Basics of Syndicated Loans & Securities

Akheel Jinabhai & Associates
(in association with McKee Commercial Law)

Also known as a syndicated bank facility, is financing offered by a group of lenders—referred to as a syndicate—who work together to provide funds for a single borrower. The borrower can be a corporation, a large project, or a sovereign government.
Loan syndication occurs when a single borrower requires a large loan that a single lender may be unable to provide, or when the loan is outside the scope of the lender’s risk exposure.

Borrower – The person or institution which is in need of a loan and takes the loan is the borrower.

Arranger – Generally one of the lenders (mostly a bank) who forms a syndicate. The arranger communicates, negotiates and attracts financial institutions to join the syndicate.

Co-arranger – The first or initial group of lenders are called co-arrangers. They find more banks to join the syndicate.

Agent – This is the party responsible for looing after the day– to- day working and administration of the loan facility. This party acts as an agent of the lenders not borrowers. The Agent acts as a mediator between the syndicate and borrower. The Agents duties set out in some detail in the loan agreement and for which it gets paid by the borrower. One of the Agents most important duties is to ensure that the borrower has complied with every condition mentioned in the loan agreement and borrower is required to give all notices to the agent. The borrower and syndicate are required to make all payments (under the loan agreement) to the Agent. The Agent then transfers that money back to the opposite parties.

Security Trustee – To secure the syndicate loan, a lender from the syndicate is usually appointed as a Security Trustee to look after the security on trust for the benefit of the lenders. Its duties are far more extensive than that of an Agent.

Co- lenders – The co-lenders would normally constitute a group of banks or other financial institutions who have contributed a percentage share towards the syndicated loan. Once these institutions have given their share of loan, and the syndicated loan agreement is signed; they usually take a more passive role in the project, relying on the competence of the Agent to further their interests.

Term Loan – This is a loan from a bank for a specific amount that has a specified repayment schedule and a floating or fixed interest rate. Term loans almost always mature between one to 10 years. Repayment of the loan could be at once at the end of the facility or in instalments. Once a term loan is paid back by the borrower, it cannot be re-drawn.
Revolving Loan – In this facility the borrower decides how often they want to withdraw and in what time intervals. Unlike a term loan, this facility allows borrower to redraw, repay or drawdown the loan during the term of its facility. If a revolving loan made to re-finance another revolving loan and drawn by the same borrower in the same currency which matures on the same date as the drawing of the second revolving loan, is known as a “rollover loan”.

Evergreen facility – A loan that can be extended after-preset periods. Like a five-year loan facility can be renewed and increased by further 5 years.

Bridging Facility – This loan is designed to be drawn urgently as a short- term measure to bridge a funding gap. Normally it is part of an arrangement in terms of which it will be retired or replaced by a longer-term loan.

Multiple Facility – These are loans that are a combination of the above. Generally, they will contain several different types of facilities in one document and each facility will have its own rules and conditions.

In a syndicated loan the security for the loan needs to be available to all lenders. This presents some difficulty because to have bonds and other registerable security issued directly to each of the lenders becomes expensive, cumbersome and when there is a change of Lenders (where they sell on or transfer their participation in the Loan or join the syndicate once security is put in place) this requires fresh and/or new bonds to be issued to that new lender. The solution is to provide the security to an entity separate from the lenders which then holds such security for and/on behalf of all lenders. Given that a separate entity holds the transaction security, there is then no need to repeat the perfection and/ or registration of the transaction security when there is a change in the members of syndication. This security structure also ensures that the lenders can equally, and if intended parri passu, share in the security.

To achieve the above under Botswana Law, a security special purpose vehicle (SPV) structure has been developed. Briefly, this structure entails: separate, ring-fenced private company being incorporated (SPV) and 100% of its issued share capital being held by an independent trust;  the SPV issuing a guarantee to the Agent and Lenders for the debt and obligations owing by the borrower to the syndication; and the borrower (and, often, its holding company, subsidiaries and group entities) providing a back-to-back indemnity to the SPV, and the borrower and other security providers extending security under that indemnity to the SPV (usually in the form of pledges, security cessions and bonds).

The reasons for such a complicated structure are the following:
Under Botswana law it is a requirement that for a party to validly provide security to another, there must be a primary obligation owed by the party providing the security to the party benefiting from the security. If security was to be simply held by the independent separate entity (the SPV) without is being owed a debt or obligation by the security provider, then that security would not be enforceable. It should be remembered that the loan obligations that are being secured are not owed to the SPV. To get around this problem, a debt or obligation is created between the security providers and the SPV, namely they indemnify the SPV for its liability under a guarantee that it provides to the lenders.

Under the Deeds Act debts to more than one creditor arising from different causes (such as debt to various lenders in a syndication, each of whom has a separate loan outstanding to the borrower) may not be secured by the same mortgage bond or notarial bond and mortgages or notarial bonds must be passed in favour of a principal, not an agent.
An alternative means of creating collective security under Botswana Law is the parallel debt structure. In addition to the primary debt obligation (Debt Obligation) to repay the loan or loans to the lenders, the borrower assumes an additional obligation (Parallel Obligation) to the SPV or holder of the security.

This Parallel Obligation is parallel to and essentially mirrors the Debt Obligation, but does not mean that the borrower agrees to a doubling of its debt obligations. The parallel debt wording will usually be included in the loan agreement or the intercreditor agreement. Further, the parallel debt construct provides that any payment by the borrower to the SPV or holder of the security in respect of the Parallel Obligation discharges the borrower’s debt to the lenders pro rata and vice versa.

In the parallel debt construct, the Parallel Obligation is considered a primary obligation to the SPV, giving it an independent and separate right to demand payment of any amounts owing due and owing under the Parallel Obligation in its own name. In this context, the SPV acts as a creditor and principal, not as an agent of the syndication. To the extent that the SPV receives any amount in payment of the Parallel Obligation from the borrower, the SPV must then distribute that amount to the syndication who are creditors in respect of the Debt Obligation. Any amounts received by the SPV under the Parallel Obligation results in a commensurate reduction of the amounts due and payable to the syndication under the Debt Obligation.

The parallel debt structure remains untested in the Botswana courts. Of particular concern is whether the Botswana courts would consider the parallel debt structure and specifically, the Parallel Obligation, a simulation. This question could arise given that the SPV does not render any performance to the borrower that is commensurate with its purported claim as creditor against the borrower in respect of the Parallel Obligation. If it were to be successfully argued that the Parallel Obligation exists only by virtue of the Debt Obligation, and is thus ancillary to the Debt Obligation, the Parallel Obligation cannot be said to be a primary obligation.

This could result in the Botswana courts holding that the parallel debt contract is a simulation, especially if they take the view that the transaction parties’ real intention is not to create an independent debt but for the security trustee to act as the agent of the lenders while holding the transaction security.