Law of Multi-Bank Financing 9780773566668

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The Law of Multi-bank Financing

Combining doctrinal, practical, and comparative approaches The Law of Multi-Bank Financing provides a comprehensive analysis of the legal and regulatory facets of multi-bank financing (particularly loan syndications and loan participations) as well as developing a conceptual framework that allows a consistent and rational approach to these financial practices. The book includes chapters on what multi-bank financing is and who does it, relevant areas of law (including contract, torts, insolvency, tax, and statutes, such as the Bank Act), the mechanics of arranging loan syndications and loan participations, financial accommodation used (direct loans, bank guarantees, letters of credit, and bankers' acceptances), legal relations between parties in loan syndications and loan participations, rights and duties of the agent bank, securities regulation issues in loan syndications and loan participations, and accounting and tax issues in loan syndications and loan participations. Agasha Mugasha argues that loan syndications, loan participations, and related practices are commercial transactions between sophisticated parties and should be analysed and regulated as such. Sample documents for syndicated facility agreements, participation agreements, sale and participation agreements, and standby letters of credit are provided in appendices. Based on law in Canada, particularly Ontario, The Law of Multi-Bank Financing includes discussions of a significant body of United States jurisprudence as well as the most important court decisions in other common-law countries. AGASHA MUGASHA obtained his doctorate from Osgoode Hall Law School of York University and is a senior lecturer in law, Australian National University.

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The Law of Multi-bank Financing Syndications and Participations AGASHA M U G A S H A

McGill-Queen's University Press Montreal & Kingston • London • Buffalo

McGill-Queen's University Press 1997 I S B N 0-773 5-I62.8-X

Legal deposit fourth quarter 1997 Bibliotheque nationale du Quebec Printed in the United States of America on acid-free paper This book has been published with the help of a grant from the Humanities and Social Sciences Federation of Canada, using funds provided by the Social Sciences and Humanities Research Council of Canada. Funds were also provided by the Australian National University

McGill-Queen's University Press acknowledges the support of the Canada Council for the Arts for our publishing program.

Canadian Cataloguing in Publication Data Mugasha, A. (Agasha), 1962The law of multi-bank financing: syndications and participations Includes bibliographical references and index. I S B N o-7735-i6z8-x 1. Commercial loans — Law and legislation — Canada. 2. Commercial loans - Law and legislation. 3. Syndicates (Finance) — Canada. 4. Syndicates (Finance), i. Title. KEIO3O.M88 1997 346.7io7'3 097-900942.-! Typeset in Sabon 10/12 by Caractera inc., Quebec City

Contents

Cases

xiii

Statutes

xxxi

Figures

xxxix

Preface xli Acknowledgments Abbreviations

xliii

xlv

i Multi-bank Financing: What It Is and Is Not

3

INTRODUCTION 3 MULTI-BANK FINANCING

Basic Transactions LOAN LOAN LOAN CLUB

4

5

SYNDICATION 5 PARTICIPATION 5 SUB-PARTICIPATION DEAL LOANS II

Complex Transactions

9

12,

TRANSFERABLE LOAN FACILITIES NOTE ISSUANCE FACILITIES 15

12,

MULTI-BANK FINANCING CONTRASTED WITH SIMILAR FINANCING TECHNIQUES 17 Introduction 17

Multi-bank Financing Contrasted with Syndications and Participations (Debt v Equity) 18 Multi-bank Financing Contrasted with International Bonds

19

vi

Contents

Multi-bank Financing Multi-bank Financing Programs 22 Multi-bank Financing Facilities 24 Multi-bank Financing Multi-bank Financing Loans 24 CONCLUSION

Contrasted with Securitization 20 Contrasted with Commercial Paper Contrasted with Note Issuance Contrasted with Unit Trusts 24 Contrasted with Broadly Syndicated

Z5

z Multi-bank Financing: Who Uses It, Where, and Why zj INTRODUCTION

2,7

THE PARTIES: WHO USES MULTI-BANK FINANCING? Borrowers 27 WHO ARE THE BORROWERS? 27 REGULATION OF THE BORROWERS 28

2.J

28

The Lenders

BANKS 28 TRUST AND LOAN COMPANIES 33 CREDIT UNIONS (COOPERATIVE CREDIT ASSOCIATIONS) INSURANCE COMPANIES 36 OTHER FINANCIAL INSTITUTIONS 37 COMPONENTS OF THE FINANCIAL MARKET: WHERE MULTI-BANK FINANCING OCCURS 3 8

Domestic Market 38 Foreign Market 38 Eurocurrency/International Financial Market THE RATIONALE:

39

WHY PARTIES USE MULTI-BANK

FINANCING

The Borrower

41

RATIONALE FOR SYNDICATIONS 41 RATIONALE FOR PARTICIPATIONS 41

The Banks

42

RATIONALE FOR SYNDICATIONS 42 RATIONALE FOR PARTICIPATIONS 45 CONCLUSION 48

3 Overview of Relevant Areas of Law

50

INTRODUCTION 50 CHOICE OF LAW 51 RELEVANT GENERAL PRINCIPLES OF LAW

Introduction 52 Set-off53 BANKERS' SET-OFF 53 STATUTORY SET-OFF 55 EQUITABLE SET-OFF 56

52

41

34

vii

Contents CONTRACTUAL SET-OFF 57 INSOLVENCY SET-OFF [DISCUSSED UNDER INSOLVENCY]

58

Insolvency 5 8 GENERAL 58 INSOLVENCY SET-OFF

6l

Methods of Transferring or Co-owning Property

62.

ASSIGNMENT 63 NOVATION 68 SUB-PARTICIPATION 70 TRUST 70 PARTNERSHIP 71 JOINT VENTURE AND JOINT OWNERSHIP 7! OWNERSHIP IN COMMON (TENANCY IN COMMON)

74

C O N C L U S I O N 75

4 The Mechanics of Arranging Loan Syndications and Loan Participations 76 INTRODUCTION THE MECHANICS

76 OF ARRANGING LOAN

SYNDICATIONS j6 Sourcing the Loan 79 THE OFFER AND THE MANDATE

80

Structuring the Loan 95 Selling the Loan 96 THE SELLING PROCESS AND THE INFORMATION MEMORANDUM 96 LIABILITY FOR INACCURATE OR ERRONEOUS INFORMATION 98

THE MECHANICS OF ARRANGING LOAN PARTICIPATIONS IZ3 Loan Participation Procedures 123 Liability Arising from the Selling Process 124 CONCLUSION IZ5 5 The Financial Accommodation Facilities Used in Loan Syndications and Loan Participations izy INTRODUCTION 127 DIRECT LOANS Il8

Money Loans iz8 Overdraft Facilities 129 COMMERCIAL

LETTERS OF CREDIT

Overview of Letters of Credit T ±9 Syndications of Letters of Credit 130 Participations of Letters of Credit 132 INTRODUCTION

132

I Z