assignment vs transfer lma

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Loan transfer provisions: assign of things to come.

Published on 30th Sep 2020

The ability for a lender to trade out of a loan position is a trademark of the syndicated loan markets, but can also be a powerful tool in the armoury of downside protection for lenders holding less liquid credits.

Sponsors and borrowers, for their part, will wish to limit a lender's ability to transfer, on the basis that they want to manage their commercial relationships. In the case of unutilised commitments, they will also want to ensure the lender's ability to fund. In a downside context, they will also have a strong incentive to prevent loan participations ending up in the hands of investors with an agenda that differs from their own, or at least those of the originating financial institutions.

The subject of transferability therefore always receives a fair degree of attention in corporate and leveraged lending transactions as the parties seek to navigate this tension. Moreover, during the coming months, against the spectre of further Covid-induced underperformance, the parties' rights will form an important aspect of contingency planning for borrowers and lenders alike. In this Insight we consider some of the issues to be alert to.

LMA position

Almost all loan agreements will expressly deal with transferability. This reflects its importance, although it is worth noting that, absent any such restrictions, loan participations would in most cases be freely assignable. The Loan Market Association (LMA) form of leveraged loan agreement provides for two alternatives for addressing transferability. Under the first option, the borrower must be consulted but is not required to give their consent for a transfer. The second option requires the consent of the borrower for a transfer, subject to certain carve-outs.

Typically borrower consent is required on leveraged finance deals, subject to certain carve-outs, but greater flexibility is often agreed on corporate lending deals. The carve-outs in the LMA leveraged finance document permit transfers:

• to an institution on a specified, pre-approved list of acceptable transferees (known as a 'whitelist' – see below);
• to another lender or one of its affiliates or related funds;
• with the borrower's consent, which cannot be unreasonably withheld and is deemed to be given after a specified period of time; and
• to any institution permitted at any time whilst an event of default is continuing.

These carve-outs will typically be modified in at least one of the following ways.

It is common to have an agreed list of entities to which a lender can transfer its interests without the borrower's consent. This typically comprises traditional, regulated financial institutions. Some loan agreements allow lenders and borrowers the ability to replace entities on such a list during the life of the loan, although this is less commonly encountered in the mid-market.

Lenders will wish to pay close attention to any carve-outs to the approved list - whether contained in the list itself or the operative provisions of the loan agreement (in particular, to competitors and distressed investors – see below). Attention should also be given to any requirements for transferring lenders to notify a borrower or sponsor prior to any transfer being effective, even if the transferee is on an approved list. Both of these exculpations have long been a feature of larger deals and now feature in most mid-market deals and (especially in the former case) a reasonable proportion of corporate lending transactions.

Reasonableness and deemed consent

Where consent to transfer is required, the borrower will usually be required to act reasonably in relation to any such request. Consent will also often be deemed to be given by the borrower if it is not rejected (although precise language varies) within a specified period. This is typically between 5 days and 10 business days. Occasionally, bespoke provision will also be made for circumstances in which it will (or will not) be deemed reasonable for a borrower to refuse consent.

Events of default

Transferability without borrower consent on an event of default increases a lender’s options by allowing the transfer of its participation to a range of potential entities which may not be named on the approved list – without the need for express or deemed consent. It may also override restrictions that would otherwise apply on transfers to competitors or distressed investors.

Historically, transfer restrictions fell away upon an event of default. Although often negotiated, in the leveraged world, it is more commonly the case that restrictions on transfers will only fall away once and for so long as a significant event of default is continuing (or acceleration notice has been served). This will include restrictions on transfers to distressed debt funds or competitors. We could well see greater focus on the relevant event of default triggers in coming months.

The 'wrong hands'

It is commonplace for leveraged loan agreements to include restrictions which from the sponsor's and borrower's perspective seek to prevent debt falling into what they might perceive to be the 'wrong hands', notably those of competitors and distressed debt funds. As the LMA form of document does not restrict such transfers, we see a range of drafting formulations around the extent of the restrictions – and the carve-outs from them.

On competitors, sponsors will be concerned to ensure affiliates (including portfolio competitors) are captured. Lenders will wish to ensure that 'affiliates' is not too broadly defined so as to pick up businesses over which they / controlling shareholders do not have control; and that the type of business which would cause the restriction to be engaged is not too wide.

On distressed debt funds, sponsors will want to cover all institutions that undertake such an activity, and to ensure activities of concern are all captured. This will include those embarking on a loan-to-own strategy, but we do see more broadly drafted restrictions, for instance covering those seeking to obtain a voting blocking stake.

Lenders, for their part, will look to limit the scope to only the relevant part of the business undertaking such an activity (and for whom it is a material part of its investment strategy). In particular, from their perspective, a financial institution should not be prohibited from acquiring debt just because it has a debt trading arm or affiliate, provided that arm or affiliate operates independently of the acquiring entity and is subject to appropriate information barriers. A similar case is occasionally raised in relation to competitors and their affiliates too.

The relationship between such restrictions and the whitelist is frequently negotiated in the context of when any such restriction should fall away following one or more events of default. However, there is sometimes (especially in smaller transactions) less focus on whether transfers to affiliates and related funds should also be subject to such restrictions. This may be of concern to sponsors to the extent it allows, for example, a debt fund to transfer commitments to a related special situations or distressed debt fund.

Pre-emption rights

A lender will need to pay attention to any bespoke pre-emption rights included, whether in favour of another lender or the sponsor. Although not frequently encountered, we have seen both.

Sub-participation

Historically, and still today on LMA terms, restrictions on transfers only applied to absolute transfers and not sub-participations (on which the document would be silent). Accordingly, in this way lenders could avoid the transfer restrictions imposed on them by a borrower. However, sponsors and borrowers (primarily in the leveraged arena) have now long been sensitive to this and so seek to impose restrictions on such transfers – in particular, those sub-participations which transfer voting rights, although broader restrictions are occasionally encountered. Again, sub-participation restrictions are less frequently encountered in lower mid-market leveraged and corporate lending transactions.

During challenging economic times, lenders may look to revisit and restructure their balance sheets by reducing exposure to certain sectors, countries or currencies under various existing transactions, whether before or after the occurrence of a default. The transfer provisions in a loan agreement provide a simple mechanism by which lenders can divest of interests in a loan without themselves being required to lead or participate in what could become a lengthy, resource-consuming restructuring, as well as mitigating some of the reputational impact and risks associated with other forms of recovery.

As such, whilst the transfer provision tension exists in most lending relationships throughout the term of the loan, it is likely to feature more prominently over the coming months as lenders navigate the distressed cycle. We have already seen lenders successfully seeking to dial back on the sponsor-friendly positions achieved pre-pandemic, especially at the lower end of the mid-market.

Documentary restrictions on the ability to exit will be most acutely felt by investors in liquid syndicated markets. However, lenders may also seek to avail themselves of what can (perhaps counter-intuitively) be more flexible documentary rights in this respect under debt fund and bilateral clearing bank documents – including potentially by way of transfers into special situations or distressed debt funds. That being said, lenders will doubtless remain mindful of preserving relationships and reputation for the longer term when it comes to the exercise of transfer rights, irrespective of the pure documentary position.

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Assignment, novation or sub-participation of loans             

Transfers of loan portfolios between lending institutions have always been commonplace in the financial market.  A number of factors may come into play – some lenders may wish to lower their risks and proportion of bad debts in their balance sheets; some may undergo restructuring or divest their investment portfolios elsewhere, to name a few.  The real estate market in particular has been affected by the announcement of the “three red lines” policy by the People’s Bank of China in 2020 which led to a surge of transfers, or attempted transfers, of non-performing loans.  Other contributing factors include the continuous effects of the Sino-US trade war and the Covid-19 pandemic.

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Transferability of Loans

The legal analysis regarding the transferability of loans can be complex.  The loan agreement should be examined with a view to identifying any restrictions on transferability of the loan between lenders, such as prior consent of the debtor and, in some cases, whether such consent may be withheld.  Other general restrictions may apply given that most banks have internal confidentiality rules and data protection requirements, the latter of which may also be subject to governmental regulations.  Certain jurisdictions may restrict the transfer of loans relating to specific types of receivables – mortgage or consumer loans being prime examples.  It is imperative to conduct proper due diligence on the documentation and underlying assets in order to be satisfied with the transferability of the relevant loans.  This may be complicated further if there are multiple projects, facility lines or debtors.  It is indeed common to see a partial transfer of loans to an incoming lender or groups of lenders.

Methods of Transfer

The transfer of loans may be carried out in different ways and often involves assignment, novation or sub-participation.

A typical assignment amounts to the transfer of the rights of the lender (assignor) under the loan documentation to another lender (assignee), whereby the assignee takes on the assignor’s rights, such as the right to receive payment of principal and interest on the loan.  The assignor is still required to perform any obligations under the loan documentation.  Therefore, there is no need to terminate the loan documentation and, unless the loan documentation stipulates otherwise, there is no need to obtain the debtor’s consent, but notice of the assignment must be served on the debtor.  However, many debtors are in fact involved in the negotiation stage, where the parties would also take the opportunity to vary the terms of the facility and security arrangement.

Novation of a loan requires that the debtor, the existing lender (transferor) and the incoming lender (transferee) enter into new documentation which provides that the rights and obligations of the transferor will be novated to the transferee.  The transferee replaces the transferor in the loan facility and the transferor is completely discharged from all of its rights and obligations.  This method of transfer does require the prior consent of the relevant debtor.

Sub-participation is often used where a lender, whilst wishing to share the risks of certain loans, nonetheless prefers to maintain the status quo.  There is no change to the loan documentation – the lender simply sells all or part of the loan portfolio to another lender or lenders.  From the debtor’s perspective, nothing has changed and, in principle, there is no need to obtain the debtor’s consent or serve notice on the debtor.  This method of transfer is sometimes preferred if the existing lender is keen to maintain a business relationship with the debtor, or where seeking consent from the debtor or notifying the debtor of any transfer is not feasible or desirable.  In any case, there would be no change to the balance sheet treatment of the existing lender.

Offshore Security Arrangements

The transfer of a loan in a cross-border transaction often involves an offshore security package.  A potential purchaser will need to conduct due diligence on the risks relating to such security.  From a legal perspective, the security documents require close scrutiny to confirm their legality, validity and enforceability, including the nature and status of the assets involved.  Apart from transferability generally, the documents would reveal whether any consent is required.  A lender should seek full analysis on the risks relating to enforcement of security, which may well be complicated by the involvement of various jurisdictions for potential enforcement actions.

A key aspect to the enforcement consideration is whether a particular jurisdiction requires that any particular steps be taken to perfect a security interest relating to the loan portfolio (if the concept of perfection applies at all) and, if so, whether any applicable filing or registration has been made to perfect the security interest and, more importantly, whether there exists any prior or subsequent competing security interest over all or part of the same assets.  For example, security interests may be registered in public records of the security provider maintained by the companies registry in Bermuda or the British Virgin Islands for the purpose of obtaining priority over competing interests under the applicable law.  The internal register of charges of the security provider registered in the Cayman Islands, Bermuda or the British Virgin Islands should also be examined as part of the due diligence process.  Particular care should be taken where the relevant assets require additional filings under the laws of the relevant jurisdictions, notable examples of such assets being real property, vessels and aircraft.  Suites of documents held in escrow pending a potential default under the loan documentation should also be checked as they would be used by the lender or security agent to facilitate enforcement of security when the debtor defaults on the loan.

Due Diligence and Beyond

Legal due diligence on the loan documentation and security package is an integral part of the assessment undertaken by a lender of the risks of purchasing certain loan portfolios, regardless of whether the transfer is to be made by way of an assignment, novation or sub-participation.  Whilst the choice of method of transfer is often a commercial decision, enforceability of security interests over underlying assets is the primary consideration in reviewing sufficiency of the security package in any proposed loan transfer.

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• Bank Notes - December 2013

English law syndicated facility agreements traditionally provide that:

• a security trustee holds any transaction security for the lenders (and any other secured parties); and
• any transfers of loan commitments are made by novation, using a transfer certificate.

Where English law governs the transaction security, this approach generally works. In particular, transfers by novation should not affect the transaction security.

What if other laws govern some or all the transaction security? The position is not always so straightforward, particularly when dealing with civil law regimes. Philippe Max (France), Tim Stubbs (Russia) and Jesús Varela (Spain) briefly discuss how their local law security is usually held in English law syndicated loan transactions. They also examine how to avoid pitfalls when transferring English law loans benefiting from that security.

Overview — LMA facility agreements and foreign law security

Parties commonly opt to use English law facility agreements to document large international syndicated loan transactions. Many of these involve foreign law security. The LMA's English law facility agreements reflect this in various ways:

• They enable lenders to transfer loan commitments by an assignment agreement (as well as by transfer certificate) "to avoid a novation of rights/obligations relevant to a civil jurisdiction". In some civil law jurisdictions existing security cannot secure novated obligations. Under an assignment agreement, the existing lender assigns its rights and the new lender assumes equivalent obligations to those of the existing lender. The intention is that this will have the same economic effect as a transfer by novation, but without prejudicing the transaction security.
• They refer to the holder of any transaction security as the "Security Agent" rather than the "Security Trustee" (although they make clear that it will hold any English law transaction security as trustee). This reflects that some foreign laws do not recognise trusts in the English law sense.
• Some also include a "parallel debt" clause, under which the security agent is owed a "parallel" and equal debt to that owed to the secured parties. This is to address the requirement under some foreign laws that the security holder must also be the creditor.

However, these documentary features are only a starting point where a transaction involves foreign law security. The LMA agreements point out that local law advice is essential to ensure that the security structure and transfer mechanics are effective in all relevant foreign jurisdictions.

French law security

French law security in syndicated transactions is usually granted to the lenders, represented by a security agent.

The French courts have recently given effect to a parallel debt structure created under a foreign law document. However, certain types of security interests (such as a " Dailly " assignment by way of security or a pledge of stock governed by the French commercial code) can only be granted to credit institutions that have extended a "credit". So parallel debt cannot be used in connection with these types of security. (Parallel debt is also not used in purely domestic French transactions. Although untested, it is generally considered that it would not work in this context.)

Unlike in some other European jurisdictions, the French Civil Code (article 2328-1) expressly allows security to be held by a person appointed by the secured creditor(s), rather than by the secured creditors themselves. However, this mechanism is not widely used in France. It raises some uncertainties and does not, for example, create a trust mechanism over the security interest held by the security agent.

In a syndicated loan transaction, the transfer of an English law loan commitment using the LMA form of assignment agreement should not adversely affect any French law security held by the security agent. Depending on the type of security interest, a registration with the relevant registry may be necessary.

A transfer by novation can also work, but the security must be expressly reserved if it is to continue to secure the novated obligations. This reservation language can be in the French law security document. If it is, there is no need to amend the form of transfer certificate.

Russian law security

There is no standard way of holding Russian law security in a syndicated loan transaction yet. The holder of Russian law security must always be the secured creditor itself. The enforceability of parallel debt structures is genuinely uncertain in Russia, so an alternative structure is often used instead. One lender in the syndicate (usually the security agent) is declared a "joint and several creditor"  with the other secured creditors for the full amount of the debt. The Russian Civil Code recognises the concept of a "joint and several creditor". Therefore, this approach is probably less risky than using "parallel debt" (which may work under a foreign law but is an unknown concept in the Russian civil system). However, its use in this context is also largely untested in the Russian courts.

What if one of the above two structures (under which a single person becomes security holder and creditor for the whole secured debt) were not used for a syndicated loan? Then security for that loan would need to be granted directly to all the lenders. This would require all lenders to be parties to the security documents, and cause administrative difficulties — for example on amendments to the security or on any transfer of a lender's loan commitment.

Russian law security is generally accessory to a secured obligation and follows the secured obligation, unless the contract provides otherwise. Where Russian law security secures English law syndicated loans, novations of those loans should always be avoided, whichever security-holding structure is used. It is unlikely the security will continue to be effective against the novated obligation. Transfers may be made by assignment agreement instead. For registered security, the register must be amended to complete the transfer of the benefit of security to a new lender. But that will not be relevant if under the transaction structure (as described above) security was not granted directly to the transferring lender.

There has been ongoing discussion in the Russian legal community about the need to introduce further changes to Russia's legal system to provide more comfort for syndicated lenders, such as recognising the concept of a security trustee.

Spanish law security

Security interests under Spanish law are accessory and so must be held by the secured creditors themselves. Spanish law does not recognise the use of a parallel debt structure to address this. A security agent will nevertheless usually be appointed to hold Spanish security in a syndicated loan transaction, but it will hold the security in the name of and on behalf of the original lenders. The lenders will need to empower the security agent to do so under a power of attorney.

If a loan is transferred by way of an English law novation in this context, any existing Spanish law security is unlikely to secure the novated obligation. This is not necessarily the case where the transfer is made by way of assignment and assumption. However, unless the purchaser signs a notarial " escritura ", legally the security will remain on the relevant Spanish registries as held by the security agent for the original lenders. The signing of an " escritura " is usually not practical because of the stamp duty payment obligations it triggers. Without an " escritura " the new lender may still benefit indirectly from the security through the contractual arrangements between itself, the original lender and the security agent. Spanish courts sometimes question the right of security agents to enforce security on behalf of unregistered lenders. New lenders may seek to reduce this risk by signing a notarial " poliza " in relation to the transfer, which does not attract stamp duty.

Law stated as at 5 December 2013.

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• Knowledge Point

How are loan trades documented?

A secondary market supports syndicated loans after syndication closing .  Only few loans do not permit secondary trading or transferability, such as club loans .

In the US loan market, an assignment and assumption agreement is a form used to document the sale and assignment of rights and obligations under a credit agreement by a lender to an assignee.  It is typically attached to each credit agreement.

Novation and assignment of LMA facilities is brought about by means of a transfer certificate (Schedule 5 ( Form of Transfer Certificate ) and an assignment agreement (Schedule 6 ( Form of Assignment Agreement )), respectively.  The agent , the transferor and the transferee are the only parties usually required for execution.  All other parties are deemed to consent to the transaction, provided the other conditions to any transfer set out in the facility are complied with.  The borrower ’s consent is not required for a transfer or assignment to another lender or an affiliate of a lender.

[Performing loans] are traded by executing an LSTA Par Confirmation and then settling the trade by completing the form of Assignment Agreement provided in the [...] credit agreement. https://iclg.com/... ' data-original-title="assignment vs transfer lma" title="assignment vs transfer lma"> – Marsh & Basta, 2018

An assignment of transferred rights under LSTA distressed documentation involves a Purchase and Sale Agreement ( PSA ), an Assignment and Acceptance Agreement ( A&A ) and a Purchase Price Letter.  An assignment of purchased assets under LMA distressed documentation involves an LMA Trade Confirmation, which incorporates the LMA standard terms and conditions, an Assignment Agreement and a Pricing Letter.

Participants’ share taken at loan initiation [...] may raise a concern with whether loan share will change as a result of loan sales in the secondary market. https://www8.gsb.columbia.edu/... ' data-original-title="assignment vs transfer lma" title="assignment vs transfer lma"> – Li, 2017

Related Items

• When do loans trade?
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Transferring a loan by assignment

Published by a lexisnexis banking & finance expert.

This Practice Note explains one of the key ways a lender can transfer a loan under English law to another lender by assignment.

The other key ways are:

novation—see Practice Note: Transferring a loan by novation, and

sub-participation or risk–participation—see Practice Note: Selling a loan by sub-participation

A loan (which is a debt) is a chose in action . A chose in action is something which is recoverable by legal action (as opposed to something which is physically possessed). As a basic principle, choses in action cannot be assigned at common law.

Assignments of choses in action are therefore either:

statutory—often referred to as 'legal' assignments because they have an equivalent effect to legal assignments, or

Under English law, an assignment is a transfer of rights; it does not transfer obligations (in contrast to a novation—see Practice Note: Transferring a loan by novation).

This Practice Note discusses:

requirements for a legal assignment

how legal assignments differ from equitable assignments

the advantages and disadvantages of assignments as a method of transfer, and

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Key definition:

Equitable assignment definition, what does equitable assignment mean.

Assignments can occur in equity when any of the requirements of legal assignment are not satisfied.

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Negotiating transfer provisions: whose side are you on?

Notably in the LMA's guide to Improving Liquidity in the Secondary Market (May 2017) and supported in the second of its biannual updates to members ( LMA News, H2 2017 ), where research commissioned by the LMA indicated that restrictions on transferability are on the rise in European leveraged loans. More recently at the LMA's syndicated loans conference (September 2017), a panel discussion on liquidity and efficiency again took aim at how negotiation trends in transfer provisions could be damaging the secondary market. There is nothing to suggest the LMA (and the LSTA) won't continue to beat the drum at the March gathering.

Both organisations have an understandable interest in ensuring the loan market has sufficient liquidity and is functioning well, and they will argue that a healthy secondary market is closely associated with a borrower-friendly primary market. But the issue is not confined to serving the best interests of the relevant trade associations and their members' trading activity. Transfer restrictions, when coupled with light touch covenant structures, for example, could create significant problems for individual lenders trying to dispose of loans, whether for operational (realising value, de-risking, liquidity) or regulatory capital reasons.

Yet borrower anxiety remains. Market commentary continues to warn of the dangers of "vulture funds", non-bank financial institutions and other investors and the necessary drafting responses (in light of cases such as Grant and others as Joint Administrators of Olympia Securities Commercial Plc (in administration)) v WDW 3 Investments Ltd and another [2017] EWHC 2807 (Ch) ) to tighten up restrictions on assignment to ensure that borrowers reserve as much control as possible over the identity of the lender or the composition of the loan syndicate (see Preying on distressed debt: limiting the scope for transfer to vulture funds, BJIBFL, January 2018).

Furthermore, despite the scope of the LMA and Xtract's market research, the issue is not limited to leveraged deals. Trends that exist in leveraged loans may feed in to other markets and real estate finance is not immune to borrowers putting pressure on their lenders to limit the portability of their debt. Indeed investors with memories of the fallout from the 2008 global financial crisis may be particularly attuned to the more capricious nature of property lenders, and the susceptibility of REF debt to being sold off or transferred to government "bad banks". Partly attributed to the strength of the relationship banking model, the following issues have been identified:

Prohibiting transfers to competitors of the borrower. Perhaps a natural aversion for some borrowers, restrictions may prevent loans being sold to an industrial competitor (who may be seeking to gain strategic control), unless the borrower, or its parent, consents. However care must be taken that the drafting does not inadvertently pull in entities that are indirect competitors (for example, "affiliates" of a direct competitor) or private equity investors operating in the same broad sphere as a sponsor.

Blacklists and whitelists . Typically these restrictions will prohibit transfers to entities that might include distressed debt funds, hedge funds, non-bank institutions or other entities perhaps seen as predatory or difficult. Whitelists specify a pre-approved list of acceptable transferees. How such entities are defined or identified is crucial. In a real estate development for example, a borrower will often be concerned that the taps are not going to be turned off on any phased funding or that a new lender is less sympathetic to the borrower's ongoing finance requirements. In Carey Group Plc & Ors v AIB Group (UK) Plc & Another [2011] EWHC 567 (Ch) , for example a sale to the Irish "bad bank" NAMA was thought to be problematic to the extent NAMA's remit meant that it was incapable of meeting certain loan servicing or ongoing funding obligations. 

Other observations include restrictive drafting of terms like "distressed investors" where definitions linked to parties that trade in a specified portion of sub-par debt may exclude any buyer , depending on the prevailing state of the market.

Minimum holds ("skin in the game"). A borrower may require its lender to retain a minimum hold amount or for transfer amounts to be above a certain figure (or a multiple of a certain figure) to prevent a fragmentation of the lender base. Care must be taken that the relevant amounts do not block necessary sales .

Sub-participation. Commonly sub-participation was seen as a route around consent issues or transfer restrictions, since sub-participants are not lenders of record (subject to elevation). However some loan agreements may now include fetters on a lender's ability to sub-participate or use other synthetic structures so as to avoid syndicate members being influenced by parties unknown to the borrower. For example, restrictions may be couched in terms that prohibit sub-participation or other synthetic methods of risk allocation to lenders that are blacklisted under any direct transfer provisions.

Other deviations from previous market norms. Syndicated loan documents, whether derived from the LMA recommended forms or not, typically include extensive, well-used transfer mechanisms that are designed to mitigate certain concerns on the part of the borrower. But they may not be operating how they should be. For example:

Misunderstanding the role of the facility agent. Syndicate lenders and borrowers may interpret the transfer provisions such that the agent is required to seek the borrower's consent. Rather it should be the existing lender (as transferor) who should request the consent.

Deemed consent provisions. The LMA has identified an apparent failure to use, or in some cases include, deemed consent or "standing offer" provisions that can be deployed to overcome delays in obtaining borrower approval for a transfer. Similarly, wording that requires borrowers simply to be consulted or not to withhold or delay consent unreasonably (or both) should be activated where circumstances dictate.

In some instances the various restrictions highlighted above will be designed to stay in place even after a default, being the point when borrowers will clearly be most vulnerable and more sensitive about the identity of their lenders. However, from a lender's perspective, the restrictions will be problematic insofar as they delay or prevent vital sales of non-performing ("distressed") debt.

Where restrictions are designed to fall away only on specified events it is crucial to look at the wording to understand when a lender might be able to transfer the loan. Arguments around whether transfer restrictions still apply unless there has been a "material" event of default should be avoided. Light touch covenant (or "cov-lite") structures that eschew financial covenants or other "early warning systems" within the documents (such as reporting obligations) may also leave lenders unable to sell deteriorating loans, for example other than to approved entities or with borrower consent, until a more serious payment event of default or an insolvency event occurs.

Interestingly, while in some instances borrowers may be pushing for their loan documents to resemble bond terms, they do not want similarly to ape the absolute transferability of those securities. Some commentators have observed that creeping restrictions on transfers may be a lawyer-led (and misguided) attempt to protect their client borrower/sponsor, ignoring the fact that stifling secondary liquidity creates its own problems. However, others argue the lawyers are simply reflecting what is "market". To the extent customers ask for it, and the lenders accommodate those requests, it is not for the customer to concern themselves with the secondary market. 

However, from a lender's perspective it may be more than helping. Conceding to a seemingly innocuous request in negotiations from a borrower (perhaps spooked by analysis following Grant v WDW 3 Investments Ltd (2017) that restricting assignees to “financial institutions” provides no meaningful protection against the kind of entity that could become a lender), may ultimately limit a lender's ability to offload a loan until more calamitous events occur. And of course it probably won't be appreciated by their debt trading desks.

 Whichever side of the debate you favour, there is no doubt that rather than shutting down transfers, some borrower anxiety as to the effect of a loan sale may be tackled in other more creative ways. For example, it may be more appropriate to address typical issues arising out of a change of lender such as confidentiality, loan servicing and ongoing funding, renegotiation of terms, lender voting rights and increased costs elsewhere in the documents. But for as long as the market allows borrowers to wield the red pen, transfer provisions will remain in the firing line.

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Trade loans and secondary trading: BAFT v LMA

Trade loans are used to finance transactions involving import or export trading and reflecting different stages in the commodity trade cycle, from pre-export financing to borrowing base facilities.

All trade loans, however, are used to finance imports, exports, or other trading transactions.

By Ian Clements

Last modified Thursday April 18, 2024

This article is co-authored by Ian Clements, Alexander Hewitt, and Evdokia Maslennikova of Dentons

All trade loans, however, are used to finance imports , exports , or other trading transactions.

Trade loans vary from uncommitted, unsecured bilateral financings, to complex secured, syndicated financings (almost inevitably made under Loan Market Association (LMA) style documents). 

In addition to ‘traditional’ loans to corporates, trade loans are also made inter-bank, enabling borrowing financial institutions to on-lend to corporates.

As in many banking sectors, market participants are often keen to achieve two things: 

• Standardised documentation; and
• Better secondary markets distribution (e.g., to de-risk or improve liquidity).  

Achieving the first tends to promote the second, which makes the standard forms published by the Bankers Association for Finance and Trade (BAFT) and the LMA so useful.

The BAFT master trade loan agreement (MTLA) creates framework terms for unsecured, uncommitted, bilateral trade loans with a single bullet repayment to corporate or financial institutional borrowers.  

Variations to the standard MTLA terms can be made in “Trade Loan Requests”, which document specific advances.

There are two ways that a lender can assign or transfer interests on a loan so that it is no longer the lender of record:

• An assignment of rights, or 
• A novation of rights and obligations.  

To use these options, either the underlying transaction must not prohibit assignment or transfer, or relevant counterparties must consent (including to disclosure of confidential information).  

While there are no market standard procedures for assignment or novation agreements used in connection with the BAFT MTLA, the LMA documents contain standardised mechanisms and agreements for these processes.  

Although the initials ‘LMA’ are synonymous with ‘market’ in many areas of the loan market, parties sometimes prefer to use shorter or bespoke documents.  

With secondary trading via transfer certificate or assignment in mind, such parties may want to pick the key features of the LMA’s primary documents summarised below. 

Aspects of the LMA 

In LMA-based facility documents, a security agent holds any security on trust for finance parties, preventing the security documents from being discharged via novation.

Each lender has a qualified right to independently sue for recovery of its own debt claims.

This even includes lenders who entered the transaction through a transfer certificate or assignment agreement. 

Payments between all parties are usually to be made available to the facility agent–and any guarantee is given to each finance party severally and directly.  

Using a quirk of English contract law (based on Carlill v. Carbolic Smoke Ball Company), the LMA form of transfer certificate novates a lender’s participation, binding all parties to the facility agreement even though only the facility agent, existing lender, and new lender sign the transfer certificate.  

The LMA assignment agreement (in effect, an assignment, assumption and release agreement) produces a similar economic result–again with only the facility agent, existing lender and new lender signing.  

The impact of novation on LMA loans

Transfer certificates are used where lenders have rights and obligations to novate (e.g., under undrawn commitments) unless the facility is in default (as there is a risk that novation can waive a default).

Each novation terminates the loan contract between the existing lender, the borrower, and all other parties with respect to the transferred participation (but not in relation to any retained participation or any transaction security).  

This means that the new lender’s rights under the security trust replace those of the existing lender.  

Bilateral lenders holding security for their own advances can avoid novation discharging their security by holding it under a security trust. 

This can be done when the bilateral loan is documented as a syndicated loan that employs the key LMA features mentioned above.

Novation and assignment agreements

The LMA assignment agreement is mainly used if a borrower is in a civil law country that has issues with transfer certificates. 

Legal advice should be taken on the effect of the assignment agreement in any given jurisdiction–including any security issues.

While economically very similar to a novation, the assignment agreement (unsurprisingly) contains an assignment of rights. 

Where participation is assigned, English law can make it impossible for an assignee to sue under its assigned rights without bringing its assignor into the proceedings.

However, one effect of the key features of the LMA forms summarised above is an English court is likely to treat an LMA assignment agreement as entitling the new lender to sue for recovery of the assigned participation without any assignor involvement.  

BAFT’s master participation agreement

Secondary trading in loans includes the use of sub-participations–something that is very common for trade loans using BAFT’s form of master participation agreement (MPA). 

BAFT’s 2018 English law MPA can create funded or unfunded risk participation in trade assets .  

Unlike the (still used) 2008 MPA, the 2018 MPA gives the buyer an equitable assignment in a participated asset. 

Again, in contrast to a 2008 (debtor/creditor) participation, the 2018 assignment model is capable of taking the asset off the seller’s balance sheet and outside its insolvency estate.  

In addition, the equitable assignment can sometimes be ‘elevated’ to a full legal assignment.

This depends, however, on the terms of the participation and applicable laws, such as the governing law of the asset, which usually gives the buyer simpler enforcement rights against the debtor under the purchased asset.

BAFT MPA vs LMA

In contrast to the 2018 BAFT MPA, LMA funded and risk participation in trade loans are debtor/creditor arrangements. 

Pending any elevation, there is only an economic transfer of the lender’s risk in the underlying transaction, with none of the lender’s rights against an obligor being transferred and the seller remaining the lender of record.

Advantages and disadvantages of the LMA

An advantage to the LMA model is it can be used where there are prohibitions on assignment or transfer in the trade loan, or when a loan is in default–and it helps prevent the sub-participation being re-characterised as an assignment.  

A disadvantage to the buyer is that it has no rights under the trade loan documents (including any security or guarantees), and no right to exercise rights or discretions under any of these documents.

A participant’s consent to any such actions is only required under LMA participations of a seller’s entire interest under the participated loan. 

A related point is that the indemnities in the trade loan are usually only triggered by circumstances happening in relation to the seller, not the buyer. 

A key difference between the LMA and BAFT participation documents is that under the LMA, elevation wording is included only in the funded version of the LMA master participation agreement . 

Even here, the language is loose and heavily qualified–with the operative provisions for the transfer or assignment being left for buyer and seller to agree outside the participation agreement. 

Ian Clements, Alexander Hewitt, and Evdokia Maslennikova recently presented the topic of trade loans at an ITFA North European Regional Committee seminar.

About the authors

Ian is a Partner in Dentons’ London office. He focuses on international commodity, structured trade, receivables and export finance transactions.  Ian’s work includes advising on various financing structures and commodity types, including borrowing base, pre-export and structured prepayment financings as well as bilateral trade finance facilities.  Ian also has expertise in export credit financings, receivables financing transactions, and trade finance distributions. Ian acts for financial institutions, alternative finance providers, borrowers, trading houses and export credit agencies.

Alexander has over 25 years of experience as a banking lawyer. He specialises (among other things) in trade, commodity and receivables finance. He regularly speaks on these topics – and on the technical side of assignments and novations.

Evdokia (Dunya) joined Dentons in 2011 and qualified into the Trade and Commodity Finance team in London in 2013. Dunya acts for banks, borrowers and commodities trading houses. Her experience includes oil and gas, metals, soft commodities, supply chain finance and receivables finance transactions.

Read the latest issue of Trade Finance Talks, July 2022

About the Author(s)

ian.clements

Ian is a Partner in Dentons' London office. He focuses on international commodity, structured trade, receivables and export finance transactions.  Ian's work includes advising on various financing structures and commodity types, including borrowing base, pre-export and structured prepayment financings as well as bilateral trade finance facilities.  Ian also has expertise in export credit financings, receivables financing transactions, and trade finance distributions. Ian acts for financial institutions, alternative finance providers, borrowers, trading houses and export credit agencies.

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Loan Participation Vs Assignment

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Sub-participation

Sub-participation is a form of loan participation in which a lender shares its risk with a second party. This type of loan participation does not change the documentation of the loan. This type of loan participation can also include future amounts for loans that have not yet been fully disbursed, such as a revolving credit facility.

The legality of sub-participation is dependent on the conditions of the loan agreement. In general, a loan participant cannot enforce the loan or proceed against the collateral on their own. Furthermore, the borrower may not even be aware that the loan participant is involved. However, the seller of the participation retains the right to enforce or compromise the loan, as well as to amend it without the consent of the participant.

As for drafting sub-participation agreements, there are many ways to do so. But it is important to include at least the following provisions: The term of the agreement, the rate of interest, and the repurchase provisions. These provisions should be included in the sub-participation or assignment agreement.

Assignment and sub-participation are standard terms in inter-bank transactions. We will examine the purposes of the loan participation and assignment agreements, as well as the terms of the transaction. While they are essentially interchangeable, they are fundamentally different.

Loan participation and assignment are both ways to transfer ownership of a loan. Assigning a loan to a third party or sub-assigning it to yourself is a common way to transfer the loan.

The terms “loan participation” and “assignment” are often used in the banking industry. Both terms refer to the transfer of a loan’s rights and payments between two financial institutions. We’ll look at what each term means and how they differ from each other.

Loan participation has long been a common form of loan transfer. Its advantages over other loan transfer methods include the ability to diversify a portfolio and limit risk. It also eliminates the need for loan servicing. However, this option can be problematic when it differs from underlying loans. For this reason, it’s important to structure loan participation carefully.

Whether a loan is a participation or an assignment depends on a variety of factors. The percentage of loan ownership, relationship with the other financial institution, and confidence in the other party are all important considerations. However, the basic difference between participation and assignment is that the former involves the original lender continuing to manage the loan while the latter takes on the responsibility of doing so.

As a rule, loan participation is a good option if the original lender does not want to keep the title of the loan. It allows the borrower to avoid the costs associated with the loan and is more attractive for borrowers. In addition, loan participation arrangements can be more flexible than outright assignments. However, it’s important to make sure that the arrangement you enter into is formal. This will prevent any confusion or conflict down the road.

Syndication

Understanding the differences between loan participation and syndication is important for lenders. Understanding these two options can help them find the best solutions for their lending needs. Syndication is a common type of lending program where lenders pool their loans together to reduce the risks of defaults. Loan participation programs can be more complex and require due diligence to be effective.

Syndicated lending allows lenders to access the expertise and business relationships of their fellow lenders while maximizing their exposure to deal flow. However, lenders who join a syndicated lending arrangement often give up some of their independence and flexibility to take unilateral action. In addition, these arrangements often involve the involvement of legal counsel, which can also be important.

A loan participation arrangement is a group of lenders coming together to fund a large loan. A lead bank underwrites the loan and sells portions of it to other financial institutions. Loan syndication, on the other hand, is an arrangement whereby multiple financial institutions pool their money together and make one large loan. In this type of arrangement, the original lender transfers the rights and obligations to the purchasing financial institution. The risk is then shared among the participating lenders, allowing them to share in the interest and the risks of the loan’s default.

A syndication contract can be structured in as many tranches as necessary to meet the borrowing needs of a customer. The underlying contract will contain a commitment contract that specifies the ratio of participation among the participants. Each tranche will have a borrower, which will be a common participant or may be different. The contract will require that each participant fulfill their commitments before the scheduled due dates.

Loan participation and assignment are standard transactions between banks. They are similar in some respects but have different purposes. 

There are many types of loan participation agreements. Some involve a full assignment, while others are a sub-participation. If you are involved in loan participation or assignment, you need to understand which type of agreement applies to your situation. There are several types of loan participation agreements, including sub-participation agreements, undisclosed agencies, and assignments.

Sub-participation agreements are typically used to assign part of the loan amount to a new lender, and the loan documentation remains unchanged. In addition, these types of agreements include future amounts, which may be provided as part of a revolving credit facility or a portion of a loan that hasn’t been fully disbursed.

Loan participation is a popular option for lenders to limit their exposure to borrowers. Lenders may sell a portion of the loan to an investor or sell a portion of their interest to another party. While the transfer of a loan portion does not always require the consent of the transferor, lenders must consider participating interest guidelines and the applicable rules.

How Do Variables Affect Bank Loan Sales?

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England’s final Euro 2024 warm-up match vs Iceland: When, where and what time?

England have one more warm-up friendly left on home soil, against Iceland, before they travel to Germany for this summer’s Euro 2024 tournament.

On Monday night, they eventually found their goal-scoring form to beat Bosnia-Herzegovina 3-0 at St James’ Park, with goals coming from Cole Palmer , Trent Alexander-Arnold and Harry Kane.

This week’s second match will be the last chance for players to impress Gareth Southgate as he prepares to submit his final England squad for the Euros.

When do England play Iceland and where?

England’s final Euro 2024 warm-up match will be against Iceland on Friday, June 7, at Wembley Stadium.

What time does England vs Iceland start?

The match with Iceland will start at 7.45pm.

What channel is the match on TV?

England’s Euro 2024 warm-up matches are being shown live on Channel 4. Alternatively, you can bookmark this page and return to follow Friday’s game via our live blog, which will include commentary and analysis from our team of reporters at the grounds.

When it comes to the actual Euros, England matches will be spread across BBC and ITV.

England vs Iceland head-to-head

The two teams have faced off five times before, with the last coming in Nov 2020 for a behind-closed-doors Nations League match at Wembley. England won 4-0 with Declan Rice and Phil Foden (2) scoring for their country for the first time. Mason Mount got the other goal. England also won their other Nations League match two months previous, thanks to Raheem Sterling ’s penalty.

Before that came one of Iceland’s most memorable results to date, beating the Three Lions 2-1 to knock them out of Euro 2016, in what was Roy Hodgson’s last match as England manager.

It was Iceland’s first and only victory over England, after the Three Lions also won 6-1 in 2004 and drew 1-1 in a 1982 friendly.

Latest odds

England to beat Iceland – 1/8

Iceland win – 18/1

Odds correct as of June 3

Betting on Euro 2024? Take a look at these Euro 2024 free bets and betting offers

What is the latest England news?

England captain Harry Kane is confident he will be fit and firing for the start of Euro 2024.

The former Tottenham striker missed the end of his domestic campaign with Bayern Munich due to a back injury but came off the bench to score in Monday’s 3-0 friendly victory over Bosnia and Herzegovina in Newcastle.

Kane told Channel 4: “I am feeling good. A lot of the end of season was precaution, of course there is a big summer coming up.

“We didn’t want to take risks with it. In the end it was a good chance to take a good break after a tough season.

“It has almost worked in my favour, missing the back end of the season. It gave me a chance to get a bit more rest than I was going to get.

“I’m not one who takes too long to get sharp and it was nice to get a goal there to get that feeling back again.”

When do the Euros start?

Euro 2024 starts on Friday, June 14, with hosts Germany playing Scotland. England play their first match two days later, on the Sunday, against Serbia . Euro 2024 fixtures take place from June 14-July 14.

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