Syndicated Lending Essay

3029 words - 12 pages

Discuss the main liabilities which could attach to the lead manager in the "sell down" of a Eurocurrency syndicated loan. In your answer, identify the main contractual techniques which lead managers typically use to limit their liability and discuss how effective these techniques might be in a court of law.I will briefly outline the areas a Lead Manager needs to be aware of when winning the 'mandate' for the syndication deal and then go on to identify potential areas of liability the LM may face in the 'sell down' process itself. For each of the potential liabilities I will attempt to identify techniques that the LM may use in order to avoid the liabilities.The main discord relates to the manager's liability for the contents of the information memorandum and the negotiation of the loan documentation. [www.lexinexis.com]Most of the LM liability issues arise in relation to the solicitation process where the participating bank sues the lead lender for:(i)negligent or fraudulent misrepresentations;(ii)concealment, and/or(iii)breach of fiduciary duty[Norton, J. J]These claims are normally brought only upon the borrower's default, insolvency or other financial distress.Initial Stage: The Mandate letter and contractual liabilityThis offer document is used to make the borrower a purely commercial proposal for the financing of the project [Howcroft, J. B ] .Figure 1: The mandate process [www.unitar.org]It is essential for the lead manager to exclude any intention to be legally bound by the mandate letter. In many jurisdictions there can be a contract even though not all of the terms have been agreed and formal documentation is intended to be completed later[Joseph Norton] . Such exclusion is usually inserted by the vital words "subject to contract" . This may however not be enough in the eyes of some courts [Donaldson, T . H] .The sell down stageTo attract participants the LM circulates an Information Memorandum (IM) to interested banks giving them details of the deal. The IM is the selling document and its legal status and the obligations to which it gives rise will depend upon the nature of the information which it contains [Donaldson, T. H] . The contents of this document present the most serious prospect of liability for the lead manager, 'no other syndicate document is more controversial, or has less utility, than the Information Memorandum,' [McDonald] . These liabilities are discussed later.Figure 2: The sell down[Syndicated Finance Overview, Greg Spier, Managing Director, Global Syndicated Finance - J.P. Morgan Chase]The Information Memorandum (IM) will generally include:*An overview of the transaction including the term sheet*An overview of the borrower's business activities and industry*Due diligence findings*Financial statementsJP Morgan website*agreements signed or to be signed which will provide credit support for the loan*details of the project or purpose of loan*where relevant a report on geology/economy of country[Howcroft J B]The...

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