Overview of syndicated lending scheme in international market

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INTRODUCTION

Actuality of the theme of the diploma work loan syndication is a funding mechanism where two or more banks come together contribute a portion of the loan to finance the project. Loan syndication1 is the most common form used for funding project finance deals, especially when it involves large sums. This is especially true for energy and infrastructure projects. The implementation of the planned project depends on the availability of funds to finance it from start to completion. Equity contribution is usually limited and the project is usually financed by debt for a large proportion of its finance structure, sponsors therefore must ensure that funds are available before the project starts. The project finance is based on limited or non-recourse to sponsors, therefore repayment of the loan is based on the isolated and assignable cash flow from the project . Therefore banks need assurance to the effect that the project will be able to generate revenue after its completion phase before committing funds to the project. This is done by ensuring that the project has an off-taker, commitment by sponsors through various covenants and representations, input supply contract (fuel or gas in case of power projects), engineering, procurement and construction contract and government support undertakings.

According to both local and foreign experts the economic growth of Kazakhstan is very much dependent on the export of mineral resources and quite negatively reacts on decrease of their prices in the world market. Therefore the idea of diversification becomes more and more actual for Kazakhstan reality. Diversification and industrialization of country is one of the major goals that declared by the State. In light of that objectives numbers of strategic plans and state programs on innovative industrial development have been implemented. According to them reorientation of economy to the export of processed products with high additional value instead of raw materials, improvement of transport infrastructure in order to efficiently benefit from attractive transit potential of Kazakhstan, development of agriculture are awaited.

Assessment of the current state of scientific problem. Obviously that such a tremendous incentive requires significant financial resources. They might be provided either by the state itself or might be raised with involvement of private capital either throughout bank loans, stock market, or venture capital. In that situation banks seem more likely to participate, because neither stock market nor venture capital market is developed enough in Kazakhstan. However huge amounts of money imply greater risk, which seriously affects the willingness of banks to provide loans in large amounts. In such situations syndicated lending scheme can satisfy their desires by allowing them to get involved in the loan while mitigating the risk. May be therefore exactly “syndicated lending has played a key role in the growth and development of companies and countries in both developed and emerging markets”.

Purpose. In this paper, we estimate models for credit spreads on syndicated loans originated by investment and commercial banks.

Practical basis of the diploma work writing. We also add to the literature on loan syndicate structure by showing that the availability of other risk management tools significantly affects syndicate composition. Sufi (2007) and Dennis and Mullineaux (2000) show that lenders form more concentrated syndicates when borrowers are more opaque. Bharath, Dahiya, and Hallak (2012) show that an increase in shareholder rights makes loan syndicates more concentrated as firm's risk shifting incentives increase. Gatev and Strahan (2009) show that commercial banks dominate the market for lines of credit as they have an advantage over other investors in managing liquidity risk. Gopalan, Nanda, and Yerramilli (2011) show that banks ability to syndicate loans decreases after a negative shock to their reputation.

The object, subject and the purpose of work cause statement of tasks:

- To study overview of syndicated lending scheme in international market;

- To analysis peculiarities of lending to large businesses in JSC "BANK CENTERCREDIT";

- To consider problem of financing of large business in Kazakhstan;

Object of research - JSC "Bank CenterCredit"

Subject of research- Syndicated lending in Kazakhstan

At the same time, implementation of such schemes depends on demand from borrowers, supply from banks and existence of an appropriate legal base. Whereas demand and supply are the market elements with some distancing from the state, the legislation is the direct “product” of the state. Therefore if the state does not make steps towards improvement of the Law by mirroring the market's need, there will be no evolution of the economy. On the other hand if there is no demand, then there is no need for legislative innovations.

So maybe there is no need for syndicated loans in Kazakhstan at all? No, there is. For example, exactly within the framework of innovative industrial program in 2011 Kazphosphate LLC (Kazakhstan company) raised a loan in amount of USD 50 million provided by two kazakh banks - HSBC Bank Kazakhstan and ATFBank as so called “syndicated loan”. The loan was provided for construction of a sulfuric-acid producing plant. The launching of the plant ensures the processing of virgin raw material - sulfur, into a sulfuric acid, and, moreover, power production at the expense of steam, which is escaping during the processing. Nevertheless the deal was closed successfully it was an extremely bureaucratic process for both the banks and the customer.

The scientific novelty of the diploma work. Arrangement of the credit took much time due to existence of certain deficiencies and restrictions of law which forced the banks and the customer either to adjust additional risk mitigating mechanisms (where it was possible) or to assume the risks (where it was impossible to reduce them contractually). In addition, the law required the customer to collect and provide the same documents in hard copies for each bank separately and the registration of the pledge doubled the customer's efforts in essence of time and expenditures because of necessity to perfect security interest on the name of both banks.

Thus, consequently in such a situation, when the Law does not allow for simplifying the procedure and reducing the risks, the attractiveness of that form of financing would vanish accordingly. Therefore it is necessary to observe more deeply what should be the solutions within the current legal framework and what should be altered in order to eliminate the obstacles. In that respect, it is important try to analyze existed Kazakh legislation in light of international experience, in order to understand what possibilities Kazakh Law provides for implementation syndicated lending scheme there.

Methodological basis of work are the principles of historicism and objectivity, and also the system approach consisting in studying of events, the phenomena and facts not separately from each other, and in total and logical interrelation. Also was used content analysis, invent analysis, the method of analogy.

The structure of work are determined by considered aims and the purpose and logic of research. Work consists of introduction, 3 chapters, conclusion, the list of the used literature.

1. OVERVIEW OF SYNDICATED LENDING SCHEME IN INTERNATIONAL MARKET

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1.1 Definition and main characteristics of syndicated lending

In order to understand what the syndicated loan is, one need to define its essential distinctive characteristics. The first and most obvious feature of this type of financing is that it implies the existing of group of creditors, i.e. syndicate. In this sense, the syndicate concept for some extent coincides with the definition given in the Black's dictionary, according to which, the syndicate is “a group organized for a common purpose; especially, an association formed to promote a common interest, carry out a particular business transaction, or (in a negative sense) organize criminal enterprises”⁸. However, not every syndicate suggests an existence of syndicated lending scheme. For instance, a group of creditors that agreed with each other to provide loans to its' customers with not less than a certain level of interest rate, might be recognized as a syndicate for the purpose of antitrust legislation in most of jurisdictions. Nevertheless, this type of syndication and lending wouldn't be a syndicated lending as it is understood in practice.

So what is a syndicated lending? In order to answer this question, it is necessary to define the following main characteristics of such deals. They are the following [1]:

- as stated above - the existence of group of creditors organized for the concrete deal;

- the loan is provided by this group of creditors to one or more borrowers (not potential, but existing borrowers)

- the loan is provided on the basis of common agreement or several agreements derived from the common deal (for instance, sometimes the structure of the deal may consist of a multiple agreements and inter-creditor agreement);

- several obligations to creditors, thus, none of creditors is liable for breach of obligation by the others;

- certain level of joint control, or so-called syndicate democracy principle, according to which the creditors delegate certain power to make decisions jointly by the majority of votes;

- benefits sharing, meaning that any proceeds received by the creditor should be proportionately divided between the creditors according to amounts owed to them; centralization of money flow through the agent.

The most important among them is the severality principle which mirrors the main idea of the whole deal - concentration of financial resources without imposing additional risks on the participants. Obviously, no bank would enter into syndicated lending if there is a probability of commitment for the entire amount of credit declared to the borrower, unless the risk is justified by a significant increase of credit costs. However, the same increased costs might “stifle” borrower's interest in borrowing.

So, we can say that syndicated loan is the loan based on the severality principle of creditors that meets other abovementioned characteristics.

For a proper implementation of syndicated lending within the relevant legal system, it is necessary to distinguish the types of legal relationships embraced by that transaction.

Syndicated loan is not a mere loan between creditors and borrowers. It is a mix of different legal relations complicated by the multitude of parties and different contractual elements within the common deal. Therefore, the syndicated lending should be considered as having manifold contractual nature.

First of all, it is a loan transaction. Thus, all the requirements for lending schemes should apply to the syndicated lending as well.

Additionally, syndication implies some level of cooperation or association of creditors inside a group in order to achieve a common purpose. Hence, there are also legal relationships which derive from this joint activity. Depending on regulating law, these relationships might be treated differently, either as mere contractual cooperation or as a consortium or a partnership, i.e. form of unincorporated organization. Consequently it might put additional liabilities on creditors. For example, a partnership under the English Law may “lead to fiduciary duties between parties (such as full disclosure and avoidance of conflicts of interest), reciprocal indemnity liabilities, and special insolvency and tax regimes”.

Besides that, syndicated lending also requires agency relationships between the whole group and a designated agent (usually one of the creditors within the syndicate). Agent usually acts on behalf of creditors and does not represent the borrower.

Usually, there are following participants referred to within syndicated deals [2]:

- the Borrower

- the Arranger

- the Agent

- the Security Trustee (if the loan is secured).

- the Creditors

The Arranger's role is to organize a syndicated credit facility for the Borrower. Usually the Arranger is a bank which is familiar with the market, regulating law and other conditions necessary to a successful completion of a deal. This allows it to find creditors interested in a deal, offer optimal conditions for both borrowers and creditors, provide certain consulting services to borrowers including consultation on documentation. Additionally, the Arranger prepares the Information Memorandum, the document used as a basis for potential investors to make their decision on entering or rejecting the deal. Therefore it “must cover all the issues which will be important to interested banks in their evaluation of the credit”. It's important to note that all the significant information necessary to make the Information Memorandum is provided to the Arranger without any need for channeling it to all the other potential creditors.

Another important function of the Arranger is to act as an intermediary during contract negotiations between borrowers and creditors. In this regard the professionalism of the Arranger may prove useful. The Arranger should know not only how to protect the creditors' risks, but also be able to propose admissible solutions if potential disputes occur during the negotiations. Although the legal firms are engaged in process of drafting the contracts, the Arranger has to predict the possible reactions of the parties for either conditions of the agreement from the initial step in order to successfully close the deal. The Arranger can receive a fee for its services, usually from the Borrower.

In case of successful formation of the syndicate, the Agent is chosen as an intermediary for all the relationships between the parties to administer the deal. “Agent may not be the bank that arranged the facility in the first place, but it is quite common for this to be so”

Agent acts as a representative of the creditors and bears certain liabilities. Summarizing several opinions, the functions of the Agent might be generalized into following:

Paying agency: directing payments from creditors to the Borrower and vice-versa;

Rate fixing: fixing floating rate basis for the floating rate loans;

Monitoring:observing performance of certain obligations (including condition precedent compliance test). However, there are few differences in some authors' views in this regard. For example, though Mark Campbell and Christoph Weaver agree with condition precedent duties, they, nevertheless, say that the Agent has no obligation “to monitor or enquire upon event of default” and only obliged to inform upon his awareness of the facts. On the contrary, the “Guide to Syndicated Loans” mentions that an Agent “monitors the compliance of the borrower with certain terms of the facility”. However, anyway since the relationship between the agent and the creditors is based on the agreement, the obligations would depend on the provisions thereof;

Information and documentation transferring: channeling the documentation and/or notices from the borrower to the creditors and vice-versa;

Record keeping: maintain the database on syndication deal participants and the history of transactions between them;

Event of default duties: making necessary steps according to the agreement and instructions of the syndicate in occurrence of event of default.

Agent can also carry out functions of the Security Trustee, although it is not prohibited to select a Security Trustee among other creditors in syndicate. Its role is to hold security interest on behalf of all the creditors and perform other liabilities connected to the security such as, for example, keeping the documents, enforcement of security interest, etc. There is no need to perfect security interest on the name of each creditor separately because the Security Trustee holds the interest on behalf of all creditors and is obliged to act in favor of each one of them. Therefore, a new creditor, to whom the relevant part of the credit is assigned, would have a security interest without any additional actions in regard to perfection.

It has to be noted that depending on the deal structure some other functions of an Agent might also be separated and transferred to other participants that act as agents for particular tasks. For instance, the duties of the designated Documentary agent relate only to the work with documentation, or the Administrative agent will perform a separate function of collecting and transferring payments.

Creditors in syndicated lending are distinguished as primary creditors (lenders or banking institutions) and secondary creditors (investors). Those who fall under the primary level enter the original deal with certain commitment to provide a credit facility and sign the original agreement. Since they are expected to grant a credit, banks often become primary creditors. However, in practice they might also be quasi-banking companies, which are allowed to provide loans and some other financial services as the regular banks. Their participation depends on applicable legislation and existing practice. The secondary creditors are any entities that are allowed to acquire debts. Usually they are investment institutions, funds, pension funds, hedge funds, insurance companies and others [3].

Taking into account the number of creditors, the creditors always bear a risk of losing their money due to unequal ranking of their claims, lack of access to the borrower's assets, etc. For example, there might be a situation when one of the banks is repaid fully while the other still have a certain outstanding amount owed by the borrower.

Therefore, the mechanism of pro-rata sharing is broadly used in order to prevent disproportional distribution of proceeds. According to this rule, any excessive amount (i.e. gains that are greater than a portion that should have been received if the gains were distributed proportionally within the whole group) received by one creditor should be “shared proportionally without discrimination”. Thus, this mechanism reduces the risks of disproportionality and unfairness between creditors.

The mechanism of pro-rata sharing implies a subrogation of debts owed by the borrower from the creditors that receive their portion to the sharing creditor. So the creditor that shares the proceeds receives the relevant portion of the debt in exchange and replaces the creditors against the borrower in respect to those debts. Consequently, debts owed by the borrower to a particular creditor are increasing, whereas those owed to others are proportionally decreasing. However, such possibilities might be restricted by the regulating legislation.

Additionally, syndicated lending provides a certain shift of decision making power from the individual level to the group level. It is also based on the necessity to protect other creditors from decisions that might be acceptable for particular creditors, but disadvantageous for the whole syndicate. Thus, according to that principle “the banks may agree between themselves to delegate limited decisions to majority control, e.g. certain waivers of non-payment obligations and the right to accelerate the loan on an event of default”.

Certain defense from potential risks is also achieved by the perfection of the security in favor of the Security Trustee, instead of each creditor separately. The Security Trustee has special obligations to distribute proceeds from enforcement between all the creditors whose claims are secured by that security. All of the security interests held by the Security Trustee are treated as equal and no creditors have more advantageous positions against the others. Apart from that, the existence of the Security Trustee allows to avoid additional actions on perfection of the security interest in case of substitution of the creditor (transfer of debt to others).

Depending on its renewability after repayment the credit facility is usually divided into two following types: non-revolving and revolving .

Non-revolving means that each drawdown is deducted from the whole loan limit, thereby decreasing the available sum to be used further. A repaid amount is not provided to the borrower again.

On the other hand, revolving facility provides an availability of repaid amount for the borrower within the limits of the credit facility. Thus, all the repaid amounts from a revolving part can again be given to the borrower.

By types of credit instruments the following are applied to the syndicated lending [4]:

- term loans;

- trade finance instruments, such as letters of credit and guarantees;

- standby facilities, such as standby letter of credits, standby loan facility.

Considering the risk sharing aspect by all the syndicate members of the syndicated lending, providing any of such facilities should be organized in a way that would involve all the syndicate members. Hence, issuance of term loans requires transfer by each participating bank of its appropriate portion to the Agent for further provision of it to the borrower. Repayment of the loan is also made through the Agent who distributes relevant amounts among all the creditors depending on their participation share.

Contingent liabilities of banks such as letters of credit or guarantees do not require immediate availability of money and, therefore, participation in such instruments differs from loans. Since the execution of letter of credit or guarantee is subject to certain circumstances, the future issuing bank does not incur any expenses at the moment of issuance. However, such bank bears risks of executing such instrument if it is called by the beneficiaries. Therefore, other participating banks undertake the obligation of participating in the execution of the letter of credit or guarantee by reimbursement of the relevant proportion to the issuing bank in case of paying of such contingent liabilities when it is due [5].

The purpose of syndication also affects a composition of facility by the types of instruments. Thus, if the purpose is the further selling of the credit to institutional investors who do not provide loans, then it is probable that revolving facilities or trade finance instruments will not be included into the structure.

Besides that, it is important to keep in mind that contingence liabilities like letters of credit or guarantees do not create a debt on the borrower at the moment of issuance. Usually the borrower is obliged to return expended amounts to the issuer after the execution occurred. But before the bank is called for execution the obligation of the borrower is not occurred. Thus, acceleration implies only a repayment of factual outstanding debt, and an enforcement of the security will cover only such amounts. At the same time the bank is not discharged from its obligations to execute issued letter of credit or guarantee until their expiration. As a result, it also can influence the combination of syndicated facility structure in terms of its instruments.

As any other regular loan agreements, the syndicated loan agreement also contains covenants. Usually they are divided into following groups:

- Financial covenants;

- Affirmative covenants;

- Negative covenants.

While financial covenants require a support of certain financial ratios on defined level (i.e. without any specification of concrete actions), affirmative and negative covenants are associated with certain actions. For example, affirmative covenants imply the fulfillment of different obligations by the borrower, such as providing the information, reports, taking out insurance, obeying the law or ecologic standards, and other. Negative covenants, in contrary, are restricted to perform some actions or activities, such as property pledge without prior consent of creditors, dividend payments, capital expenditures, mergers and acquisitions, restrictions of pari passu and other.

However, it should be noted, that covenants do not guarantee high defense of creditors' interest in case of their breach by the borrower. For instance, a breach of the negative pledge does not cancel or diminish security interest of another creditor only on the ground of the absence of consent of the creditor that imposed a negative pledge. At the same time in some jurisdictions, particularly in the United Kingdom for instance, such creditor is allowed to claim compensation for damages from pledgee “for the tort of procuring a breach of contractual relations”, if he was aware of existence of negative pledge covenant.

Therefore, the main purpose of covenants is to provide the creditor with the possibility for demand of early repayment of the whole outstanding amount in occurrence of specified events or breach of obligations and termination of credit agreement rather than just creating a security interest on the property of the borrower or imposing the real blocks for borrower's actions. In syndicate the issue on acceleration usually transfers to the majority vote, thus, use of covenants for early repayment by a separate lender is reduced.

Depending on the structure of the deal a loan can be covered by security or may be unsecured. The security might be of different types. The pledge and guarantee are the main and often-used types [6].

Usually there is a wide variety of different types of property that could be pledged as collateral, such as equipment, immovable property, money, receivables, inventory, grain and other types. As mentioned earlier, security interest is generally held by the Security Trustee in favor of all the creditors within the syndicate.

The guarantee might be provided either by an individual or companies depending on the applicable law.

Without a doubt, the main purpose of the security is to secure a performance of its obligations by the borrower and to avail the creditors with the possibility to recover a debt from the security. However, the security may be necessary also for regulatory requirement purposes. For example, in some countries classification of the loan and its provision depends on existence and value of the security. The smaller value of the security leads to the higher classification requirements and provision level. Therefore, the absence of the security could result in additional costs depending on provisioning.

Besides the security, it is needed to notice about the possibility to use such option as subordination. Subordination infers an agreement between different level creditors on change of their claims priority. Wood explains two main methods of subordination - turnover subordination and contractual subordination. In turnover subordination junior creditor undertakes the obligation to return to senior creditor all the amounts received from the debtor, sufficient to cover all the debts owed by that debtor to senior creditor. There are two means of accomplishing such relations between senior and junior. The first implies the use of trust scheme where junior holds all the payments received from the debtor for the benefit of senior creditor. The second implies contractual obligation of the junior to pay the senior all the payments received proportionally to debts owed by the debtor. So it means that the junior creditor becomes contractually bound to pay as a separate debtor of the senior creditor. In contractual subordination creditors contractually change the ranking of their claims - so junior creditor stands in ranking after senior creditor [7].

Usually banks when providing loans contemplate the possibility of further selling of them to the third party. In some cases this might even be the main goal - to sell the loan and make additional profit out of administration services. For example, in Kazakhstan there is a hypothec credit system that is provided for the purchase of hypothec credits from banks by a single government- owned operator (“Kazakhstan Hypothec Company” JSC). At the same time after an acquisition of credits they remain with the banks which render administration services for a certain fee. As a result banks refinance their loans and use received amounts for further crediting, meanwhile receiving a certain fee from the abovementioned operator. Therefore, banks are highly motivated to sell the loans and indeed grant them with the initial goal to do so.

Since the syndicated loan is a credit, the creditors might be interested in transferring their portions to the third parties as well. The reasons may be different, which can be grouped into the following:

Regulatory reasons - to maintain certain capital ratio requirements and/or other regulatory requirements.

Financial reasons - to raise money or to crystallize a loss. For example, it might be profitable for the creditor to refinance the loan in order to use money for further lending, while continuing to obtain benefits from this refinanced loan acting as a payment agent for the new creditor for a certain fee. In regards of crystallization it might be necessary to get back the outstanding amount at a discount as well as to release the money which is “frozen” as a provision.

Risk management reasons - to reduce the risks occurred in connection with “particular market sector, geographic region or country, industry or even customer by virtue of overall exposure or changes in the political or economic environment”.

The main methods of transferring the loan or its part are the following:

Novation - creditor transfers of all the rights and obligations derived from the loan or its part to the third party. So novation means a substitution of the creditor as a party in agreement;

Assignment - the creditor assigns the rights derived from the loan or its part to the third party for a certain consideration. Obligations of the assignor still remain with him and he is obliged to fulfill them properly;

Sub-participation - might be funded or unfunded. Funded implies the deposit of the fund from the third party (investor) to the creditor with the obligation of the latter to return it. It is subject to payments that the creditor receives from the borrower. Due to the fact that the third party bears double risk, there is also an additional fee payable by that third party to the creditor for such risk. Unfunded participation means only transfer of the risk, therefore, it is also called the “risk participation”. According to this scheme the investor undertakes the obligation similar to a guarantee to repay the debt of the borrower as the event of default occurs. No transfer of funds or channeling of payments is required. However, since the investor bears a risk it receives a risk fee from creditor.

1.2 What is the syndicated lending according to Kazakh law

Kazakhstan legislation contains the definition of syndicated loan only in the Rules of credit documentation maintenance (hereinafter referred to as “Rules of credit documentation”), which serve to regulate banking activity in the sense of formation of credit dossier and maintenance of documentation associated with the credit operations. According to these Rules of credit documentation, the loan jointly formed and provided by two or more banks that are members of banks syndicate to the borrower (group of affiliated borrowers) on the ground of one loan agreement (attaching to it the other documents if necessary) fall under a syndicated loan. Syndicate is understood as two or more banks joint with the purpose of carrying out of joint credit operations and reduction of potential losses for every participant in case of insolvency of the borrower, subject to retention of legal and financial independence of banks within the syndicate.

Besides that the Rules of credit documentation also contain the definition of the Agent bank which is a bank that represents syndicate members and executes syndicated loan administration services [8].

Thus, according to the abovementioned definitions, the syndicated loan under Kazakhstani legislation is the loan that meets the following characteristics:

- multitude of bank-creditors;

- common loan agreement (attaching to it the other documents if necessary)

- existence of the Agent bank which represents the syndicate members and executes the credit administration services;

- common borrower or group of borrowers.

Clearly, an existence of the most important principle of the syndicated lending, the severality of creditors, is not a key for syndicated lending in Kazakhstan. Hence, even normal loans with the multitude of creditors with joint and several liabilities are treated as syndicated loans. Although it contradicts the main purpose of syndication, which is risk sharing, nevertheless, it might have logical justification. The definition of the syndicated lending consisted in the Rules of credit documentation focuses primarily on the procedure of credit documentation formation rather than on the nature of the relationships between the creditors. For these purposes, the character of the relationships within the syndicate and existing forms of liability do not really matter. The presence of the multitude of creditors as subjects that form a credit dossier is considered to be in the foreground.

However, it might lead to the question, whether it is possible to establish the severalty principle contractually, or does syndicated loan by default imply joint and several liabilities on creditors. In order to answer this question it is necessary to analyze common and special norms of the Kazakhstani legislation.

According to the article 382 of the Civil Code of the Republic of Kazakhstan, the counterparts are eligible to determine contract conditions, unless certain conditions otherwise specified by the legislation. In addition, according to the article 380 of the Civil Cod, the parties to the contract are allowed to conclude a contract independent of the legislation. The Kazakhstani legislation does not contain any prohibitions to combine different independent liabilities between different creditors and borrowers into one common agreement. On the other hand, such a combination might lead to an assumption of occurrence of multiple parties on the creditors' side. Then according to the article 269 of the Civil Cod of the Republic of Kazakhstan, the entire shared, joint, and several or secondary liabilities arise on the creditors' side. Nevertheless, according to the articles 285, 287 and 288 of the Civil Cod, the regulation of the abovementioned liabilities, their occurrence and cancellation might be a subject to an agreement between creditors and borrowers. Thus, banks in the syndicated lending can contractually determine severality of liabilities of each bank/party, thereby implementing severality principle.

Although the legal definition covers the severality principle, it does not make any reference to the other two important principles - a syndicate democracy and a pro rata sharing. Thus, it is important to understand whether it is possible to implement these principles through an agreement.

A syndicate democracy is, in fact, a waiver of certain decision making rights by the creditors in favor of the common majority. Although this principle is not widely spread within the legal practice of Kazakhstan, a possibility of its implementation is embraced by the Civil Cod of the Republic of Kazakhstan. According to the article 2 of the Civil Cod, individuals and legal entities may waive their rights and are free in their establishment based on agreement. Nevertheless, apparently courts are inclined to restrain the individual creditors from making decisions independently, even though it was conferred on the common majority level. Decision making power might be treated as the right guaranteed by the Law, exercising of which is dependent only on entity's will. Thus, the right of decision making might be waived voluntarily by simply not exercising it. However, it is not obligatory to waive this right in the future, thereafter freely exercising the right.

In regards to a pro rata sharing, it is important to note that the Kazakhstani legislation allows using such means of contractual relationship. According to the article 276 of the Civil Cod of the Republic of Kazakhstan, a performance of the entire obligation or its parts might be imposed on a third party. Thus, each syndicate member by the contract relies on a borrower's obligation to repay the loan proportionally equal to the amounts owed to other creditors in case of any exceeded sums received by a certain creditor (i.e. according to the pro rata sharing principle). However, most importantly, according to certain peculiarities of the Kazakhstani legislation, implementation of this principle faces certain problems, which are explained further.

Similarly to the international practice syndicated lending scheme, the Kazakhstani syndicated lending system also comprises several legal relationships. Generally, it includes a credit relation between the creditors and a borrower as well as those between the creditors themselves.

As for the credit relationships, the bank's lending operations in Kazakhstan are regularly subject to licensing. Therefore, in order to be a member of a syndicate the bank has to receive an appropriate license.

Additionally, being a bank loan, a syndicated loan has to meet certain statutory requirements. So according to the article 728 of the Civil Cod of the Republic of Kazakhstan, the loan agreement has to be written, otherwise it is considered void. Besides that, as stated in the section three of the Rules of credit documentation, the original copy of the loan agreement that terminated without the use of the standard form approved by the authorized bank or with the change of this form without approval of the authorized bank, must be signed by the head of legal services of the bank (or by the lawyer in the bank's branch) and by the parties, and has to be ensealed by the borrower and the bank. Generally, the syndicated loans do not fall under the regular standard banking products (at least in Kazakhstan), therefore, there is a limited likelihood that the banks have a standard form of the syndicated loan agreement. Moreover, the banks can involve legal firms that have experience in these or similar schemes in order to represent their interests during the negotiation process. In that case a participation of “internal” lawyers could be diminished significantly. It is ambiguous then whether the signatures of these “internal” lawyers make any sense after their detachment from the negotiation processes. Absence of the lawyer's signature neither affects the validity and enforceability of the agreement nor implies that the legal risks are not observed properly. Therefore that procedure seems to be absolutely pointless and burdensome in terms of time and costs which might eventually have an effect on the timeframe of closing the deal [9].

In addition, the Kazakhstani legislation imposes requirements to the language, textual format and consequence of conditions of the agreement. According to the Resolution N18 (hereinafter referred to as “Resolution”) of the Financial Supervision Agency dated February 28, 2011, the loan agreement must be written in Kazakh and Russian languages or in Kazakh and acceptable for the parties language in case of the presence of a foreign party. It should be printed out on the A4 paper size sheets, using “Times New Roman” font with the minimum font size of 12, font normal spacing, paragraph single-spaced and indentation. The following conditions are mandatorily required to insert on the first two pages of an agreement (or in case when the agreement is expressed on two languages simultaneously with dividing the sheet onto two columns, then they should be placed on the first four pages):

- date of closure of an agreement;

- total amount and currency of the loan;

- terms of the loan;

- type and size of interest rate, size of annual effective interest rate calculated in order prescribed by the National Bank of Kazakhstan;

- order of calculation of floating interest rate (in case of the use of floating interest rate);

- means of repayment;

- method of repayment;

- the priority of paying the debt;

- order of calculation and size of penalty for overdue payments.

Certainly, these requirements are established for consumer protection in order to avoid situations when essential conditions are hidden within the complicated structure of a contract. However, taking into account that syndicated lending does not involve individuals or small companies, but rather big corporations that have possibilities to adequately assess all the risks related to the deal, it is not justifiable to spread some of mandatory requirements to the syndicated schemes.

Besides the requirements to the agreement, the Kazakhstani legislation also contains some mandatory rules on documentation which must be mandatorily provided to the banks within the syndicate for the purposes of formation of the credit dossier and revealing beneficiary owners. According to the section 29 of the Rules of credit documentation, the borrower is obliged to provide the lenders with the same package of documents. Notably, it is prohibited to form one common credit dossier by the Agent bank only. Moreover, certain documents are required to be provided in the original form or/and notarized copies of them (for instance, incorporation documents must be presented in notarized copies, business plan or technical-and-economic assessment - in the original copy).

The relationship between the creditors is divided into two types - inter-creditor relations and agency relations between all the creditors and the agent.

In the inter-creditor relations, according to the Kazakhstani legislation, a syndicate may be recognized as a consortium. The Civil Cod of the Republic of Kazakhstan determines the consortium as a temporary association of legal entities, which is not a legal entity itself, and which implies consolidation of its participants' resources and coordination of efforts for resolving certain tasks. At the same time consortium members retain their economic freedom.

Matching the definition of a consortium to the abovementioned definition of a syndicate, it is notable that both of them coincide to each other and have the same characteristics [10]:

- both imply association of legal entities (i.e. banks) without creation of a new legal entity;

- both imply consolidation of resources;

- both have a certain purpose.

Therefore, it is possible that a syndicate of the bank can be considered exactly as a consortium, i.e. a partnership formed by the legal entities (as a form of unincorporated organization).

Such a consequence could impose a serious negative impact on the members of a syndicate. According to the article 230 of the Civil Cod of the Republic of Kazakhstan, the property created or acquired as a result of joint activity of consortium members becomes their joined shared owned property. Additionally, in accordance with the article 210 of the Civil Code, their shares are considered as equal, unless the Law or agreement states otherwise. Thus, an absence of the precise share determination equalizes the shares independently from participation proportion in the whole credit amount. This results in equally-shared payment amounts unless the agreement between the memebers specifies otherwise. Besides that, according to the article 231 of the Civil Code of the Republic of Kazakhstan, the procedure of loss covering must be specified in the agreement between consortium members. Otherwise both the common expenses and losses are covered from the common property and deficient amounts are divided among the members proportionally to their shares in common property. Particularly, if the shares are not defined properly, the division is made on the assumption of the shares equality [11].

Additionally, the character of consortium relations imposes certain restrictions on the further disposition of the share in the consortium, i.e. a share of the entire syndicated loan. According to the article 216 of the Civil Code of the Republic of Kazakhstan, the owner of the share who is planning to sell it has to offer his share to the other co-owners first, according to the preemptive right rule. Thus, it significantly influences subsequent transfers of loans by the syndicate members.

Speaking about the agency relationship, it is important to note that in international practice the agent acts for a fee. In Kazakhstan, however, every commercial activity into which a bank is engaged is a subject to restrictions imposed by the legislation. The Law of the Republic of Kazakhstan “On banks and banking activity in the Republic of Kazakhstan” (further on referred to as “The Law on Banks”) specifies the exhaustive list of activities in which the bank could be involved with commercial purposes. The service as a representative of third parties on issues connected to banking operations that could be used as a justification for receiving fee is the closest to the agency function of syndicates. So, in Kazakhstan it is possible to be a syndicate agent for a fee. However, further transfer of loans by the banks to other non-bank investors may cause some problems. According to the Article 30 of the Law on Banks, providing banking and other operations falls into the category of banking activities. The activities provided by nonbanks, on the other hand, do not fall under this definition. Hence, representative services on issues connected to the non-banking activities are not be allowed to be provided by the banks. This might seriously affect the possibility on administering syndicated loan after the transfer to non-banks.

The participants of the syndicated deals, just like in the international deals, can be divided as follows (except one of them):

- the Borrower

- the Arranger

- the Agent

- the Creditors

As was mentioned earlier, the banks can benefit from any commercial activity except for those listed in the Law on Banks. Notably, arrangement of credit is neither specified in the list nor could be recognized as a representative service. Therefore, the arrangement of syndicated loan formally should be organized only on the free of charge base.

There is the exact definition of the Agent the legislation in Kazakhstan. According to the Rules on Credit Documentation, “The Agent is the bank to which the members of banking syndicate entrust representing their interests and providing the credit administration services regarding the syndicated loan during its life”.

It is important to note that the foreign currency denomination of the loan might cause additional complications related with the currency control regulation. According to the Article 13 of the Law of the Republic of Kazakhstan “On currency regulation and currency control,” foreign currency transactions between the residents are prohibited, except inter alia the following:

- operations with currency valuables that arc considered the banking operations and other operations permitted to the banks and banking organizations;

- payments for the banking services of carrying out the foreign currency transactions, and payments of penalties according to agreements on providing banking services in foreign currency [12].

Accordingly, in case of loan transfers by the Creditor banks to the non-bank investors, the payments between the borrower and such investors in foreign currency will be very problematic, because such transactions are not considered as banking operations and other operations permitted to the banks and banking organizations.

The Creditors are traditionally banks, like in the international practice. Compared to other investors, they are usually most active players on the stock exchange market. Besides the banks, the Creditors include pension funds, insurance companies and investment funds. The state investment structures can also act as potential investors - for example, JSC “The Investment Fund of Kazakhstan” or “DAMU Entrepreneurship Development Fund”.

Speaking of the pension funds, it has to be noted that there are two types of them in Kazakhstan - the Single National Pension Fund, which belongs to the state and holds the mandatory pension contributions, and private voluntary pension savings funds, holding the voluntary pension contributions. As of January 1, 2014 the total value of pension savings was 3733.4 billion tenge (approximately USD 20.5 billion), which could be invested into lending (including syndicated) with low risk ratio and covered by security.

However, neither Single National Pension Fund nor voluntary pension funds are allowed to invest in loans even if they have high level security coverage. The same prohibitions are imposed on investment possibilities of insurance companies and invest funds.

So, unlike the international experience, in the Creditors in Kazakhstan are fully cut off from the syndicated lending market. The only remaining investors are banks, state structures and other private investors. However, they are not allowed to invest due to some problems related to the restrictions on the agent-bank side discussed above.

Speaking of the Security trustee concept, it is important to state that while this concept is widely used in the international market, it is not present in Kazakhstan at all to designate a certain trustee for the benefit of different creditors. There is a legislative rule, according to which, if the collateral is pledged to secure another obligation, then claims of the subsequent creditor satisfied after the previous creditor. Even if the agent would act on behalf of each of the banks, it will be still required to determine the priority of their rights in order to consequentially determine the ranking of their claims.

In order to preserve a certain balance between the interests of the creditors, the syndicated lending schemes imply use of several instruments as pro-rata sharing, syndicate democracy and perfection of the security interest not on the behalf of each of the creditors, but on the behalf of the common Security trustee. However, the implementation of these principles in Kazakhstani reality might be problematic.

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