Syndicated lending, a rising threat for country’s banking sector by Dr.Gazi Sirazul Islam

The market share of assets held by public sector banks rose to 73 percent, while the proportion held by private sector banks and banks based in other countries rose to 20 percent and 7 percent, respectively. A syndicated loan involves two or more banks making separate loans to a borrower on common terms governed by a single loan agreement, which provides for the proportions in which each member of the syndicate is to contribute to the overall loan and operates to co-ordinate the respective positions of the syndicate members.

Therefore, for the Bank to be the arranging bank, it will have to approach other banks to form the syndicate. If the bank prefers to keep the fact hidden that the loan is being syndicated, then the bank may opt to loan the money directly to the borrower and later can syndicate a major part of the loan Alternatively, if it is not necessary to hide the fact of syndication then the Bank may arrange to put the deal together and the syndicate members may lend directly to the borrower, then the Bank can continue as the agent bank, though not necessary and often other bank end up performing the role of agent banking.

Though there are no fixed or mandatory procedures that must be followed to syndicate a loan there are several ways in which a borrower wishing to raise finance, or engage in refinance can arrange to syndicate a loan. The initial phase is termed ‘originating the loan. After assessing the state of the lending market and the position of the borrower, a single bank or group of hanks will ordinarily seek to obtain a mandate from the borrower to act as the lead bank (termed the ‘arranging bank’ or ‘arranger’) in arranging the syndication of the loan sought by the borrower.

At this stage, the Bank is advised to decide the scope of its undertaking to the borrower to syndicate the loan and in particular, whether it is prepared to underwrite the loan in other words, whether the arranging bank provides the borrower with an undertaking either to lend a certain portion of the funds sought itself and to make “best efforts to syndicate the remainder (in a ‘partly underwritten offer’) or to lend the full amount sought (in a ‘fully underwritten offer’) in the event that it does not prove to be possible to form a bank syndicate willing to lend. Regardless of whether the arranger underwrites the syndication or not, its principal function following appointment will be to negotiate or ‘structure the terms of the proposed loan by balancing the borrower’s requirements against the lending market prevailing at the time. It is essential at this stage that the arranging bank gauge the interest in the proposed loan amongst the potential syndicate member by sending our a ‘term sheet’ to some or all of the lending community. It is further advised that while sending out the term sheet, the Bank work with the borrower to prepare a more detailed information memorandum about the borrower and the loan itself. This memorandum should be used to market the loan to any banks that subsequently express an interest in being part of the proposed syndicate.

Following the completion of the above stages, the arranging bank should then negotiate the final terms of the loan agreement with both the borrower and those banks interested in lending following receipt of the placement memorandum and to secure those banks’ agreement to the proposed terms. In the case of the arranging bank itself is considering lending as part of the syndicate, it is advised to make its own assessment of the credit risk based on the available information at the same time as negotiating the loan’s terms with the other parties. Once those terms are negotiated to the satisfaction of the borrower and the syndicate banks, the arranging bank should then ensure the proper execution of the loan documentation.

Once the execution of the loan document has been done, generally the role of the arranging bank ceases to exist and direct contractual relations arise between the borrower and each of the syndicate banks unless the arranging bank itself choose to be a member of the lending syndicate or as the bank appointed to act as agent of the syndicate banks collectively in dealing with the borrower and administering the loan facility (termed the ‘agent bank) or both. There are two potential sources of liability for the arranging bank in the pre-lending period: (1) the borrower, and (2) the potential members of the loan syndicate who receive and base their lending decision upon the ‘term sheet’ and/or information memorandum’. The arranger bank’s liability to the borrower is more likely to be a contractual one as the arranger bank generally acts pursuant to the borrower’s mandate when marketing the proposed syndicated loan.

Accordingly, the arranging Bank assumes the risk that the terms of the proposed syndicated loan may prove unacceptable to the lending market, whether as a result of the arranger having misjudged the current marker or having failed to anticipate changes in market conditions. For example, a ‘market flex clause’ or ‘material adverse change’ clause in the preliminary documents which will eventually entitle the arranging bank to change the pricing, structure or terms of the loan agreement in order to take account of prevailing loan market conditions. Most claims brought by the syndicate banks against the arranger involve allegations that there were errors in the term sheet, information memorandum or other pre-contractual documentation or that the arranger failed to disclose some material fact about the borrower or the terms of the loan agreement itself. Potential action for misrepresentation on account of misstatements embedded in the information memorandum can be illustrated by the case of NatWest Australia Bank Ltd v Tricontinntal Corp Ltd, where the arranging bank failed to disclose contingent liability of the borrower despite a specific inquiry by the NatWest. UBAF also highlights that, as misrepresentations made by an arranger to the syndicate banks will often relate to the character, conduct, credit, ability, trade or dealings’of the borrower with a view to the borrower obtaining ‘credit, money or goods’, the arranger will not be liable unless the misrepresentation is ‘made in writing, signed by the party to be charged therewith.

However, it should be noted that, an arranging Bank may be potentially liable to the syndicate lenders for the content of the information memorandum or for any statements made during the course of negotiation till the execution of loan contract, unless it has reasonable ground to believe in its truth, and has so believed up to the time the contract was made. Although initial non-disclosure of information by the arranging bank does not generally constitute a misrepresentation, lenders have tried to circumvent this particular restriction in a number of ways: by arguing that the arranger has impliedly represented certain material facts, such as that the information in the term sheet or information memorandum remains accurate and accordingly constitutes a ‘continuing representation’ until the signing of the loan agreement.

In UBAF Ltd v European American Banking Corp it was suggested that the arranging bank may have some fiduciary duty towards the members of the syndicate, however, such a position can be counter-argued for refusing to impose fiduciary duties on arranging banks towards corporate borrowers apply mutatis mutandis to the arranging bank’s position vis-�-vis the members of the lending syndicate. The arranging bank should also notice that, whilst appropriate disclaimer notices and exclusion clauses within the information memorandum might go some way to protecting the position of the arranging bank, they should not be relied on exclusively.

The writer is an advocate

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