by Michael Fielding and Andrew Besser
For a long time property lending was regarded as a relationship business. Loan documentation was comparatively short and informal, and if a borrower encountered problems he would try to work these out with a lender who knew and understood him and his business and with whom he had worked over a period of time.
The internationalisation of financial markets in the 1980s fuelled the appetite of many banks to build up assets, while other banks, which had been long established as property lenders in the UK, were looking either to shed assets or to limit asset growth. The property boom of the late 1980s created an apparent insatiable demand by property developers and investors for debt.
The conceptual tool most frequently employed to bring together large-scale borrowing requirements, availability of money and banking facilities was the syndicated loan.
There is one group of issues arising from the syndicated loans structure that, in troubled times, irrespective of the relationship between the borrower and the party he perceives as “his” banker, may well prove at best irksome and at worst to have disastrous and wholly unexpected consequences.
A typical “syndicated” loan has the following characteristics:
(1) The bank with which the borrower has developed his relationship underwrites the loan and, in most cases, actually lends the monies;
(2) The loan agreement is drafted as an advance “syndicated” loan agreement, enabling the original lending bank to transfer to other banks tranches of the original loan;
(3) The asset sales team(s) of the original lending bank then sells off tranches of the loan in the banking market, the original lender acting as agent bank.
A borrower who thus started life borrowing from bank A (whom he knew) ended up borrowing also from banks B, C, D, E and F (none of whom he knew)!
The growth of mortgage indemnity insurance policies in commercial property lending further divorced, in the case of loan facilities backed by such policies, the borrower from his original relationship. In addition to the constraints imposed by subrogation, these policies contain provisions fettering the exercise by the lender of his rights and discretions under the loan agreement.
A borrower may therefore not only start with bank A and end up with banks A to F but his relationship with those banks can also be governed by the views of insurance company G!
The identity and parties with whom a borrower is to deal is consequently of great importance to property borrowers for the following reasons:
(1) The usual structure of the “advance” syndicated loan documentation is to vest the exercise of powers, rights and discretions in the agent but subject to the overriding rights of the majority in value of the lenders, a group whom the borrower may not know and who may have little experience of property market lending.
(2) There will be an obligation for consultation between the agent and the syndicate members. This means that not only must the agent first go through its own internal processes in relation to any aspect of the loan requiring a decision but then so must banks B to F. Such a process is not conducive to the quick decisions required by many aspects of a property loan.
(3) The above points illustrate “downsides” that a borrower inadvertently finding himself in a syndicated loan may experience even when things are going well. When things begin to go badly the borrower may find himself functioning in an increasingly hostile and aggressive environment because:
(a) The agent may either be reluctant or no longer able to agree of his own volition waivers, variations or releases which may be sought in the interests of both the borrower and the loan itself;
(b) If, as is often the case, the majority of the loan is transferred to banks who have limited experience of property and property lending, there will be a temptation for such banks to collectively cut and run, either by looking for reasons to default the loan or, if a relevant event of default has occurred, by requiring the loan to be called;
(c) Requests for further advances and/or drawings under committed facilities which make sense in commercial terms may be blocked in the absence of unanimity and will inevitably be subject to delays. A refusal by some participating banks to bear their share of a proposed increase could be highly prejudicial to the borrower.
All these potential problems are exacerbated where the loan itself is backed, wholly or partially, by a mortgage indemnity policy, because of the need to obtain the agreement of the insurer, who in turn may have to consult co-insurers!
In summary, the application of the syndicated loan to large property ticket lending over the past two to three years has resulted in a weakening of the important relationship links that in the past have so often been of immense benefit to both property borrowers and lenders.
While there can be no easy solution at the negotiation stage to the issues above, there are a number of matters that borrowers would be well advised to address with a view to mitigating the impact of some of the problems outlined.
First, a borrower should try to ensure that the bank with whom he has his relationship and which is best placed to understand his business retains the majority of the loan for itself. Bearing in mind that such loans are underwritten on day one and become syndicated only after drawdown, it will often be possible to obtain such an undertaking from the original lender which will preserve the benefits of the initial relationship and that lender’s expertise in the property market.
Second, it is important that the original lender should remain as agent for the duration of the loan. The majority of loan agreements contain a provision entitling the agent to resign, and many provide for the majority banks to remove the agent. Prudent borrowers should seek to prevent either such event from occurring.
Third, borrowers should try to ensure that as many as possible of the rights and discretions of the agent are not subject to the control — in either positive or negative terms — of the majority banks. A cautious borrower should assume that where the majority banks can direct the agent in the exercise of his rights and/or discretions that exercise will be hostile.
Finally, borrowers should seek both the right to approve prospective assignees of portions of the loan and to limit the number of prospective assignees, for example, by specifying minimum tranches of the loan that may be transferred. This at least will limit the number of banks involved.
With regard to the “double-barrelled” risk of an insurance company’s involvement, it seems to us that unless a mortgage indemnity policy was on the negotiating table from day one the borrower should endeavour to ensure that the lender cannot take out such a policy except with his approval. If such a policy were in prospect, the borrower should be actively involved in the negotiation of its terms in order to ensure, for example, that the agent’s discretionary powers cannot be controlled by the insurer.
The question of further advances is a delicate one. It is not often that a borrower will feel willing to discuss freely with a lender what pre-legislative steps should be taken if he needs to ask for more money, for example, in the case of a cost overrun! If, however, that is a possibility, the nettle should be grasped and a provision negotiated, allowing a specified majority percentage of the lenders to make further advances ranking pari passu with the existing loan facility.
In all cases, whether or not a borrower is successful in negotiating provisions of the nature outlined above, he should always view the covenants he enters into and the undertakings that he gives, not only within the context of the relationship that he enjoys with his original lender but also bearing in mind that a number of lenders who are unfamiliar to him may be scrutinising these covenants and undertakings in great detail and often from a hostile standpoint.
In conclusion, if an underwritten loan is going to be sold down, the borrower must assume that if the going gets tough he will be dealing with lenders whom he does not know and who have little or no understanding of his business or the market generally. He cannot assume that the professional face with whom he negotiated on day one will remain in place to provide constructive assistance. He should negotiate the terms of his loan agreement as far as possible to mitigate the possible impact of this.
