It appears that the industry is starting to “enjoy” a modest increase in activity as to participations, assignments and syndications. This “enjoyment” is not without more than a fair share of trepidation and reluctance, but the allure of increased revenue is difficult to withstand. Regardless of this trepidation, participations, assignments, syndications and intercreditor agreements can be done safely and profitably. However, one should not enter into these without knowing exactly what is encompassed. They are fraught with potential minefields.
This is the first article of a several part series on participations, assignments and syndications. We hope that by the end of the series, if you decide to do such a deal, you will be better prepared and will go into it with your eyes wide open.
Vocabulary is important. Participations, assignments, syndications and intercreditor agreements are not synonymous. Each comes with its own set of issues, obligations and costs (and headaches.) It is important to know the difference and to use the right term. Otherwise, it is difficult to properly convey the terms of the proposed deal and the obligations of your institution. To that end, let’s discuss what each term basically means from a legal standpoint.
1) Loan Participation – A loan participation is an agreement between two or more lenders in which a primary lender (“Lead Bank”) sells specific rights, including partial economic rights, in a loan to other lenders (“Participants”). The Lead Bank is the only bank that has contact with the borrower and the only one in privity of contract with the borrower. Therefore, the participating lender has no obligations to the borrower. Likewise, the Lead Bank is the only one that can pursue remedies against a non-performing borrower; the participant banks are “along for the ride” per whatever is in the participation agreement. The participation agreement defines and sets forth the respective responsibilities of each lender. In other words, a Participant only looks to the participation agreement to understand its rights – and not the underlying loan documents with the borrower. Regardless even if one is only a participating bank, one must do the same degree of independent credit and collateral analysis as if one were the originating lender. (FIL-38-2012)
2) Loan Assignments – An assignment is a sale or transfer of up to all of the lender’s (“Assignor”) rights and obligations in a loan to another party (“Assignee”). Upon completion, the Assignee then will step into the same shoes as the Assignor for those rights assigned. Assignee has a direct contractual relationship (or privity of contract) with the borrower controlled by the initial loan documentation.
3) Syndications – A syndication is a type of assignment. It is usually a complex and large loan between multiple lenders and a single borrower. Each lender holds its own set of promissory notes with the borrower (and therefore stands in privity of contract with it), but one bank is designated the lead bank. In some cases, there are arrangers that underwrite and fund certain costs and expenses, and then assign out portions of the loan to other lenders prior to the closing date.
4) Intercreditor Agreements – An intercreditor agreement is an agreement between two or more creditors of the same borrower. Each creditor has its own set of loan documents with the borrower but each creditor generally has interest in the same set of collateral or payment source. Therefore, the parties enter into an agreement detailing their differing rights and priorities to reduce confusion and potential conflict. The borrower is not a party to the intercreditor agreement.
This article exposed you to the basic meaning of each of these. Therefore, hopefully, we can be more assured that everyone is speaking the same language when discussing these types of arrangements.
In the next newsletter, we will detail these four types of agreements including what each entails, their applications and their inherent positives and negatives.
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