True Sale Participation Agreement

Today, global financial markets in crisis are once again focusing on counterparty credit risk, as was the case after the collapse of Lehman Brothers a decade ago. The European secondary credit market uses a standard “loan participation” form to transfer borrowers` risk and the profitability of a loan to the secondary market. The London-based Loan Market Association (lmA) publishes several forms of loan participation. In addition to the underlying borrower`s credit risk, the credit risk of the lender selling the loan on the market is a particular problem for investors who hold stakes in the LMA. The seller is called “Grantor” of the participation. Participation agreements generally contain a clear statement of the intention of the original bank and the participating bank to consider the interest as an assignment of the interest on loans related to holdings (and also to provide that the right of the original bank to participate in the loan be passed on to the participating bank and that nothing in the participation agreement is interpreted as the creation of a relationship between the debtors and the creditors between the bank and the participating bank). Participation agreements often contain a provision that, if a change in generally accepted accounting principles that come into effect after the date of the participation agreement would result in the transaction being treated as a transaction other than the purchase and sale of a stake in the loan, the parties agree to negotiate in good faith any necessary changes to the participation agreement or any modification of the transaction in order to preserve the original intent of the parties. to preserve the parties` original intent. which must proceed with the purchase and sale of a shareholding in the loan. While these provisions may be useful in justifying a change in the participation agreement, they will not, as a general rule, over the accounting or agency positions that the existence of an optional provision or a limitation of the transfer in the participation agreement negates the “true sale treatment” of the participation. If you have any doubts about your current participation agreement, talk to Jason or your trusted BKD advisor before the end of the year to talk about it.

Participation agreements can often be amended to include a language that can account for the transfer as a sale, but it must take place before the end of the year. The second provision, which creates problems, limits the ability of the participating bank to otherwise reject or transfer its shareholding to a third party. In general, such restrictions will not negate the treatment of “actual sale” where a provision simply limits an assignment or transfer without the consent of the original bank, as long as such consent is not improperly retained or does not limit the transfer or transfer to a competing institution (as long as there are other voluntary buyers). However, other prohibitions and restrictions may be problematic if the participating bank limits the transfer or exchange of interest. Loan participation has been a valuable tool for commercial lending for years. This is all the more true because they allow banks to participate in transactions that would otherwise put them at too high a risk, or because they can acquire or sell a stake in a transaction necessary to meet their legal credit limit.

Dieser Beitrag wurde unter Allgemein veröffentlicht. Setze ein Lesezeichen auf den Permalink.