The Practical Law Banking and Finance team have released a suite of over 50 documents in a new syndicated facility lending module that includes a standard form of syndicated facility agreement and security trust deed, as well as security documents that have been prepared for use in a secured syndicated loan transaction.
When creating these new and updated documents, the team came to realise that there are some very interesting and useful sections in syndicated facility agreements that are all too often overlooked by banking and finance lawyers, banks and other lenders, and borrowers.
What are those five sections? We are glad you asked.
1. It only takes one lender to make a “syndicate’
In a practice note included in the ‘Parties’ section of the new syndicated facility agreement, the Practical Law Banking and Finance team go into detail on the various parties to a syndicated lending transaction and the process by which one finance party, usually given the title of ‘arranger’, will be appointed by the borrower and asked (for a fee, of course) to arrange the syndicated loan facility, including bringing in other excited lenders to form the syndicate.
Typically, the arranger will lock in the lenders that will make up the lending syndicate before the syndicated loan documentation is settled. However, this is not a strict legal, or commercial, requirement. There are many good reasons why a syndicate can be made up of just the one lender at the time the first loan is made. Just because there is one lender, it does not mean that the loan becomes a bilateral facility, though. The syndicated loan document will still be drafted as a syndicated facility agreement, along with the various other finance parties that make up a syndicated loan transaction such as a facility agent and a security trustee will still join the single lender to form the ground of finance parties.
The ‘Parties’ clauses in the new Practical Law syndicated facility agreement can easily be amended to allow for the entire loan to be made by one initial lender. The intention is then that the lender will sell down its loan to other lenders in the days after financial close. Syndicating a loan after financial close is known in finance circles as “syndicating on the secondary market“. There are detailed notes on this as part of the new Practical Law syndicated lending module, if you would like to read more on this exciting topic.
2. The ACCC is not a fan of syndicated lenders playing “show and cartel”
Competition law and banking law do not often cross paths. When they do, it tends to be when they awkwardly run into each other during the early stages of a syndicated loan transaction. While Practical Law Australia has some very fine resources on competition law, the new Practical Law syndicated loan module has several short, sharp notes on how competition law affects, or should affect, the behaviour of the finance parties from the very start of a syndicated lending transaction.
Competition law concerns arise because the process of lenders forming a syndicate may involve the exchange of commercially sensitive information between them. Lenders are technically (and legally) in competition with each other during the syndication process in the sense that each is bidding to provide debt to a borrower.
From the perspective of the Australian Competition and Consumer Commission (the ACCC), the potential for lenders to share information and collude together to be selected as syndicate members means that the ACCC is always on the look-out for cartel conduct amongst potential lenders, especially in recent years.
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Any law firm acting for the finance parties in a syndicated lending transaction should recommend that its clients obtain independent legal advice on competition law issues, such as:
- pre-commitment sharing of information;
- arms’ length bidding for a part of the total syndicated loan amount;
- the level and topics of discussions between finance parties on the transaction; and
- steps that can be taken to prove to the ACCC that there was no collusion between finance parties such as collusion on the scope and price of transactional banking services offered to the borrower.
Several clauses in the Practical Law syndicated facility agreement are designed to remind the lenders of these issues and additional detail on anti-competition laws as they apply to syndicate lenders is set out in various drafting notes in that document. While we are bias, we strongly recommend these notes to banking and finance lawyers and syndicate lenders.
3. Non-bank lending syndicates need experienced facility agents
Statistics on the lending market in Australia clearly show the growth in private banks and non-bank lenders, especially over the past two years. Both the number of private and non-bank lenders, and the size of the loans they are offering to borrowers, has grown significantly and, if trends continue, will continue to grow steadily in coming years.
So far, there have been few public examples of major banks joining up with non-bank lenders to form a syndicated lending group. However, there are no legal barriers to this arrangement, and it offers up both challenges and opportunities for traditional syndicate lenders, facility agents, and security trustees.
One opportunity for banks with an agency division or the capacity to take on the role of security trustee is for that bank to act as the facility agent or the security trustee (or both) for a syndicate of non-bank lenders that have come together to form a syndicate. Those non-bank lenders often do not have the resources to act as facility agent or security trustee. That means they may be looking to engage an experienced bank to act in these roles, even if the bank is not lending any money in the transaction. This provides the bank with a potential new revenue stream for its agency and security trustee divisions, while opening up the world of syndicated lending to non-bank lenders.
True, there are downsides with such an arrangement, but these are commercial rather than legal in nature. There is nothing in the Practical Law syndicated facility agreement, security trust deed, or related finance and security documents that prevents new forms of syndicated lending such as those hinted at in this section. In fact, the documents in the syndicated lending module are designed to allow for a range of different lending and syndicate arrangements.
4. Business hours apply under the syndicated facility agreement
Most syndicated loan documents, including the Practical Law syndicated facility agreement, allow for a variety of communication methods from paper, to telephone, to email. The same documents even allow notices to be sent by fax (younger readers, this is like a photocopier only it sends the document down the telephone line. Don’t worry about them – they are almost obsolete).
The range of communications technologies available to lenders and borrowers allows the parties to communicate in real-time and at any time. If a borrower wants to request a loan under a facility agreement at two in the morning on a Saturday, they can do so if the notice clause in the document allows for email delivery of loan drawdown notices.
However, some traditions are harder to break than a diamond encased in a case of quartz, and one such tradition is the understanding that any instructions received by a finance party before 9am on a working day will be treated as having been received at 9am that day, and any notices received after 5pm one day will be treated as having been received at 9am on the next working day. Yes, in some small ways “workin’ nine ‘till five” lives on.
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There are many reasons for this, and laziness or contracted working hours are not generally one of them. Rather, this eight hour window within which a party is contractually required to action any notices it receives under a syndicated loan document is based in practicality.
Before 9am and after 5pm it is difficult, sometimes impossible, for a finance party to gather the mix of people and systems it needs to carry out requests such as transferring loan funds or taking or releasing security.
For example, the real time gross settlement exchange system operated by the Reserve Bank of Australia and used by all financial institutions in Australia to transfer funds between banks shuts down before 5pm each work day. A facility agent simply cannot transfer funds between banks at the request of the borrower after 5pm.
For this reason, amongst many others, even a document as up-to-date as the Practical law syndicated facility agreement, only allows for an eight hour window when notices can be sent, received, and actioned. And, in an age where flexible working practices and work/life balance are becoming increasingly valuable and important, long may this clause continue to survive in syndicated loan documents.
5. FIRB are generally fine with foreign security trustees…
…even where that foreign security trustee holds security over valuable Australian assets including real property.
In a world where all finance is international it is almost inevitable that a syndicate of lenders will be made up of both domestic and foreign banks. It is also entirely likely that a foreign domiciled financial institution will be selected by the borrower as the facility agent or the security trustee.
The Practical Law standard security trust deed assumes that the security trustee will not be a foreign person for the purpose of the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA). It also assumes that Foreign Investment Review Board (FIRB) approval will not be required when a borrower grants, or the security trustee enforces, any of the security held by the security trustee. What if there is a foreign incorporated security trustee, though? Does the foreign security trustee need to get FIRB approval before it can sign any security documents, especially any security over Australian real property?
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The answer is: probably not, but the issue needs to be considered carefully. The drafting notes in the Practical Law security trust deed go into detail on some of the exceptions to FIRB approval that apply in lending transactions.
While the law itself is complicated, there is an exception under the FATA for a foreign entity that is holding and, importantly, enforcing security over Australian property on behalf of lenders. This is known as the moneylenders’ exception and the drafting notes in the new Practical Law security trust deed will give banking and finance lawyers and potential foreign security trustees all they need to know (in a very readable, practical way of course) about this exception and when it does, and does not, apply to syndicated lending transactions.
Practical Law subscribers can access more information on syndicated lending transactions, security trusts, and competition law considerations for syndicate lenders, in the following practice notes on Practical Law Australia:
- Practice note, Syndicated facilities.
- Practice note, Security trusts in finance transactions.
- Practice note, Syndicated facilities: arranger, facility agent and security trustee.
- Practice note, Syndicated facilities: understanding the syndicated loan market.
If you are not subscribed to Practical Law, simply request a trial to access the full suite of banking and finance legal resources, including those on the topic of syndicated facility agreements.
