This essay seeks to explore the extent to which the judgment in Redwood is true for the majority of commercial transactions. The syndicated loan may afford lenders very good profits, particularly if they are the lead manager or part of the loan management group. In the case of Redwood Master Fund Ltd and others v TD Bank Europe Ltd [1] ,
……an agreement governing a syndicated loan facility created several classes of lender, any amendment to the terms of the facility agreement permitted under that agreement had to be made bona fide for the benefit of the lenders as a whole.
Edwin Cheney's states that requirements of good faith should not be interpreted so literally as to mean that any change to the agreement which might have been prejudicial to one class of lenders, or a sub-group of that class, could not be held to be in the best interests of the lenders as a whole. As the purpose of the doctrine was to prevent the abuse of majority power so as to favor sectional interests over those of the syndicate as a whole, it was sufficient for the court to be satisfied that the power was being exercised in good faith. [2]
2. Framework of Syndicate Loan
By the assistance of multiple lenders, Syndicated loans are provided to one borrower. The loan agreement is of single with separable in nature. In this loan, lenders have a good relationship among themselves. In syndicate loan, only one leading bank takes some percentage of the loans and then splits up the rest to others active banks. Within the syndicated loan framework is a range of alternatives, and a borrower starts by designing a borrowing strategy and loan structure best suited to its needs and objectives. While the credit itself is clearly the primary objective, a borrower may seek to meet any number of subsidiary objectives,
……such as access to a certain bank's services in the future, improved relations with existing banks with which it deals, or access to a geographic region it is contemplating entering. [3]
What is "Lead Manager"
The lead manager is the vehicle for structuring, placing, and managing the loan and is a critical element-perhaps the most critical--in the syndicated loan process. The borrower may issue a general invitation for offers, choose from a short list of three to five candidates, or else negotiate directly with one lender' [4] .
Positive aspects of Syndicate loan
Redwood stated that certain borrowers in need of credit may decide to go the route of a syndicated loan as the amount of financing and risk factor that necessitates dispersion over a number of institutions. Overall, in this loan borrower can easily assess the loan at the floating interest rate without any complications because it is the single loan agreement between the agent and borrower.
Approves & Reject the loan
The information from the analysis and a proposal go to the department that approves or disapproves the offer; it may request additional information or changes, to understand the judgment significance in Redwood case. If it does not approve the credit, it should give immediate notification to the borrower in a way that will not affect potential future business. For example, the bank can aim for a greater yield through an unequal fee distribution, aggressive retention targets, or a combination of the two. Another factor is the potential for getting an unconditional mandate. If that proves unlikely, then price return is the key factor [5] . This is important to know because banks compete for lead management for two primary reasons i.e. greater return from the management fee and prestige and the likelihood of new and repeat business as lead manager. Economically, the eigenvector measure has the largest effect, 'nearly doubling the probability of selection in the equity sample and increasing it by more than 50% in the debt sample.' [6]
If a decision is made to offer a bid, the bank must send the borrower a specific proposal. The basic objectives underlying the proposal are to establish the terms and conditions of the loan, clarify all the points involved in best possible way, and stimulate the interest of the borrower. In the case of Redwood, the first defendant, TD Bank Europe Ltd, was the facility agent under the agreement, supported by 98.6 per cent, by value, of the lenders in the syndicate. The second and third defendants, UPC Distribution Holdings BV and UPC Financing Partnership, were borrowers under the facility agreement who opposed the claimants' application. Mr John Brisby, QC and Mr Richard Hill for the claimants; Mr Jeffrey Onions, QC, for the first defendant; Ms Elizabeth Jones, QC, for the second and third defendants. Mr. Justice Rimer said that the claimants had asserted that against a background of admitted risk about the borrowers' parent company's long-term viability, the modified waiver letter was manifestly unfair to those lenders whose commitments to the syndicate were predominantly as "A" lenders. The significance of this decision will be investigated in the following pages.
Traditionally, the loan market Association (LMA) -- which offers higher rate of return than many other assets available elsewhere in the market -- is not accessible to other financial institutions. Yet at the same time banks may be interested to trade default risk as a separate exposure and this requires the takers (read financial institutions) who can provide this kind of protection. Before making its decision, the borrower may ask one or more bidders for further information or details and may seek to negotiate some of the terms and conditions. It may also ask for a market sounding, that is, a test of the market, to be carried out by the offeror. [7] As for the basis on which a decision is made to award a mandate, obviously a foremost criterion is the price of the credit facility. However, that factor can be modified by other determinants. [8]
3) Key factors of success
A key one is the reputation of the proposer for professionalism and successful syndications, as defined by the ability to place the loan within the specified time; negotiate an acceptable contract; manage the loan; work with and maintain cooperation and good relations among members of the syndicate, particularly those that competed for the lead; achieve a balance among the interests of lenders, borrower, and agent that leaves each party satisfied; and earn the stipulated return for the lead bank [9] .
A measure of success in terms of cooperation among syndicate members is the number of times the borrower is called on to resolve disputes among claim parties, underwriting agreement, prior successful experience with the manager and the availability of credit. In some instances, the borrower may decide to give the mandate to more than one lead manager [10] . It will do so, for example, if it believes the loan will be difficult to place by virtue of its size, price, or status. [11] Multiple lead managers offer more underwriting potential and more access to other lenders through their network of contacts. If more than a certain number of banks have a joint mandate, they generally appoint a coordinator or coordinating group. [12]
Authorization
A borrower may give the lead manager either an unrestricted mandate or a conditional mandate. Under the former, the mandated manager has full authority as to the formation of the management group, the fee distribution, and the placement in the marketplace. 'Conditional mandates impose limitations on the lender in terms of structuring and carrying out the loan [13] . The conditions may be negotiable on the basis of the degree of difficulty of placing the loan as per the lead manager. For example, it may perceive the borrower to be a risky creditor; the size or purpose of the loan may not be attractive; or the terms specified may be difficult to achieve given the nature of the borrower. Lenders prefer unconditional mandates. [14] They afford more control and a greater opportunity for profit and prestige. Whether an unconditional mandate is possible depends, in part, on the status of the borrower. Marginal ones generally will not give unconditional mandates. [15]
Having received the mandate, the lead bank then proceeds to place the loan. How the task of placement is handled internally varies. The lead manager spends the first days after the mandate is awarded largely on internal tasks and deciding on the structure of the syndication management group, preparing lists of potential managers and of general claim parties, setting the fee structure, and retaining outside legal counsel for the contract [16] . As for the structure of the management team, today there are generally several managers and sometimes co-managers, some of whom the borrower may have specified for that role. [17]
According to Simon, Rawlings and O'Driscoll, there was 'no evidence that the majority of the lenders, or any lender, were motivated in consenting to the variation of the modified waiver letter by any sort of consideration of bad faith; their motivation had been to implement a reduction in overall size of the facility for the benefit of the lenders' [18] . The starting point in assessing the validity of the exercise of the power conferred by cl 25 must be to assess, by reference to all available evidence, whether it was being exercised in good faith for the purpose for which it was conferred. [19] Viewed objectively, the modified waiver letter was not sufficiently discriminatory and unfair towards the class of lenders to which the claimants belonged to justify a finding that it was not for the benefit of the lenders as a whole or was otherwise an improper exercise of the cl 25 power.
Essential Factors in Management Team Decisions
A number of factors go into decisions about the management team. The influence of the borrower and its objectives is one of major essential factor. The best way to get the loan placed should also consider in management decisions. To encourage that bank to join, the lead manager may offer it a manager's role. [20] A third variable is the ability of another bank to underwrite part of the loan. Underwriting is somewhat less popular now, with lenders unwilling to handle that task; and they frequently seek to sell down their participation when the loan target has been met. A central task in the placement period, often the responsibility of the lead manager but sometimes assigned to another manager, is to keep book, that is, to record all the contacts made and the responses. The term firm commitment states that the mandated bank commits itself to find the funds at specific conditions and terms.
a) Club syndicate
The club syndicate is a new placement technique, it involves a small group of banks arranging the syndication, with each committed to holding its share of the loan. By signing it, both parties commit themselves to the terms and conditions specified in the agreement. In many ways, the headings are similar to those of the proposal, with the addition of information on the roles and responsibilities of all managers and claim parties and certain other topics related to the actual borrowing. It is useful at this point to review the roles of the key claim parties on the lenders' side of a syndicated loan as loans have grown in size and complexity so has management structure [21] .
The judge concluded that there is no proper basis on which the claimants can attack the modified waiver letter as a misuse of the cl 25 power. The authors have rejected any suggestion that it was the result of any bad faith on the part of anyone. Lenders, like the claimants, should end up by making net advances to UPCD which would be used to repay certain of the B indebtedness [22] . That was simply the consequence of UPCD's insistence that the implementation of an overall reduction--something which was of benefit to all lenders. The lenders' wish to have an overall facility reduction was something to which they consider the majority lenders' could properly give effect pursuant to the cl 25 power. [23]
On complicated transactions, waivers and consents are negotiated frequently. Additionally, at any time, one or more lenders might wish to get out of a deal. Renegotiations became necessary for UPC after its parent company defaulted on debt repayments. [24] This triggered a credit event on UPC's loans, to which Redwood and other funds had bought exposure. They had bought about €65 million of the A tranche of UPC's debt in the secondary market - a part of the company's debt facility that had not yet been drawn. Following the cross-default, the company renegotiated all of its debt with a group representing the majority of its creditors. However most of these investors held interests in an already-drawn B tranche as well as the undrawn facility. Dennis states that 'Robbing Peter to pay Paul Far from reducing the funds' exposure, the deal that was struck required them to lend up to €30 million to UPC under the A facility to pay back creditors holding the B tranche. The funds pointed to the judgment in British America Nickel v MJ O 'Brien that concluded: "The majority voting provisions power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only." The presiding judge, Mr Justice Rimer, said their case hinged on two points: whether the majority lenders had negotiated with UPC in good faith and whether a reasonable person would see the deal as being in the interests of all the lenders as a group.
b) Restructuring
The restructuring was the result of bargaining that the banks could not wholly control, he said. And the workout included elements that benefited all classes' offenders. However it was his judgment on the second point that pleased bankers most. Rimer said it was all right for individual lenders to negotiate in their own self-interest even when that conflicted with the wishes of others. "By signing up at the outset, each lender submits to the decision of the majority lenders at important forks in the road," he said. "The decision of the majority to allow the company to trade would be exactly the type of decision that the [majority voting] clause was directed at enabling the majority lenders to make. [25] But those buying debt should know they will be bound by majority decisions in a restructuring.
Companies want to know that renegotiations with their creditors will be quick if they become necessary. One of the directors at the British Bankers' Association (BBA) welcomes Justice Rimer's accordance with international best practice in banking, which he believes is to keep companies solvent. "The judgment appears to concur with Insol's principles of best practice, which the BBA has supported and endorsed," [26] he says. Nevertheless, the funds are considering an appeal, although they have probably lost about $1.5 million for their troubles so far. [27] Banking litigators say others will try similar tactics, if only to disrupt restructuring negotiations. Nor will they necessarily care whether they win or lose.
For example, Redwood could have profited simply by harassing its fellow bankers enough to get bought out. For months UK Telecoms Company Colt Telecom has been locked in similar litigation with aggressive bondholders, prompting fears that vulture funds will use the threat of court proceedings to get what they want in workout talks. [28] At White & Case, Allen says 'banks should keep a record of how they account for minority views in restructuring negotiations, just to be safe. But for now he is happy with a victory for the industry. [29]
The case was pending a verdict as IFLR went to press. US vulture fund Highberry, an auxiliary of the hedge fund company Elliot Associates, is hopeful to reclaim its initial venture in Colt Telecom bonds [30] through a High Court petition to have the UK Company declared bankrupt. Under UK bankruptcy administration procedure Highberry could expect to reclaim around four-fifths of the face value of the undisclosed number of bonds it now holds. A ruling in favour of Highberry from the High Court would expose cash-strapped companies to aggressively litigious tactics from bondholders and would scare off potential equity investors. Debt-laden telecommunications, media and technology companies in particular would be forced to radically restructure their balance sheets while some would undoubtedly go to the wall.
Highberry's action, which was launched in October 2007, is based on the assumption that Colt will not be able to meet £1.2 billion ($1.8 billion) in debt repayments on bonds that will mature between 2005 and 2009. Colt has insisted that it will be able to service the debt in full, pointing to a cash pile of around £1 billion put together from other fund raising activities. The US fund lost a procedural round in its battle at the end of November after the High Court in London rejected its application to force Colt to disclose documents and information about its financial projections to 2009. The presiding judge, Justice Lawrence Collins, described the application as reminiscent of US corporate litigation tactics that have never been used in the UK before.
Six basic charges make up the cost of a loan: Out-of-pocket expenses. The lead manager must be reimbursed for any out-of-pocket expenses, such as legal fees or photocopying, regardless of whether the loan is successfully placed. The interest rate is usually based on a spread over the LIBOR or SIBOR, both of which are the rates at which leading banks offer to place deposits with other prime Euromarket institutions. The spread has ranged between 0.375 and 2.5 percentage points and has often been, and still is, the most important and competitive element in syndication lending. It is influenced by the borrower's rating and acceptability in the marketplace, the riskiness of the loan, the purpose of the loan (rescheduled, loans are subject to higher spreads, a sort of penalty), availability of other loans (competition in the market), and general market conditions. Lenders look at the spread as a basic component of the total return and as a useful means of comparing competitive bids. Therefore, a key task of the mandated bank is to determine what the market will bear; and its popularity and perceived success.
Conclusion
After critically analyzing the judgment whole case, it could be concluded that the executives of Redwood Master Fund have every right to be let down. An English court has enforced it and other minority investors to accept a restructuring deal struck among their fellow lenders and a troubled borrower, Dutch cable company United Pan-European Communications (UPC). The deal would compel Redwood and a faction of similar funds to lend €30 million ($30.8 million) to UPC so it could pay back further creditors. It is a decision that the funds' lawyer describes as "taking money out of the pockets of one set of lenders and putting it into the pockets of others". It is evaluated that if the judge sided with the minority investors on this case, any disgruntled creditor could hold its fellow bankers to ransom.
As compare to the securities market, the syndicated loans market is relatively new that is mainly seemed because corporations' needs to raise capital by borrowing money could no longer be accommodated by a single bank. In addition to creating a "pool" funds available for lending, it provides diversification of bank's credit portfolio because it can participate in many syndicate loans. In addition, banks' risk level decreases as each bank only provides a portion of the loan.
Other possible costs are a prepayment penalty, cancellation fees, and post-default interest charges, a sort of penalty interest. Repayment of the principal is usually done on a six-month basis, although there are variations, such as yearly percentage reductions of the credit, tailor-made cash flow project loans, annual repayments, and bullet maturities. Once a loan is made, it must be serviced. To a large extent, this function involves monitoring the loan and borrower. Servicing a syndicated loan is often the responsibility of the agent, who handles the operational aspects in compliance with the loan terms.
