Silent Sub Participation Agreement

Given the recent volatility in European financial markets, the importance of liquidity and flexibility in the banking sector has once again been highlighted. At this time, some lenders may attempt to restructure their balance sheets by reducing exposure to certain sectors, countries and/or currencies in various existing transactions. The transfer terms of a syndicated loan agreement provide a simple mechanism for lenders to purchase or sell units of a syndicated credit contract. Context is a syndicated loan for which funds are provided by a consortium or group of lenders. A syndicated loan is often a useful way for lenders to spread risk or extend a larger credit than they could individually. In Oman, large syndicated loan contracts are generally subject to English law or the laws of another foreign jurisdiction, as lenders tend to favour the predictability of how such an agreement and offshore guarantee would be applied in such a jurisdiction. The application of English law to LMA sub-participation agreements since the financial crisis, particularly in the troubled debt market, has increased considerably in Spain. A partial capitalization stake creates new contractual rights between the existing lender and the sub-participant under the same terms as the contract between the existing lender and the borrower. The existing lender becomes an intermediary between the borrower and the participant.

The sub-participant makes available to the borrower funds that the existing lender grants to the borrower. The sub-participant will only be reimbursed by the existing lender if the borrower prepays the existing lender. Unlike innovation, there is no transfer of existing rights and the borrower often ignores the contract between the existing lender and the participant. Financial players in the troubled market in Spain often use the LMA`s under-participation agreement. However, “partial participation” is not a concept traditionally recognized by Spanish law. As a result, borrowers object to the application of the law and argue that such an agreement should be redefined as a transfer of debt. Such a new characterization would be detrimental to questionable obligations. The new lender has a direct relationship with the borrower and other parties to the syndicated loan agreement. The loan agreement should include the form of the transfer certificate used for innovation and contain a provision that the borrower does not object to the original lender selling its shares in the loan agreement to a new lender.

Novation is generally used for revolving credit facilities for which the original lender has outstanding obligations, such as the loan bond. In a recently confidential case in which Allen-Overy LLP worked for the winning party, the Spanish courts examined for the first time the type of partial participation. The bank has presented, by an English legal expert, experts on the fact that a partial participation of the LMA is not a transfer of the loan and none of the conditions of the partial participation which claim to reject one of the bank`s existing rights over the borrower, so that the bank remains, in accordance with English law, the lender with respect to the loan and therefore the party entitled to sue the borrower for default.