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The use of multi lender financing arrangements has increased greatly in recent years. Because of the cost and complexity of many financial ventures, a single lender may be unable or unwilling to loan all the funds required by a borrower. Multilender financing arrangements typically fall into one of two categories: loan participations or loan syndications. This article discusses and evaluates the structure, role of the parties in, and risks and benefits of each such arrangement.
Loan participations
Structure: Generally, participations are loans where the "lead lender" (Lead) sells a participation in a loan to one or more participating lenders (Participant(s)). The sale may be expressed in terms of a dollar amount or a percentage of the loan. The Lead then continues to manage the loan on behalf of itself and the Participants. The relationship among the lenders is typically formalized by a participation agreement, which states in writing that the Participant receives an undivided interest in the loan. The sale of the participation generally occurs after the Lead and the borrower have executed the loan documentation. The Participant is thus dependent upon the Lead for protection of its interests in the loan-the Participant and the borrower do not have privity of contract and thus have no rights or obligations to one another.
The role of lead lender and participant: In a participation arrangement, the Lead negotiates the terms of the loan with the borrower and concludes the lending arrangements. The Lead then seeks other lenders' participation. For arranging the participation, the Lead generally charges the Participant a fee for managing the loan and relaying information from the borrower to the Participant. The Participant makes its advances to the Lead, in the form of purchases of participation interests, rather than the borrower. Repayments are made directly to the Lead by the borrower, and collateral is held by the Lead in its own name. The Lead remains the only lender in privity with the borrower, and the Participants obtain contractual rights of participation with the Lead. The Lead alone deals directly with the borrower and retains all the loan documentation. The Participant is involved solely with the Lead and has no rights directly against the borrower.
Reasons to sell or purchase loan participations: A lender may...