The Main Liabilities Faced by a Lead Manager in a Syndicated Loan - Case Study Example

Identify and discuss the main liabilities faced by a lead manager in a syndicated loan Introduction A syndicated loan is a financial arrangement made by a group of lenders to lend money to a single borrower. The borrower can be either a company, a corporation, a group of companies, a multinational company or even a government. Such syndicated loans consist of either one or both of a credit transfer or/and a fixed amount of funds. As for the interest rate it can be a floating flexible rate as per benchmarked rates given by commercial interbank lending/borrowing practices (Howcroft, 1998). The leading bank which arranges the loan acts often as the underwriter of the loan thus guaranteeing repayment to the constituent banks in the syndicate. Thus the risk involved for the lead banker or the manager in a syndicated loan is manifold and takes on an equally multidimensional character. Analysis Syndicated loans as many other forms of lending entail risk which can be defined as the sum total of liabilities faced by managers who arrange the loan. However it’s the lead manager of the lead bank or financial institution who would have to face the highest amount of risk despite the existence of a number of other co-lenders (Donaldson, 1979). While credit risk is subject to the same level of assessment and definitional interpretation, there is a very significant impact associated with the lead manager’s role because it’s he who would have to act as the underwriter of the syndicated loan. It’s the underwriting part of the lead manager’s action that has to be well understood in order to understand the very nature of the risk element and its nature and extent (Choudhry, 2007). As much as the risk element involves a degree of opportunity cost to the lender or the manager, there is specific weight attached to the role of the lead manager for the sole reason that he is not only the lead lender but also the lead performer. In other words the administrative burden on him would be more important in the syndicated lending context than any other consideration. Since they are bank loans they take priority over bonds in case of bankruptcy. This characteristic attaches much more importance to the risk faced by the lead manager. Thus the first and foremost liability faced by the lead manager is the contractual liability. In the corporate laws of a country the issue of “an information memorandum” connected with a syndicated loan, can be regarded as identical to the issue of a debenture. In this backdrop it’s natural for the loan agreement to have a clause that provides that any inaccurate or misleading piece of information given in the information memorandum of the syndicated loan shall amount to an act of default by the borrower (Mugasha, 2008). In the eyes of the rest of the syndicate participants, the lead manager is responsible for the repayment even if the borrower’s insolvency had been known even before the piece of wrong information came to light. According to law debenture is an undertaking by the borrower to repay the money deposited with or lent to him by the debenture-holder in the course of carrying out a business and that the business concerned is not one or part of another business which borrows and lends money in order to gain a differential by way of a profit margin or interest. Thus the contractual liability of the lead manager is focused on the fact that he shall not knowingly or unknowingly enter inaccurate or misleading information in the information memorandum of the syndicated loan agreement. However, there is no general agreement on the issue of ‘whether an information memorandum is exactly similar to a debenture’. In fact disclosure requirements in corporate law will not affect the relationship between the arranger or lead manager and the agents in the same way as they affect those ordinary investors in a prospectus. In other words lead manger’s contractual liability has a greater degree of complexity and sophistication than the definable liabilities of an issuing firm in an initial public offer (IPO). Secondly there is the statutory liability that the lead manager of a syndicated loan will have to face in the event of default by the borrower. Statutory liability consists of two parts. They are: (a). liability due to negligence; and (b). potential liability of not exercising due diligence to other syndicate members. In the first place the lead manager is liable to the other participants in the syndicated loan to the extent that he can be held responsible to the representation being made at the time of the contract. If such representation of facts is deemed to be a legal act on the part of the lead manager at the time of entering into the contract, any subsequent discovery of negligence resulting in a loss either to the other participants or/and the borrower could lead to create sufficient grounds for legal action. Statutory liability of the lead manager under the same circumstances could also lead to potential liability to other members of the syndicated loan agreement. In the first place the lead manager is expected to exercise due diligence in the performance of his duties as the lead manager (Smithson, 2003). Should he fail to do so due to whatever the reason or reasons, then any subsequent discovery of it could constitute statutory liability and the other syndicate members have a right to seek legal redress against it. Finally there is the liability connected with tort of negligence. In the case Hedley Byrne v. Heller & Partners Ltd [1964] , the House of Lords decided that the respondent party Heller & Partners was not liable for damage though they were required to act responsibly in providing the information asked for by the aggrieved party (McIvor, 2006). Thus the principle of “assumption of responsibility’ was developed for the first time. The lead manager is also expected to act responsibly in providing information about the borrower to the other members of the syndicate. This act of responsibility might not constitute a legal liability to pay damages to the other members of the syndicated loan though. Subsequently in the Caparo Industries plc v Dickman [1990] case the House of Lords enunciated three principles on negligent misstatements (Dunitz, 2001). This case supersedes the first. 1. The defendant’s behavior must constitute sufficiently reasonable harm. 2. There must be a good enough relationship of “proximity” between the parties. 3. Above all it ought to be “fair, just and reasonable to impose liability” on the defendant. In this case the defendant company was charged with not exercising due care in preparing accounts of a firm which was the takeover target of the plaintiff company. As for the lead manager of a syndicated loan, there can be instances in which all three principles can be applied. If the information referendum as the only reliable document available to the other members of the syndicate contains inaccurate information which subsequently harms one or more of them, the manager’s liability is established (Ross, 1987). However there is no generally accepted test on the issue of harm. Secondly there must be a good enough relationship of proximity between the plaintiff and the defendant. A proximate relationship between the lead manager and the other members of the syndicate might be interpreted as one in which they have known one another sufficiently enough to warrant an agreement involving transfer of substantial amounts of money. Again there is no adequate representation of proximate relationship between the lead manager and participants in a syndicated loan unless they have been involved in similar business activities for a considerable period of time. Nonetheless no lead manager would have acceptance among strangers. Finally in order to ensure that the lead manager’s action sufficiently and conclusively warrants the inclusion of fairness, justice and reasonableness in imposing liability on him is something far-fetched if it’s only based on the inaccurate information in the information memorandum. Conclusion The grounds on which a certain statement contained in the information memorandum is to be regarded as inaccurate or/and misleading might not be found under normal circumstances because lead managers cannot be expected to provide more information than necessary to form a judgment or an opinion on the borrower’s credibility and current financial solvency (Altunbas, Gadancecz and Kara, 2006). It’s unlikely that disclaimers can be included in the agreement or the information memorandum. Even if they are included no law courts would allow them to be reasonable enough not to impose liability on the manager. However, it’s all the more difficult to establish sufficient foreseeability of a future loss of money entailed by such action. In any case what matters more is the way in which the information memorandum has been prepared. For instance willful negligence might not be attributed to the lead manager even if such circumstances do arise (Taylor and Sansone, 2006). The available remedies such as those under the unfair contracts laws would adequately compensate the plaintiff than any other special law. Finally as for the proximate relationship between the defendant and the plaintiff, it’s unlikely that professionally unknown people would be involved in a contract of this nature. REFERENCES 1. Altunbas Y., B. Gadanecz, and A. Kara, 2006, The Evolution of Syndicated Loan Markets, The Service Industries Journal, Vol. 26(6), pp. 689-707. 2. Choudhry, M. 2007, Bank Asset & Liability Management: Strategy, Trading, Analysis, John Wiley & Sons, Inc, New Jersey 3. Clement, R.V. (Ed.), 2001, Risk Management And Litigation in Obstetrics And Gynaecology, Martin Dunitz, London. 4. Donaldson, T.H. 1979, International lending by commercial banks, Macmillan, , London. 5. Howcroft, J.B. 1998, International Bank Syndicated Lending: Some Practical and Legal Issues, Accounting and Business Review, Vol.5, No1, pp 123-140. 6. Mcivor, C. 2006, Third Party Liability in Tort, Hart Publishing, Nebraska. 7. Mugasha, A. 2008, The Law of Multi-Bank Financing: Syndicated Loans and the Secondary Loan Market, Oxford University Press, Oxford. 8. Ross, M.G. 1987, Concurrent liability in tort and contract, Structural Survey, Vol.5, Issue3, pp288-299. 9. Smithson, C. 2003, Credit Portfolio Management, John Wiley & Sons, Inc, New Jersey. 10. Taylor, A. and Sansone, A. (Eds.), 2006, The Handbook of Loan Syndications and Trading, McGraw-Hill, New York. Read More