Lma Risk Participation Agreement

Although there is no automatic right of the sub-participant, in the event of insolvency of certain market players, it is common for an “increase clause” to be included in the sub-participation agreement that gives the participant the right to (i) the perception of a sub-participant to a lender in a record position (if it is granted direct rights and obligations to the borrower), or (ii) the transfer of the loan to a third party (with the intention of the operator of a new interest with such a third party). For most LMA sub-participations, each party can request an increase. Parties are required to “make reasonable commercial efforts to, as soon as possible, ensure that the sub-participant (or any other person who may sanitize as a sub-participant) becomes a lender after the credit documentation.” The transfer of the loan to the 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 partial participation agreement expires at the deadline for the increase — the date the agent designates as such according to the credit documentation. This memorandum provides an overview of the practical problems faced by a partial participant in a credit market association (“LMA”) with a partial English-language participation agreement when the lender`s creditworthiness deteriorates. The LMA participation agreement provides both the recipient and the participant with the opportunity to “take” the participant, allowing both parties to convert the participant`s participation in participating loans into a direct “lender” (subject to the terms of the credit contract). If the lender`s solvency becomes a problem, the participant can increase the participating loan and become a direct lender under the credit agreement. However, credit contract restrictions, adverse tax effects and regulatory concerns (some legal regimes govern direct credit and a bank lender may require a banking licence) may mean that an increase is not a viable option. iv) Tax – Depending on the borrower`s and sub-participant`s tax residence, an increase, if the sub-participant becomes a direct lender, may result in unfavourable tax treatment of interest collected under the credit contract, including withholding, etc. Some credit contracts offer a gross amount for such a deduction, but often the gross amount is limited. Nevertheless, the risk of fiscal inefficiency in the face of potential credit and performance risk will be eliminated if Grantor does not comply with its payment obligations under the partial participation agreement, which may be further enhanced by the lender`s insolvency. Although the bank was successful, the litigation resulted in a delay in execution, which could have been avoided if, as usual, the partial participation had been confidential between the lead bank and the participant.