders (nancial institutions) tend to be to safeguard against uncertainties
of ending in an environment which is not conducive for business. Bonds on the other hand are sought as
security by credit markets against inherent risks especially in times of economic uncertainties. This is
why in the aftermath of the recent global nancial crisis, banks were anxious and unwilling to lend not
only to each other but also to small business for fear and to curtail potential market risks. It needs to be
noted that just like in other forms of international commercial agreements, parties in syndicated loan
agreements have autonomy to nominate the governing law of the agreement, not necessarily from
jurisdictions where parties do business. Where parties have not nominated the governing law clause of
syndicated loan contracts, rules of private international law such as characteristic performance of the
contract will apply.
Social implications – There is a growing body of literature on syndicated loan markets, but one
wonders why mechanisms for transferring proprietary rights and interests of contractual parties have
not been written about as much. It is an important area but has somehow been overlooked by scholars
on this subject. If the borrowers’ fails to keep up their repayments (default), it will have an adverse on
loan markets and the economic stability which will in turn affects businesses, people and national
governments.
Originality/value – The paper was written on the basis of evaluating primary and secondary data
sources to gain insights into commercial experiences of harnessing syndicated loan facilities as an
alternative form of raising nance for development projects. It has examined case law which reects the
law and practice of syndicated loan markets both in common and civil law jurisdictions. Particular
attention has been paid to the credibility of source materials and its relevance to usage and practice of
syndicated loan agreements. The core element of this methodology has been an evaluation of generic
issues which underpin syndicated loan agreements, analysis of academic literature and evaluation of
cases and policy documents. The paper has drawn examples in both common and civil jurisdictions to
gain insights into the law which governs syndicated loan markets and its practical application.
Keywords Duties and obligations of commercial parties, Its intricacies,
Proprietary rights and interests, Syndicated loans
Paper type Research paper
1. Introduction
The syndicated loan process involves dynamic technical issues banks and legal
advisers will need to bear in mind to safeguard the rights of contractual parties. Some of
the technicalities may include contract law in the context of common law and civil law
jurisdictions, company law with regard to partnerships, agency and principal
relationships, duciary issues and duty of care (particularly on the part of the lead bank
which arranges the syndicate), insolvency and enforcement of contracts in foreign
jurisdictions, choice of law issues and performance of contracts. As there is no
transnational law of syndicated loan agreements, transfer of proprietary rights may be
subject to rules of private international law and how they apply in a jurisdiction where
JFRC
24,2
178

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