In last week’s eleventh part of our ongoing series, we looked at the major considerations for banks and other lenders in project finance transactions.
Because of the sheer scale of such transactions which may exceed a bank’s credit exposure limits, a group of banks and financial institutions (‘syndicated lenders’) forms a syndicate and works together to provide a loan (‘syndicated loan’ or ‘syndicated bank facility’) jointly for a single borrower.
The borrower could be a company (see, ‘Dar company gets Sh331 billion loan facility for trade expansion.’ The Citizen. August 17, 2014), a large project incorporated as a special-purpose vehicle/SPV or a sovereign, such as the Government of the United Republic of Tanzania.
Each syndicated lender contributes a part of the loan to the borrower, and the entire syndicate shares in the lending risk. Moreover, in the vast majority of cases, one of the syndicated lenders acts as both the ‘arranging bank’ (also called, ‘lead bank’) and the ‘agent bank’.
So, in this week’s twelfth part of the series, we highlight some key points concerning the role of the agent bank in syndicated lending.
After the arranging bank has originated a syndicated loan, the agent bank assumes the vital role of administering the loan on behalf of the syndicated lenders, including acting as the communication link between the borrower and the lenders. This role imposes staid legal responsibilities on the agent bank towards the syndicated lenders.
The English common law (which is applicable in Tanzania by virtue of Section 2 of the Judicature and Application of Laws Act Cap 358 but in so far as the circumstances of Tanzania and its inhabitants permit) places a strict fiduciary duty on the agent bank to perform its duties and responsibilities towards the syndicated lenders.
The agent bank is typically granted power to single-handedly make decisions, although the agency agreement may provide that consent/approval from some or all of the syndicated lenders is required for material issues, such as, interest rate/maturity date changes. This effectually clips the agent bank’s ostensible power to bind the lending syndicate.
Certainly, the agent bank has the duty to exercise reasonable care, complete trust and utmost good faith towards the syndicated lenders, who surrender flexibility in autonomous decision-making.
Hence, it may be bound by the general principles of contract of agency, including those principles which Part X of the Law of Contract Act Cap 345 perceives as being fiduciary as a matter of course, to notify the syndicated lenders of any occurrence of an event of default when it knows about it.
However, as a panacea for the agent bank’s ‘catch-22’ situation with regard to such notification unless communicated in writing, the agent bank can seek the insertion of an 'ostrich' clause in the agency agreement and not be required to give notification of an event of default if not received by written notice.
Since the agent bank may also be the general banker of the borrower, the ostrich clause can also help to mitigate conflicts of interest between the agent bank and the syndicated lenders.
Concomitantly therefore the agent bank should make a full disclosure of its interests to the syndicated lenders and perform its duties to them with reasonable care, complete trust and utmost good faith.
Agent banks can take some comfort from the recent decision of the English High Court in Torre Asset Funding Ltd & Another v. The Royal Bank of Scotland  EWHC 2670 (Ch) in which, after analyzing the role of a syndicate agent as being “solely mechanical and administrative in nature”, the Court held that the agent’s contractual duties are defined in the agency agreement and it refused to imply wider terms. The Torre decision will be of interest to the broader constituency of banks in Tanzania, because of its persuasive authority.
As precautionary measures, the agent bank should negotiate indemnity or limitation of liability provisions in the agency agreement. This, however, may not be the silver bullet since any vagueness in the agent bank’s duties and responsibilities may cascade into unintended wide interpretations.
Here’s a parting shot: Efficient loan syndication relies greatly on the financial buoyancy of, and the exercise of reasonable care, skill and diligence by, the agent bank. Consequently, banks and their in-house counsel must familiarize themselves with the legal issues surrounding the relationship between the agent bank and the lending syndicate by tapping the knowledge of experts.