Assignment and Securitisation
Modern larger scale bank loan facilities commonly provide for loan assignment and securitisation. This enables the bank to transfer the loan of the benefit of the loan to another, enabling it to make fresh loans and earn additional profit. The bulk of the work is likely to be involved in setting up the loan and accordingly, this may be the more profitable end of the business. As discussed in other sections on securitisation, there may be attractions for other investors in holding loan portfolios commonly through special purpose vehicle entities.
There may be provisions for syndication of the loan. The loan may be underwritten, by a syndicate of banks on the outset. Syndication and transfer/securitisation may be attractive to a bank but may be of concern to a borrower. The borrower may be concerned at dealing with a new bank which may not understand its business or is less sympathetic to concerns which it considers reasonable. There may be concerns regarding the transfer of confidential information.
Compromise positions may be negotiated. The borrower’s consent may be negotiated as a requirement, and it may be provided that the borrower is not to unreasonably withhold consent.
The borrower will wish to be protected from the costs of transfer and in wish to ensure that its interest payments will not be increased and that grossing up obligations will not commence to apply, because of a tax withholding obligation and grossing up clause.
Although the bank’s right to transfer or assign the loan may be restricted, banks will generally be able to allow some participation by third parties, in the benefit of the loan. This will not usually involve notice to the borrower. In effect, it is a transfer of the beneficial interest in the loan and the originating bank will appear to continue as the lender.
However, the original /transferor bank is likely to retain significant rights including rights to give key consents. This will require that the transferor bank consults with and obtains the consent of the purchasing bank. The transferor/originating bank may have less interest in the loan. It may not be willing to devote resources to it.
In the case of syndicated loans, the power to make key decisions binding on all is delegated. Typically, a majority as provided by the original agreement would be required for key decisions.
The Irish banks were required to deleverage and dispose of assets under the EU ECB IMF program. Several Irish lenders exited the market and disposed of their loan portfolios.
Apart from the special statutory considerations below, many loan transfers were undertaken in accordance with contractual and standard transfer mechanisms.
Section 110 TCA vehicles which had been used commonly in connection with securitisation were used by investors in many cases, to acquire portfolios of loans. Unlike conventional securitisation, the deleveraging and winding up of the banks required actual transfer of legal title to the loans and security.
The title to the loan agreements and security were transferred as opposed to just a beneficial or contractual right of participation in them. A direct sale involves the assignment of title to the assets, directly from the seller to the buyer. This might be done by the bank transferring the assets directly to a buyer entity or to a special purpose vehicle, the shares of which are then sold to the buyer entity.
Loan Sale Agreements
A loan sale agreement is in broadly similar terms to other asset sale agreements. Warranties may be negotiated. If the lender is in winding up or insolvent, the value of warranties may be limited. Generally, lenders are unwilling to give substantial warranties on loan sales.
Warranty cover would be required in relation to the basic existence of the loan structure, title, et cetera.
Tax issues arise on the transfer of loans. Certain stamp duty exemptions exist. Capital gains and other implications arise.
A so-called synthetic transfer might be commercially and beneficially effective, but it leaves the institution as the legal owner of the loan and security. s However, in the context of loan disposal and deleveraging this would leave the original lender in place and interposed which could cause complication in terms of loan administration.
In cases where loans were already syndicated and there was a single trustee or nominee holding the benefit of the security, the beneficial interest could be transferred without any transfer of legal title. Some of the lenders may undertake further roles such as security trustee, agent, account bank, et cetera. It will be necessary to transfer such additional roles and or deals with them contractually.
Other than where the loan is syndicated, security is usually held by the lender. This leads to risks about whether new security is required with a new loan agreement. New security would require re-registration and raises issues as to priority. Counterparties to security documents such as fundholders, insurers, banks would require to be notified of the transfer.
Isses with Transfer
The lender may have given a range of ancillary credit such as letters of credit, guarantees to third parties, et cetera. Some of these documents may not be easily assigned and may be required to be novated, cancelled and reissued. Each of these is likely to require consent. Some loan agreements carry associated derivatives by way of interest rate swaps. The consent of the counterparty bank is likely o be required.
The relationship between banker and client is confidential. A transfer of loan and security requires that commercially sensitive information be transferred. Data protection issues arise. Accordingly, consent may be required. The question arises as to whether the original documentation allows consents to transfer of data and the passing on of commercially confidential information. Many loan agreements do contain a specific provision in that regard. Others do not.
Where security is held in other jurisdiction, further layers of complexity arise. Civil law jurisdictions do not generally recognize trusts or the transfer of the interest under a trust. In syndicated loans, this requires debt obligations being undertaken to the security trustee in parallel to the principal creditor. The transfer of these structures raises further complications.
Each loan agreement and security documentation must be considered from the perspective of its assignability. The general principle is that quantifiable receivables may be transferred unless there is something explicit or implicit which limits it or makes the counterparty a necessary entity.
The borrower may legitimately claim that it contracted with a particular bank entity and that assignment is not permissible. Generally, however, receivables in themselves are assignable. Most loan agreements and security documents specifically contemplate and allow assignment.
NAMA & IBRC
The National Asset Management Agency acquired loans through a special statutory mechanism in the National Management Agency Act 2009. The National Asset Management Agency acquired by transfer order, the development loans and connected loans of the six major participating institutions. NAMA itself, due to the illiquidity of the property market, undertook many loan sales.
The NAMA acquisition mechanism was designed to circumvent contractual and other restrictions that would otherwise have applied to the acquisition of the assets, i.e., the benefit of the loan agreements and attendant security.
The Irish Bank Resolution Corporation (to which the assets of the Irish Nationwide Building Society and Anglo-Irish Bank Corporation plc) had been transferred was wound up. The Irish Bank Resolution Corporation Act 2013 contained similar provisions, designed to facilitate the transfer of loans in the course of winding of IBRC.
The Code of Conduct on the transfer of mortgages was published by the Financial Regulator long before the financial crisis. It may have implications in the transfer of loans. Generally, it applies to loans and mortgages of residential property. It provides that written consent of the borrower is required before the transfer of a loan. Sufficient information to enable the borrower to make an informed decision must be provided.
This raises the questions as to whether the regulatory code is legally binding on lenders as and whether and to what extent it affects the contractual relationship with the borrower.