Tackling Issues in Structuring Syndicated Asset-Based Loans

The syndication process typically follows the following pattern: A key lender initiates the loan opportunity, arranges the syndicate and then typically serves as the administrative agent for the participating lenders (the “members”).¹ The agent lender then receives fees for arranging and administering the loan and the supporting collateral in addition to the interest that all lenders in the syndicate receive pro rata to the amount of their participation. Another benefit of loan syndication is that the agent and the non-agent lenders may refer loan syndication opportunities to one another in the future.

It is important for agents and non-agent lenders to recognize that their participation in the loan syndicate may restrict their ability to make totally independent decisions and to exercise their rights and remedies independently with respect to the loan. The agent typically has the authority to make day-to-day decisions, although the loan documents may include “lender group democracy” provisions that govern how the lender group can make certain decisions, e.g., regarding dealing with borrower issues such as covenant or monetary defaults, waivers, extensions, over-advances, etc., as well as any disagreements among the lender group about how best to proceed. Thus, in negotiating the requisite percentage of lender approval required for certain actions or amendments to the credit agreements, which may be measured by the number of lender group members or by the cumulative percentage of their participations, the lender group may decide to require a simple majority of lenders to approve minor amendments to the credit agreement and two-thirds of the lenders to approve material changes, such as changing the maturity date or waiving a covenant default.

Bank and Non-Bank Lenders

Understandably, this may cause issues among members of a lender group when some are regulated, and others are not. Additionally, even when all lender group members are regulated, some may have regulatory difficulties unrelated to the loan at issue or have other portfolio problems, causing them to be more conservative in dealing with a borrower’s problems.

Furthermore, lender group members typically have the right to “sell down” their participation to a loan buyer in part or even to sell their participation completely. In this way, “new faces,” which are typically unregulated lenders or funds, may appear around the table of the lender group, adding to the diversity of perspectives and needs that can make lender group decision-making a challenge.

Lender groups that encounter difficulties with a borrower should consider engaging a financial advisor early in the process, since the agent may be afraid of “getting shot in the back” by unhappy member lenders or their successors who have purchased initial lender interests and may feel that the agent is “asleep at the switch” and not being proactive enough. It should be noted that this is different from recommending or requiring that the borrower engage a turnaround professional because the lender group’s financial advisor is there to help the group harmonize their differing viewpoints and live within their documents.

Furthermore, lenders should carefully negotiate the following provisions in their syndicated loans and participation agreements, among others:

• The ability to assign an individual member’s interests
• Decision-making regarding the borrower, including enforcement actions, modifications and forbearance agreements, waiver rights, loan advances, etc.
• Information and notice rights
• Liability and standard of care applicable to the agent and the non-agent lenders
• What happens in the event of group members’ defaults

ABL syndication remains a valuable way for lenders to reduce their exposure and avoid excessive concentration, and the relationships with other lenders created through such syndications can be worthwhile sources of potential future business; however, loan syndication also includes new considerations and potential risks and these are best handled by planning in advance through loan documents.

1. While similar, loan syndications should not be confused with loan participation agreements. In a loan participation, the originating lender transfers or sells a portion of its interest in a loan to a participant pursuant to a participation agreement. The participant lender does not enter into a contractual relationship with the borrower, who remains obligated to the original lender. The originating lender does not become an agent or a fiduciary of the participant. Instead, the parties define the extent of the participant’s rights to consent to the originating lender’s decisions with respect to the loan in the participation agreement. In a syndicated loan arrangement, the borrower enters into a single credit agreement with a group of lenders and may execute a separate promissory note evidencing the borrower’s obligation to repay each lender’s share of the credit facilities. One lender is designated as the agent for the group and authorized to handle communications with the borrower, disbursements and protection of the collateral. Generally, a syndicated loan provides more rights for the member lenders than a participated loan.
2. For a broader discussion of potential syndicated lender group issues, see, Brownstein H., “Harmonizing Your Lender Group…Or Else, ‘There Be Dragons,’” ABF Journal, 2009.