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Lma Loan Assignment Definition

With the recent volatility in European financial markets, the importance of liquidity and flexibility within the banking sector has been the subject of renewed focus. During such times, some lenders may look to restructure their balance sheets by reducing exposure to certain sectors, countries and/or currencies under various existing transactions. The transfer provisions in a syndicated loan agreement provide a simple mechanism by which lenders can buy or sell interests in a syndicated loan agreement.

By way of background, a syndicated loan is one for which the funds are provided by a syndicate, or group, of lenders. A syndicated loan is often a useful way for the lenders to spread risk or to extend a larger loan than they would be able to do individually. In Oman, large syndicated loan agreements are typically governed by English law, or by the laws of another foreign jurisdiction as lenders tend to prefer the predictability of how such an agreement and the offshore security would be enforced in such a jurisdiction.

This article considers three ways in which a lender may sell all or part of its interests in a syndicated loan agreement, namely through novation, assignment or sub-participation.

Novation

Novation is the most effective way of transferring rights and obligations under a syndicated loan agreement from an original lender to a new lender. The existing agreement (including all outstanding commitments) between the original lender and the borrower is dissolved and replaced by a new agreement between the new lender and the borrower.

The new lender enters into a direct relationship with the borrower and other parties to the syndicated loan agreement. The loan agreement should include the form of transfer certificate used to effect the novation and a provision stating the borrower has no objections to the original lender selling his interest in the loan agreement to a new lender. Novation is typically used for revolving credit facilities in which the original lender still has outstanding obligations such as the obligation to make future loans.

The drawback of this method is that, if the loan is secured, the security is discharged and needs to be renewed each time a novation is executed and the priority of the security may be affected adversely. This, however, can be resolved by appointing a security trustee to hold the security granted under the loan for the benefit of all the lenders.

Assignment

Unlike novation, assignment involves the transfer of rights, but not obligations. For a legal assignment under English law, the assignment must be:

  • absolute (i.e., the whole of the debt outstanding to the existing lender);
  • in writing and signed by the existing lender; and
  • notified in writing to the borrower.

A legal assignment will transfer all of the original lender's rights under the loan agreement, but none of the obligations. New security is not required on each assignment as the original lender retains his obligations under the loan agreement.

An assignment is not an appropriate option if there are outstanding lending obligations, since the original lender’s obligations are not transferred.

Sub-Participation

The distinguishing feature of a sub-participation arrangement is that the original lender remains the "lender of record" to the borrower, and there is no direct contractual relationship between the sub-participant and the borrower. No borrower consent is required, so this process can be confidential.

A funded sub-participation creates new contractual rights between the existing lender and the sub-participant on the same terms as the contract between the existing lender and borrower. The existing lender becomes an intermediary between the borrower and the sub-participant. The sub-participant puts up funds which the existing lender loans to the borrower. The sub-participant is only repaid by the existing lender when the borrower repays the existing lender. Unlike novation, there is no transfer of existing rights and the borrower is often unaware of the contract between the existing lender and the sub-participant.

See the 'Issues and Guidance' tab on the left-hand side for further information and guidance when using LMA documentation.

These Materials (which term includes, where the context permits, text, content, spreadsheets incorporating macros and electronic interfaces, and their underlying assumptions, conversions, formulae, algorithms, calculations and other mathematical and financial techniques) are made available to members of the Loan Market Association to facilitate the documentation of transactions in the loan markets. None of the Loan Market Association, Allen & Overy or Clifford Chance accept any responsibility for any use to which these Materials may be put or for any loss, damage or liability whatsoever arising from such use. None of the Loan Market Association, Allen & Overy or Clifford Chance has reviewed the laws of any jurisdiction which may apply to either party to an agreement using these Materials and its subject matter. Members should therefore consider all the relevant legal, accounting and regulatory issues before using these Materials or entering into a transaction under them and, if appropriate, consult their professional advisers.

In relation to recommended form documents, members are responsible for ensuring that the precise form and content of the documentation for a particular transaction is appropriate. Members should therefore satisfy themselves that the documents and any modifications to them are appropriate in the circumstances and the economic intentions of the parties.

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