Last Updated October 08, 2019

Law and Practice

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Winston & Strawn London LLP provides a wide range of legal services through its banking and finance practice, to public and private companies, leading financial institutions, multilateral and development finance institutions, private equity and investment funds, alternative funding sources, investors and emerging companies, on investment grade, leveraged and mezzanine financings. The firm advises on high-profile transactions and matters ranging from cross-border transactions, initial public offerings (IPOs) and project finance matters, to distressed acquisitions and creative “first-of-their-kind” financings. Clients include leading international funding sources which provide senior, subordinated, secured and unsecured debt, and hybrid (equity/debt) products, as well as institutional investors who regularly participate in senior debt markets, equity sponsors, and borrowers in both developed and emerging economies. Additional thanks to partners Ed Denny and Dan Meagher and associate Shaheer Momeni, among others, for their contributions to this chapter.

There are no specific restrictions on foreign lenders' granting of loans to corporate borrowers. Restrictions apply to loans for individuals and mortgage lending.

There are no specific restrictions on the granting of security or guarantees to foreign lenders.

There are no exchange controls regarding foreign currency exchange. 

Banks and other regulated lenders are obliged by law and regulation to ensure that funds drawn from them are not used in breach of anti-corruption and sanctions regimes. Lenders are required by law to actively seek and identify bribery and corruption risks and maintain processes to mitigate these risks, and to identify and implement controls regarding money laundering. 

The UK is currently required to adhere to UN and EU sanctions and it also has an autonomous terrorist sanctions regime. It is expected that the EU sanctions regime will cease to apply to the UK following Brexit, however, in the case of a no-deal Brexit, the UK will look to carry over all EU sanctions at the time of its departure pursuant to the Sanctions and Anti-Money Laundering Act 2018 (the Sanctions Act) or the EU (Withdrawal) Act 2018. 

As a consequence of increasingly aggressive enforcement action (especially by the US sanction authorities), lenders now seek specific contractual assurances in these areas which go beyond general compliance with applicable laws, representations and undertakings and the illegality mandatory prepayment provision. In relation to anti-corruption laws, lenders’ proposals are often less wide-ranging than those relating to sanctions. 

In the pre-contract due diligence stage, investigations into the borrower group’s compliance with sanctions law have become customary. Non-compliance with sanctions laws will customarily constitute an event of default under the facilities, or trigger automatic prepayment and cancellation of the loans, restricting the borrower’s use of proceeds and entitling the lender to accelerate the loan and to take enforcement action against the borrower.

Both the agency and trust concepts were created by and are recognised under English law. 

Loan Market Association standard documents are generally adopted by lenders. Under these, the agent bank is specifically authorised to act for the syndicate members in respect of the administration and servicing of the loan under a contract of agency constituted under the syndicate management clauses of the loan agreement. The agent bank is regarded as an agent of the syndicate members with fiduciary duty for the duration of the loan contract (subject to exclusion clauses). 

Historically, most facility agents and security trustees in English syndicated acquisition finance structures were departments within banks, but there are now a significant number of other providers in the market who offer agency and trustee services.

The establishment of a security trust by a security trustee is generally used to hold any English law security on trust for the benefit of the lenders from time to time. Through the establishment of a trust account, the proceeds of payment can be delivered to and from the borrower and the syndicate members on receipt from the syndicate members and the borrower respectively. The security trustee bank is regarded as security trustee of the syndicate members with fiduciary duty for the duration of the loan contract (subject to exclusion clauses).

The transfer of loans to new parties is governed by the terms of the facility agreement. Trading of syndicated debt is common and active, with the most prevalent structures for trading debt being the following:

  • novation: this extinguishes the original contract between the borrower and the outgoing lender and creates a new contract between the borrower and the new lender on the same terms. Novation is the most widely used form of transfer in the London market, since it protects the transferee from certain acts by the transferor. However, it may have adverse consequences for overseas security, especially in some European jurisdictions. Parallel debt provisions may be needed to mitigate these consequences; 
  • assignment: under English law it is possible to assign the lender’s rights, but not the lender’s obligations to the borrower. Assignments are common, but coupled with assumption of duties as regards the obligations of the lender, eg, lending commitments; and
  • sub-participation and total return swap: these arrangements involve the creation of a new contract between the lender and the participant while the existing contract between the lender and the borrower remains in place. They are not suitable where the lender wants to extinguish all of its involvement in the facility but they are used to transfer commercial risk where restrictions prevent a direct transfer. The participant is exposed to credit risk on the lender as well as the borrower, and does not benefit from security the borrower has granted the lender unless otherwise agreed.

A transfer will, at a minimum, require the borrower or obligor's agent to be consulted or notified, or trigger pre-emption or other rights for the other lenders in the syndicate. Assignment and transfer regimes have become more controversial as lenders in the European market try to reduce secondary market transfer settlement terms. Provisions which require a borrower’s consent, or allow transfers to lenders on a white list or during payment or insolvency-related events of default are resisted. Transferability in relation to competitor restrictions and around loan to own and distressed investors has become a focus as well. All of these entitlements need to be addressed and observed in order to ensure a valid transfer.

The buyer of the debt will usually benefit from any English security following the transfer without compromising the priority of the security, as English law security held under secured syndicated loans will typically be held on trust by a security trustee for the benefit of the lenders from time to time and/or benefit transferors. Different considerations may apply to overseas security for a loan governed by English law.

Lenders and borrowers are free to agree contractual terms. The Loan Market Association syndicated facility agreements include a choice between restricting or permitting debt buy-backs in certain circumstances and include optional provisions which disenfranchise a sponsor that becomes a lender. As well as restrictions on borrowers’ purchases, lenders are increasingly seeking an absolute restriction on sponsors or other shareholders acquiring a portion of the debt which would allow them to block a scheme of arrangement of the debt even when they are disenfranchised.

Where debt buy-backs are not expressly regulated within a facility agreement, a borrower or sponsor seeking to buy back its own outstanding debt will need to consider whether there are any other restrictions in the loan documentation which could prohibit a transfer of debt to it.

The “certain funds” rules are contained in the City Code on Takeovers and Mergers (the Takeover Code) and require that a bidder has sufficient means to fully finance any cash consideration, or implement any other type of consideration, offered for an acquisition of a public company before its offer is publicly announced. Financing conditions may not normally be invoked except in narrowly defined pre-conditional offers where a necessary material authorisation or regulatory clearance is required for the offer to proceed. 

Winston & Strawn London LLP

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JeRobertson@winston.com www.winston.com
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Authors



Winston & Strawn London LLP provides a wide range of legal services through its banking and finance practice, to public and private companies, leading financial institutions, multilateral and development finance institutions, private equity and investment funds, alternative funding sources, investors and emerging companies, on investment grade, leveraged and mezzanine financings. The firm advises on high-profile transactions and matters ranging from cross-border transactions, initial public offerings (IPOs) and project finance matters, to distressed acquisitions and creative “first-of-their-kind” financings. Clients include leading international funding sources which provide senior, subordinated, secured and unsecured debt, and hybrid (equity/debt) products, as well as institutional investors who regularly participate in senior debt markets, equity sponsors, and borrowers in both developed and emerging economies. Additional thanks to partners Ed Denny and Dan Meagher and associate Shaheer Momeni, among others, for their contributions to this chapter.

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