Syndicated Loans And Bonds - Essay Example

Syndicated Loans v Bonds I. Introduction One of the most crucial points in company transactions, especially those concerning trans-national transactions is the accumulation of funds in different currencies. Often times this presents a management dilemma as to the best methods to carry out the task. For purposes of discussions, let us focus on two options, which are (a) to enter into a syndicated loan facility (b) issuance of bonds. To some extent, syndicated loan facility and bonds are similar in the sense that both deals with debts. However, the source and nature of its legal framework are different thus their impacts or consequences also differ. To gain a clear perspective of what a syndicated loan facility, let us first understand the nature thereof. II. Nature of Syndicated Loan Facility and Bonds Syndication can be loosely translated in terms of pooling of resources and capital. Banks are syndicated when they come together to carry out a single or multiple business transactions to a single or multiple individual. One of the most popular transactions which this syndicated banks undertake is the syndicated loan facility. A syndicated loan facility is the term, which refers to a long-term loan, issued by a number of banks collectively to a single client or borrower. A lead institution or bank will serve as secretariat and manage the syndicate. Typically, not all banks that will respond to the call for syndication have the same financial capacity and standing, they may not be of equal footing at all. Thus, the need for a system that will allow the participating banks to limit their participation according to their capacity in order to mitigate any incidents that may potentially lead to overexposure1. In other words, participating banks maintain their own independent operations and the participating banks only maintain “an arm’s length relationship”2 with each other. By contrast, bonds are securities issued by companies to the public as evidence of indebtedness. Bonds are promises to pay the principal as well as interest to its holder at a certain specified time indicated in the instrument. Government and business corporations for a number of purposes, which are generally indicated on the face of the certificates, may issue it. Generally, issuance of bonds is another form of borrowing money. Thus, the relationship formed between the issuer of the bond and that of the holder thereof is that of a debtor and creditor. Bonds are highly saleable commodities3 as they are considered a safe form of investment and can be used as collateral to support loan4. III. Comparison By its nature, a syndicated loan is a series of loans, thus, for each loan release; the debtor may prescribe that it be release in different currencies. Such multiple currency characteristics are not applicable in bonds issuances. Typically, all conditions of the bonds are clearly written on the face of the bond certificate and often in a fixed term. Thus, whatever currency is stated in the terms of the bonds, this shall govern. In effect, single-currency policy takes effect. Syndicated loan is a form of direct indebtedness. The transaction entails that the company borrows money directly to the bank. In the case of bonds, the company does not purport to borrow the funds from the bank but merely issues an instrument, which could be marketed as a form of investment on the part of the bondholder. As to parties, syndicated load involves limited parties since the transaction is between the debtor and the banks that are participants of the syndication process. Bonds on the other hand are issued at large. Meaning, anyone who has access to the bonds and can afford to pay thereof can be a holder thereof. In short, bonds are less burdensome in effect than that of syndicated loan. Another point of comparison between bonds and syndicated load is in terms of the means of disseminating information. For syndicated loan, the lead bank circulates an Information Memorandum (IM) to banks as an invitation to participate in the syndicate. Potential violations of this IM could be prosecuted under the provisions of the Misrepresentation Act of 1967, which provides for statutory liability under Section 2 (1)5 and the Unfair Contract Terms of 1977 under torts or lex loc delicti commissi. Liabilities for torts and negligence in the execution of management duties of the lead bank and the ensuing losses incurred through reliance of the good faith thereof is well laid in the case of Hedley Byrne v. Heller (1974)6. Potential liabilities of the members of the syndicate may also arise if the IM contains inaccurate provisions that could have been clearly avoided with the exercise of due care.7 On the other hand, in bonds issuance, a prospectus is drawn. The basic difference between IM and prospectus is that and MI is the agreement governing the relationship between the banks who are participating in the syndicate while a prospectus is an instrument defining all information necessary to let the prospective investors “informed assessment of the assets and liabilities, financial position, profit and losses and prospects of the issuer and of any guarantor…“8. The provisions of Section 195 of the Companies Act 1985 govern the liabilities of the trustee in bonds issuances. According to the case of Derry v Peek (1889)9, the trustee can only be guilty of fraud, there has to be a fraudulent intent present. Thus, as applied in the case of Arbitrage v Nurse (1997)10, the Court ruled that even if the trustee deliberately committed a breach of trust, “if they did so in good faith, honestly believing that they were acting in the best interests of the beneficiary there could be no fraud”11. Note that under our present laws, there is no clear distinction between negligence per se and gross negligence thus both could easily quality as the other in given instances. In terms of obligations, syndicated loans entail several obligations whereas bond would demand for joint and several obligations. In syndicated loan, each bank may enforce their individual rights separately but subject to the severalty clause, which may contain provisions binding the parties to the decisions of the lead bank and the “majority bank” on which certain events of default has occurred; whether to call default and accelerate and cancel the loan; and whether to amend the agreement with respect to, or to waive, certain non-fundamental breaches by the borrower. Rescheduling will be reserved to the banks as a whole; in other words, it will require a unanimous, not just a majority decision12. On the other hand, making changes in the terms of the bonds is more difficult compared to that of syndicated loans. Bonds requires more stringent measures before the terms thereof can be changes. A certain collective value of the bonds issued is need to cast votes in favor of the changes before changes can be legally affected. The fact that bonds have an extensive base of investors, this can be quite a challenge. In the case of Law Debenture Trust Corporation Trust Corporation Plc v Acciona S.A., Concord Trust, Mizuho International Plc (2004) 13 the Court ruled in favor of the rights of the bondholders to decide what should and should not be done and justifications such as the promotion of “beneficial interest” of the bondholders is not an excuse. “The fundamental issue…is that they were entitled to be heard and block (if they thought appropriate) any transaction whether it was beneficial or not.” 14 IV. Conclusion Given all the characteristics of syndicated loan and bonds, I would therefore advice the client to take the loans option for the following reasons: 1. It is more convenient in terms as the company can draw different currencies which is what is really needed 2. It is easier to change the terms thereof that that of bonds 3. Although bonds provides broader creditor base, this may not work as an advantage as demands for redemption may prove to be difficult to manage 4. Syndicated loan provides a more solid ground in terms of economic stability as we deal solely with the banking institutions not a mixed clientele as in the case of bonds 5. As a good payer, it would be a good idea to establish Bibliography Books 1. Berger, A.N. and G.F. Udell (1990) Collateral, Loan Quality and Bank Risk Exposure” Journal of Monetary Economics, 25 pp. 21-42 2. Bhattacharyya. (1995), The duties and liabilities of lead managers in syndicated loans, BJIBFL 172 3. Casolaro L., Dario Focarelli and Alberto Franco Pozzolo (2002) The Pricing Effect of Certification on Bank Loans: Evidence from the Syndicated Credit Market, mimeo, Bank of Italy, Research Department 4. Cranston R. (2002), Principles of Banking Law, 2nd Edition, Oxford University Press 5. Davies & Halliday (1997), Risks and responsibilities of the agent bank and the arranging bank in syndicated credit facilities, Vol.5 JIBL 182 6. Gabriel P. (1986), Legal Aspects of Syndicated Loans, London Butterworths 7. John K, Anthony W. Lynch, Manju Puri (2002) “Credit Ratings, Collateral and Loan Characteristics: Implications for Yield”, Research Paper 1748, Graduate School of Business, Stanford University 8. Karmaanolis P. (1992), The Legal Implications of Sovereign Syndicated Lending, New “A” Oceana 9. Wilkinson & Lucas. (2003), High Yield Bond Issues, PLC 15 10. Wood P. (1995), International Loans, Bonds and Securities Regulations, London Sweet and Maxwell Cases 1. Armitage v Nurse (1997) 2 All E.R. 705 2. Banque Keyser Ullmann SA v Skandia (UK) Insurance Co. Ltd. (1991) 2 A.C. 249 3. Concord Trust v Law Debenture Trust Corp (2005) UKHL (2005) 1 WLR 1591 4. Derry v Peek (1889) L.R. 14 App. Cas. 337 5. Hedley Byre & Co. Ltd v Heller & Partners Ltd AC 465; [1963] 2 All ER 575 6. Law Debenture Trust Corporation Trust Corporation Plc v Acciona S.A., Concord Trust, Mizuho International Plc (2004) EWHC 270 (Ch) 7. Swingcastle Ltd. v Alastair Gibson (1991) 2 A.C. 223 Read More