Syndicated Loan and Loan Participations

By: Lisa D. Love, Esq., Partner, Love and Long, L.L.P.

Loan syndications and loan participations continue to grow in commercial finance as lenders seek to expand beyond their traditional sources of revenue, enter new or developing markets and industries, maintain acceptable levels of diversification of its investments, and share development risks and credit risks with respect to particular or complex projects, borrowers or industries. Loan syndications and participations also permit lenders to reduce capital weight and provide financial accommodations to valuable clients whose credit needs exceed a lender’s credit exposure limits. These arrangements allow lenders to engage in transactions which might otherwise be prohibited by their lending policies and guidelines. In addition, these arrangements permit lenders to access expertise, business relationships and deal-flow of the arranging lender without having to invest large amounts for marketing costs and administrative capabilities. Although there are benefits to these lending relationship, lenders within a syndicate group give up the day-to-day routine decision making to the lead lender and the flexibility to make decisions independently and take unilateral actions with respect to the loan in favor of group decision making based upon agreed levels of consent. However, the relationship between syndicate lenders and the borrower and participant lenders and the borrower are usually very different.

A syndicated loan is a loan made respectively by two or more lenders contracting directly with a borrower under the same credit agreement with the lenders dividing the responsibility to lend the full amount of the loan. Each lender has a direct legal relationship with the borrower and receives its own promissory note from the borrower. Typically, one or more lenders will also take on the separate role as arranger of the loan and as agent for the credit facility and will assume responsibility of administering the loans for all lenders, including collecting loan payments and fees made under the notes and distributing to each syndicate lender its respective share. The arranger and agent are able to increase its profitability by receiving additional fees and compensation for such services. A syndicated loan differs from loan participation in that the lenders in syndication participate jointly in the origination and the lending process.[i]

A loan participation involves a sharing or selling of ownership interests in a loan between two or more financial institutions. Normally, but not always, a lead bank originates the loan, closes the loan and then sells ownership interests to one or more participating banks. The lead bank retains a partial interest in the loan, holds all loan documentation in its name, holds all original documentation, services the loan and deals directly with the borrower for the benefit of all participants. Participations can either be made on a pari passu basis with equal risk sharing for all loan participants, or on a senior/subordinated basis, where the senior lender is paid first and the subordinate loan participation is paid only if there is sufficient funds left over to make the payments. Such senior/subordinated loan participations can be structured either on a LIFO (Last In First Out) or FIFO (First In First Out) basis.[ii] The participation agreement will also include the terms of the arrangement to include profit sharing among the lenders, loan fee sharing, standard of care the lead lender or administrator owes to the participants, and the responsibilities of the participants. In many cases, the borrower may not even know that the loan has been participated out to other lenders.

With participations, the contractual relationship runs from the borrower to the lead bank and from the lead bank to the participants, whereas with syndications, the financing is provided by each member of the syndicate to the borrower pursuant to a common negotiated agreement with each member of syndicate having a direct contractual relationship with the borrower. Some other key provisions to negotiate in syndicated loans and participation agreements include assignments, enforcement actions, amendments and workouts, waiver rights, decision-making, information and notice rights, liability and standard of care on agent or participating lender, default and payment priorities, co-lender and participant defaults provisions, each of which can have a significant impact on the co-lender and participants.

As the attractiveness of loan syndications and loan participations continue to increase, lenders and their counsel must be familiar with the legal issues surrounding such transactions. Specific attention must be given to the various key terms described above and the negotiation of such terms to the benefit and best interests of your client.

[i] Federal Deposit Insurance Corporation, Risk Sharing Asset Management Guidance RSAM-2011-15

Lisa D. Love is an attorney concentrating in corporate finance, project finance, equity financing and secured transactions (including loan syndications and loan participations). She has served as counsel to the United States Department of Treasury, financial institutions, quasi-public and private development entities, Fortune 100 companies and other corporate entities. She is currently the co-chair of NAMWOLF’s Transactional Practice Area Committee and a member of NAMWOLF’s national board of directors.