However, Spanish legislation does not explicitly regulate this type of transaction. This entails the risk of reclassification into Spanish law. In recent cases, debtors are beginning to argue that under-participation is in fact an assignment of receivables. The consequences of a debt assignment are as follows: In the case of a partially financed participation, the existing lender identifies the amount of the loan in which it wishes to participate and then receives a deposit of the same amount from a new lender. The lender making the deposit is called a “sub-participant”. For most of LMA`s sub-holdings, either party may request an increase. The parties are required to use their “commercially reasonable efforts” to induce a sub-participant (or any other person the sub-participant may request) to become a lender as soon as possible, in accordance with the credit documentation. The transfer of the loan to the sub-participant is subject to the provisions of the credit documentation and applicable law. Under-participation agreements that allow for an increase generally provide that the existing under-participation agreement will terminate on the effective date of the increase – the date designated as such by the agent in the credit documentation. In summary, in cases where the grantor is not yet subject to formal insolvency proceedings in the United Kingdom (administration or liquidation), the grantor`s ability to carry on business in the ordinary course of business is not limited. It follows that, where the sub-participant is concerned about the grantor`s ability to fulfil its obligations, the sub-participant generally `increases` its participation in the loan and becomes a direct registered creditor or may require that the loan be transferred to a third party in order to enable the sub-participant to enter into a new sub-equity agreement with the third party for the same credit agreement.
Under-participation is a means by which a lender can transfer its risk on a loan to another lender. Under-participation differs from news and assignments in that it does not involve a transfer of rights or obligations. On the contrary, it creates a new set of rights and obligations between the existing lender and a new lender. The initial loan remains in place and the relationship between the borrower and the original lender is not affected. In other words, a sub-ownership agreement is completely different from the initial transaction. Given the derived nature of the LMA form of the sub-equity agreement – the underlying loan is owned by the grantor – there is a potential risk that the transaction would be settled if the transfer or increase was made on the eve of insolvency. An increase during a moratorium (i.e., however, the period following the appointment of an administrator during which creditors acting against the debtor are effectively frozen) would in practice require the cooperation of the administrator and is therefore unlikely to be set aside at a later stage (although an administrator`s actions can still be challenged by creditors or a liquidator upon application to the court). iv) Tax – Depending on the tax residency of the borrower and sub-participant, an increase if the sub-participant becomes a direct lender may result in unfavourable tax treatment of interest income under the credit agreement, including withholding tax, etc.
Some loan agreements offer crude for such a holdback, but often the scope of crude is limited. However, the risk of tax inefficiency is weighed against the potential credit and performance risk if the grantor fails to meet its payment obligations under the sub-equity agreement, with the risk further increased by the grantor`s insolvency. In summary, in the event that a grantor experiences a deterioration in credit quality, in particular where this may result in the commencement of formal insolvency proceedings by the grantor, a sub-participant should give strong consideration to mitigating the grantor`s performance risk and the risk of becoming an unsecured creditor in the grantor`s insolvency by immediately increasing any requested Sub-participations. Where such an increase is not possible or undesirable, a sub-participant should also consider requesting the transfer of the creditor`s registered position to a third party in order to negotiate and maintain a further under-participation between that third party. (i) Qualified creditor – The credit agreement may contain contractual restrictions for eligible creditors. These restrictions are often linked to tax definitions, and many buy-side funds struggle to participate directly in a loan. Financial players in the troubled market in Spain generally use the LMA sub-participation agreement. However, “under-participation” is not a term traditionally recognized by Spanish law. This led borrowers to oppose enforcement, arguing that such an agreement should be reclassified as an assignment of receivables.
Such a reclassification would be detrimental to investors in difficulty. While an administrator and liquidator have some powers to override transactions due to favoritism and undervaluation, as well as those that defraud creditors, only a liquidator has the power to reject onerous contracts in general. In the absence of such a circumstance, the failure of an administrator to operate under a sub-participation agreement would therefore constitute a breach and give rise to a claim for damages by the sub-participant. However, the possibility of making such a claim would be subject to the moratorium resulting from the appointment of the director. For the increase to take place, the grantor must issue a transfer certificate in the form prescribed in the credit agreement either with the sub-participant (if it is the party that becomes the registered lender) or with the third-party company (for example.B another banking company that agrees to acquire the position of the sub-participant). possibly with a view to granting sub-participation to sub-participants). Under the terms of the sub-participation agreement, the parties agree that the existing lender will only make payments to the sub-participant if it has received equivalent amounts from the borrower under the loan agreement, i.e. a sub-participant can claim that the under-participation creates confidence in the proceeds of the underlying loan in favour of the sub-participant. However, such a characterization is difficult to substantiate, as the sub-participation agreement often explicitly states that nothing in the agreement constitutes the grantor as an “agent, trustee or trustee” for the participant. While this argument may be well founded in the context of non-cash distributions, the general nature of the structure of the sub-equity, i.e. a loan from the sub-participant to the grantor, is not readily suited to such an interpretation. In cases where it is prejudicial or impractical for the sub-participant to become a registered creditor, it may be possible to (i) order that the under-participation be increased in favour of the third party and (ii) enter into a new under-participation agreement with the third party.
Such a regime would have the effect of transferring the economic benefits of the loan without suffering any of the above disadvantages. It is clear that the need to negotiate the terms of such an agreement with a third party may delay immediate resolution, but such a transfer would effectively mitigate the credit risk of the original grantor (although the sub-participant is exposed to the same risk of insolvency as the new grantor). While there is no automatic right of the sub-participant to liquidate or expand in the event of the grantor`s insolvency, some market participants often include an “increase clause” in the sub-participation agreement that allows the sub-participant to (i) require the sub-participant to be (i) become a lender of a registered position (which gives it direct rights and obligations vis-à-vis the borrower), or (ii) the loan is transferred to a third party (with the intention that the sub-participant enters into a new sub-participation with that third party). In the event of the insolvency of a UK concessionaire, the sub-participation is subject to the control of the administrator or liquidator. .
