Lma Unfunded Risk Participation Agreement
In a recently confidential case in which Allen-Overy LLP worked for the winning party, the Spanish courts examined for the first time the type of partial participation. The bank has submitted, by an English legal expert, experts on the fact that a partial participation of the LMA is not a transfer of the loan and none of the conditions of the partial participation that claim to reject one of the bank`s existing rights over the borrower, so that the bank remains, in accordance with English law, the lender with respect to the loan and therefore the party entitled to sue the borrower for default as part of the loan. Financial players in the troubled market in Spain often use the LMA`s under-participation agreement. However, "partial participation" is not a concept traditionally recognized by Spanish law. As a result, borrowers object to the application of the law and argue that such an agreement should be redefined as a transfer of debt. Such a new characterization would be detrimental to questionable obligations. This means that a leading bank, which uses an under-participation agreement while starting with the application, may have difficulty enforcing the rules. If the borrower discovers the partial participation and objects to the payment on the basis that the debt is contested (a credito litigioso) or on the basis that the effective creditor has lost the advantage of the corresponding guarantee, he may ask the court to terminate the execution of the guarantee on the basis that the partial participation must be rectified as a transfer and that this assignment does not include the corresponding guarantee. Similar problems could arise in the event of insolvency. However, Spanish law does not explicitly regulate such transactions. This may lead to a new characterization under Spanish law.
More recently, debtors are beginning to argue that a partial interest is in fact a transfer of debts. The consequences of a debt transfer are as follows: because of the structure of the LMA (i) participation agreement of the participants, the participant is not directly involved in the credit contract that governs the underlying loan, (ii) the lessor does not transfer or transfer to the participant any rights or obligations under the credit documentation , and (iii) the participant has no interest in the ownership of the loan or the credit documentation. The participant therefore has only a contractual relationship with the lender and has no direct rights to the underlying borrower. In the event of the lender`s insolvency, the participant therefore has only the right, if there is no agreement to the contrary, to demand, as an unsecured creditor, in the event of the lender`s insolvency, unpaid amounts earned under the participation contract. This structure is very different from the form of "true sale" participation agreements used in the U.S. market. We have published a revised agreement on the conversion of tempered window (Lookback without observational movement). new agreement on the average rate change (retrospective with change in observation); Revised comments on tariff change mechanism agreements; The maturity sheet for tariff-change facility agreements; and RFR conditions for use in addition to the revised replacement of the screen flow language. The LMA participation agreement provides both the recipient and the participant with the opportunity to "take" the participant, allowing both parties to convert the participant`s participation in participating loans into a direct "lender" (subject to the terms of the credit contract).
If the lender`s solvency becomes a problem, the participant can increase the participating loan and become a direct lender under the credit agreement. However, credit contract restrictions, adverse tax effects and regulatory concerns (some legal regimes govern direct credit and a bank lender may require a banking licence) may mean that an increase is not a viable option.