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A syndicated loan arrangement is one by which several lenders combine their efforts in extending a loan to a borrower. Syndicated loan arrangements enable borrowers to raise a large loan simultaneously from multiple lenders and to offer numerous benefits for both lenders and borrowers in terms of flexibility and loan administration. Generally, the loan would be governed by a single umbrella agreement made between the borrower and all the lenders in the syndicate, and the lenders’ obligations thereunder would be several and not joint. Often the agreement would also contain a mechanism for lenders to transfer their obligations to new lenders, thus creating an active secondary market for the trading of loan commitments. However, in light of the decision of the English courts in Redwood Master Fund Ltd and others v TD Bank Europe Ltd and others (Redwood)  EWHC 2703 (Ch),  1 BCLC 149, lenders looking to obtain a minority stake in a syndicate, whether through the primary or secondary market, should assess the risks of having to comply with the decisions of the majority lenders before they sign up.
Lenders may consider entering into a syndicated arrangement for various reasons. A lender in a syndicate would be able to share the credit risk of a large loan which the lender would not have been able to shoulder on its own. It would also give the lender the flexibility to sell off its portion of the loan in the secondary market. Being part of a syndicate would also help strengthen relationships with other lenders which may be useful for other endeavours, including future syndications.
Due to the number of lenders involved in a syndicated loan and the diversity of their interests, the concept of “majority lenders” is an important commercial element for both the borrower and the lenders. To avoid administrative deadlock, lenders will usually agree to comply with the decisions of a specified majority in the syndicate, often a two-thirds (i.e. 66⅔%) majority. Typically the majority lenders would have the power to make decisions on amendments and waivers, acceleration of obligations, calling events of default and other aspects of loan administration and to instruct the facility agent (i.e. the lender who will administer the loan and handle payments between the borrower and the syndicate) accordingly.
The corollary to the majority lenders concept is that the minority lenders in a syndicated arrangement may be bound by decisions which they had not agreed to. Minority lenders would thus be concerned about the majority’s exercise of their power. While the issue has yet to be considered in the Singapore courts, the English courts have shed some light in the case of Redwood where it was decided that the majority lenders need not be concerned if their decision would place some lenders at a disadvantage as long as they had made the decision in good faith.
These are the relevant facts of Redwood. A borrower had entered into a syndicated loan agreement with multiple lenders, the terms of which provided that the lenders would make available three separate facilities (Facilities A, B and C) to the borrower. Each lender assumed different commitments under each facility and some lenders assumed commitments under more than one facility. The agreement conferred on the majority lenders the power to consent to amendments and waivers and that any such amendment or waiver would be binding on all lenders.
The borrower then ran into some difficulties and eventually underwent restructuring. At this point in time, Facility A had yet to be drawn, Facility B had been partly drawn and Facility C had been fully drawn by the borrower. With the consent of the majority lenders, the facility agent issued a letter which effectively required the Facility A lenders to allow the borrower to draw on Facility A so that the borrower could use such sum to prepay the Facility B lenders (the variation). The net result was that some of the Facility A lenders had to make payment to the distressed borrower while some of the Facility B lenders stood to receive payment. A number of the Facility A lenders who formed part of the minority then brought proceedings seeking a declaration that they were not bound by the loan agreement as varied. They alleged that the letter discriminated against the Facility A lenders as a class since it “subjected them to an unfair exposure to risk solely for the purpose of removing an equivalent risk from the [Facility B] lenders” and that the majority lenders were not entitled to do so as the variation did not benefit the lenders as a whole.
Rimer J in finding for the majority lenders held that the validity of a majority decision should not be assessed by whether it had been made for the benefit of the lenders as a whole – instead, the courts would assess, “by reference to all available evidence, whether the power is being exercised in good faith for the purpose for which it was conferred”. He explained that each class of Facility A, B and C lenders would have rights and interests “peculiar to that class” and it would “often be impossible” for the majority lenders to exercise their powers in a manner which would objectively benefit each member of each class. He also noted that the loan agreement was a commercial contract which had been “carefully and commercially drawn” and that “by signing up at the outset, each lender submits to the decision of the majority lenders at important forks in the road”. Unless it could be shown that the decision of the majority lenders was motivated by malicious intent or a desire to confer special collateral benefits on the majority, the majority lenders’ decision should be accepted as valid.
As such, lenders looking to sign up for a minority stake in a syndicated loan arrangement should take heed of the consequences of a majority decision which would bind the syndicate as a whole. In particular, while it may be argued that a minority lender who had been involved from the beginning would have had the opportunity to negotiate the terms of the loan agreement, the same cannot be said for one who enters into the syndicate by way of the secondary market. Notwithstanding that a minority stake may be priced attractively in the secondary market, lenders should carefully scrutinise the terms of the loan agreement to ascertain if their interests are sufficiently aligned with the majority lenders’, and where their interests diverge, whether they are prepared to bear the potential risks of majority decisions.
Dentons Rodyk acknowledges and thanks Xie Jiayan for her contribution in the writing of this article.
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