IN Bangladesh, loan syndication is a common form of financing. Loan syndication means a loan offered by a group of lenders (banks or financial institutions) working together to provide funds for a single borrower. It is a process involving several different lenders in providing various portions of the loan. Generally, loan syndication is needed to finance situations where a borrower needs money to establish a large project. The idea is for the banks to formulate a syndicate between them to make a loan of a comparatively large sum of money which one single bank would find difficult to afford. The main objective in a syndicated loan is to remove the lenders' risk and reduce its exposure levels.
In loan syndications, the Agent Bank perhaps plays one of the most important roles. This article highlights few important points relating to the role of the Agent Bank. Before the role of the Agent Bank comes into play, it is generally the Arranger Bank or Lead Bank that initiates the loan syndication. In many cases, the Lead Bank and the Agent Bank are the same entities. The Lead Bank only comes forward when it is approached by the potential borrower due to any existing relationship or previous client dealings between them.
When approached, the Lead Bank will try to put together a syndicate of lenders to fund the loan sought by the borrower, generally on a 'best efforts' policy. However, the role of the Lead Bank is not simple since it has to establish a balance between the syndicated lenders and the borrower. It has to make sure that it does not price the loan too generously in favour of the borrower or too aggressively in favour of the lenders. Subsequently, the Lead Bank is required to prepare an 'Information Memorandum' to inform the prospective members of the syndicate about the details of the terms of the proposed loan and the financial status of the borrower.
Once the facility is ready and the loan amount is ready to be committed by the lenders, the time comes for the Lead Bank to either customarily assume the role of the Agent Bank or, separately, for the Agent Bank (which can be a separate bank) to now take charge. The Agent Bank is the link between the borrower and the other lenders in the loan syndication. The role of an Agent Bank is significantly important in order for a loan syndication to operate efficiently as the Agent Bank is appointed to administer the terms with profound accuracy. While this role lets the Agent Bank maintain its senior status and its relationship with the borrower, it also imposes serious responsibility on the Agent Bank towards the syndicated lenders.
The English common law (which has persuasive authority in Bangladesh) places a strict fiduciary duty on the Agent Bank to perform its duties towards the syndicated lenders. The Agent Bank acts as the agent of the lenders and not for the borrower. Its main duties will typically be, inter alia, to act as the conduit in the channelling of payments to and from the borrower, so that when the lenders pay their share of the loan, it will be the duty of the Agent Bank to pass on the lump sum to the borrower. Likewise, when the borrower repays the capital, it only pays one sum to the Agent Bank who then responsibly distributes it pro rata to the lenders.
In most case, the Agency Agreement will place additional duties on the Agent Bank. For example, the Agreement may require the borrower to furnish the syndicated lenders with certain documents such as its annual accounts which will then be passed on through the Agent Bank. Also, the Agent Bank may be charged with the duty to pass on to the syndicated lenders certain other notices (for example, notice concerning the event of default made by the borrower, or to serve notice on the borrower of any decision by the syndicated lenders or to accelerate the facility, whatever the case may be).
Once these duties and powers have been specified, the Agency Agreement may also make it clear that the Agent Bank enjoys no further powers or duties. This may then effectively reduce the power of the Agent Bank to bind others within its ostensible authority.
There is no doubt that the Agent Bank has the duty to perform its responsibilities reasonably and with utmost care towards the syndicated lenders. Hence, whenever it becomes aware of any occurrence of an event of default, it may be obliged under the general principles of agency law to pass the information on to the syndicated lenders. However, an 'ostrich' clause is regularly included in the Agency Agreement to permit the Agent Bank not to pass on such information unless it received via a written notice. This provides a partial solution to the Agent Bank's dilemma as to whether it should report the borrower's breach to the syndicated lenders unless communicated in writing.
Agency laws generally discourage the Agent Bank to place itself in a position which may conflict between its own interests and the interests of its principals, i.e, syndicated lenders. Clearly, this can be offended when the Agent Bank is the general banker to the borrower. So, it is very important that the Agent Bank discloses all is interests to the syndicated lenders and diligently fulfil its duties to them. When funds are channelled through the Agent Bank to or from the borrower, it will be the loss of the syndicated lenders if somehow the Agent Bank fails to pass the funds on to the intended recipient. Likewise, if a drawing of funds is collected from the syndicated lenders by the agent but not delivered to the borrower, the members remain liable to pay the borrower.
The Agent Bank may take some precautions by making sure that it expressly addresses these issues in the Agency Agreement and gets some form of indemnity or limitation of liability from the syndicated lenders. However, these precautions may not be foolproof as any ambiguity in the Agent Bank's stated duties may lead to the duties or powers being interpreted broadly than intended.
Given the short space, we have tried to highlight few important points regarding the role of the Agent Bank. The proficient functioning of a loan syndication depends heavily on the good conscience and necessary care and skill of the Agent Bank. So, it is very important for banks and financial institutions in loan syndication to draft and negotiate the Agency Agreement with utmost care and through specialists in this field.
The writers are barrister and advocate respectively from the law firm, Sattar&Co.