Overview of syndicated lending scheme in international market

Examining relevant court cases, such as New Bank of New England, N.A. v. Toronto Dominion Bank, one paper argues that US case law preserves unaltered the contractual rights of the creditors among themselves during a debt restructuring process. A creditor's right to enforce its claim against the borrower is not affected by the problems such action may cause other lenders. Similarly, the rights of the lending group's majority are not impacted by an implicit obligation to a minority lender or its interests.

Lender default

When one co-lender fails to perform its obligation to fund its percentage of the loan to the borrower, it has breached its agreement with the borrower (if a direct or regular participant) or with the other lenders (if an indirect participant). In lending relationships with additional funding obligations, such as construction loans or lease-up loans, the mechanism for dealing with a defaulting lender must be clearly set forth in the primary and/or syndication loan documents. Some loans are structured to allow the non-defaulting lenders to advance the defaulting lender's share in exchange for the benefits associated with that advance. In some cases, defaulting lenders must take a step-down in priority with respect to distribution of payments and fees received from the borrower. In addition, some primary and/or syndication loan documents state that a defaulting lender loses its right to have its vote counted in any decision requiring the consent of co-lenders.

CONCLUSION

The importance of syndicated loans in the corporate debt market has been highlighted both in the theoretical and empirical literature. During the global financial crisis their volume was squeezed in most countries and banks from the developed countries quit the emerging markets. In Kazakhstan, however, the reforms implemented before the crisis enabled domestic banks and financial institutions to play a bigger role in the syndicated loan market. As a result the volume of syndicated loans in Kazakhstan grew steadily during the crisis. The present paper examines not only lending volumes, but also the cost of debt, and more generally both the price and non-price terms of syndicated loans. It emerges that foreign syndicated loans offered lower interest rates to attract more Kazakhstan borrowers. Moreover, the loan amount was lower for longer maturities in the case of foreign syndicated loans in Kazakhstan. Domestic syndicated loan arrangers tended to offer better non-price than the price-terms. This has resulted in a constant credit supply in Kazakhstan during the global financial crisis.

Our findings contribute to the literature on cross-border syndicated loans and on syndicated loans in emerging economies during financial crises. Information on banks' lending volumes in emerging markets is not sufficient to design policy responses to financial crises, the amount and cost of debt should also be examined. Our study of the Chinese case suggests that the impact of the financial crisis in emerging markets was mitigated by appropriate syndicated loan contract terms. It 25 provides important information to policy makers of other emerging countries aiming to design an effective debt market strategy to tackle future global crises, since bank credit has a significant impact not only on firms' activities but also on the macroeconomy (Campello et al., 2010). A follow-up study will investigate such effects in the post-crisis period.

Summarizing the abovementioned risks and problems that could arise in Kazakhstan in regarding to syndicated lending, one can be convinced that although it is theoretically possible, but it is practically disadvantageous to be involved in such schemes there. By entering into such transactions the creditor would not fully achieve real risk sharing, which is main purpose, but rather would get additional risks, for example stemmed from consortium nature of such transaction.

Therefore it is crucial to understand how problems should be solved in order to attract creditors to use this tool. Otherwise I think syndicated lending would still be as a mere theoretical instrument with absolutely useless practical meaning.

On the basis of abovementioned analysis I will elaborate the problems with providing certain recommendations for their resolving.

Consortium nature problem

As it was stated before, according to Kazakhstani legislation it is very likely that syndicate would be considered as a consortium (joint unincorporated entity), thereby applying certain negative impacts on creditors. Moreover, it couldn't be resolved via contractual conditions between the parties. Therefore it could be strong reason for the parties to abstain from syndicated lending.

In United Kingdom, for example, syndicate is not recognized as a partnership (the form of unincorporated entity) “because there is no sharing of net profit between the members of the syndicate”, as well as in U.S., although syndicate members still have common purpose and sign a common agreement.

Taking into account that it is not possible to contractually avoid application of consortium nature of syndicate in Kazakhstan, it is necessary to make relevant amendments into the legislation precisely stipulating that syndicate of banks in syndicated lending transactions are not a consortium.

Pro-rata sharing problems

As it was stated above in Kazakhstan there is no subrogation of the rights (debts) to sharing creditor from the creditor that received its portion according to pro-rata sharing clause. It could lead to the problem with ranking and even loss of security interest. At the same time Kazakhstani legislation provide for automatic transfer of creditor's right in case of execution of the guarantee by the guarantor. So in my opinion this approach could be extended to situations of paying the borrower's debts by the third parties, because functionally it is almost the same, except that the obligation of that third party is not joint and several as in case of guarantee.

Therefore it is needed to add into the Civil codex the provisions that would prescribe automatic transfer of creditor's rights to the third party which paid the obligations of the debtor, unless otherwise is not agreed by the parties.

Security trustee problem

Existence of security trustee makes it possible not only to hold the creditors on the same level towards the security, but also to make the transfer of loan easier. Since there is no need to register the change of security holder, because the Security trustee holds security interest on behalf of all the creditors, transfer requires only providing relevant information to Security trustee.

Taking into account the problems with the ranking of security interest of several creditors in Kazakhstan, possibility to designate one representative on the name of whom security interest is registered on behalf of all creditors, would be a solution to mitigate the risks. Therefore it is recommended to make necessary alterations in legislation which would allow to implement security trustee scheme.

Prohibition to enter into the market for institutional investors problem

In order to boost loan market as a whole and especially syndicated lending market it is needed to allow more investors to be get involved with it. It is obvious, that it should be also assessed how risky it might be for them in comparison with conventional investment tools, but in my view at least secured loans might allowed to investment.

As it is shown in this paper, the most active institutional investors are barred from the loan market in our country. However, according to international experience they participate in such transactions⁹⁷.

I think it might be possible to reassess the risks and try to allow to some extent to pension funds, insurance companies and investment funds in Kazakhstan participate in loan market by investing in high level loans. For that purposes the list of permitted instruments for investment might be added by such loans. It might not only diversify their portfolio, but also might boost crediting as a whole.

Restriction to act as an aeent for non-bankinz organizations

The other problem connected to the investors is that banks in Kazakhstan are restricted to act as a representative on issues not related to banking operations. It creates some ambiguity and even risk for agent bank when the transfer of loan occurs in favor of non-banking organization.

So in order to eliminate possible misunderstanding or even penalties from the regulatory body, it should be clearly stated in the legislation, that agency functions of the banks in syndicated lending is allowed independently on what types of investors participate in loan.

Currency control problems

Although currency control issues could be resolved by the agreement throughout special clauses provided for converting payments into the local currency, it might for somehow decrease participants' desire to be involved in such transactions.

At the same time as it might be inferred the legislator exempt banking operations from the currency control restrictions in order to make it possible to foreign currency loans exist in Kazakhstani market. Therefore I think it will coincide with the rationale of that permission for the banks also to administer foreign currency loans even after transfer of rights to non-banking organizations. In that sense it is needed to exempt from restricted operations also loans in foreign currency provided by the banks and transferred to third parties.

Bureaucracy problems

There are some mandatory rules mentioned earlier regarding the form and content of the loan agreement in Kazakhstan. However, it seems more efficiently if the content and technical issues as size and number of pages for instance would not be prescribed by legislation for bank loans to corporate customers. Such customers are presumed to be sophisticated in business transactions, or at least they have possibilities to hire a legal firms for support. So in my view it would be better to exempt from the form and content requirements loans to corporate customers. However it is not crucial for implementing syndicated lending schemes in Kazakhstan, because it is still possible to follow this rules in such type of financing.

Additionally the requirement to have a full credit dossier by each of the member of syndicate also may be too burdensome for the borrower. Therefore may be it would be better to leave such requirement only to agent bank and allow to hold to other banks some sort of “light” dossier with only necessary documents for monitoring purposes.

BIBLIOGRAPHY

Dictionaries

1. Black's Law Dictionary, (8th ed.2004), West, a Thomson business, USA

Books

2. Philip R. Wood, International Loans, Bonds and Securities Regulation, Sweet and Maxwell Limited (2015)

3. Mark Campbell, Christoph Weaver, Syndicated Lending: Practice and Documentation, Euromoney Institutional Investors PLC (6th ed., 2013

4. Saurabh Mukherjea, Syndicated Lending. A Handbook for Borrowers in Emerging Markets, Euromoney Publications PLC 2015

5. Allison Taylor, Alicia Sansone, the editors, The Handbook of Loan Syndications and Trading, The McGraw-Hill Companies, Inc. (2007)

6. Philip R. Wood, Comparative Law of Security Interests and Title Finance, Sweet and Maxwell Limited (2nd ed., 2014)

7. Philip R. Wood, Project Finance, Subordinated Debt and State Loans, Sweet and Maxwell Limited (2015)

8. E.P. Ellinger, Eva Lomnicka, Richard Hooley, Ellinger's Modern Banking Law, Oxford University Press (4th ed., 2014)

9. Arthur R. Pinto, Douglas M. Branson, Understanding Corporate Law

10. Matthew Bender & Company, Incorporated (2009)

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