Top Ten Issues to Consider When Dealing with Loan Participations
Loan participations can be an effective way for lenders to reduce their exposure to a borrower’s credit and manage their loan portfolios and liquidity, and for investors to acquire an interest in a loan without becoming a lender of record under the loan agreement. Although loan participations are customarily used in the loan market, they differ from assignments (i.e. outright sales) in several important ways.
Before delving into the issues, what do we mean by a participation interest in a loan? Although discussed in more detail below, generally a participation refers to a situation in which the lender of record, or Grantor, retains legal (or nominal) title to the loan while simultaneously conveying to the investor, or Participant, the economic interest in the underlying loan.
There can be several reasons why parties might use a participation arrangement rather than an outright assignment. From the Participant’s perspective, it may not satisfy requirements under the Loan Agreement to become a lender of record. In certain jurisdictions there can be licensing requirements to engage in lending activities, which the Grantor may satisfy but the Participant might not. Sometimes the Participant may want its investment to be confidential and unknown to the Borrower, Administrative Agent or other parties in the credit facility. And, finally, the Grantor may wish to remain nominally a lender under the Loan Agreement – for example, to continue to receive syndicate information – while offloading some or all of its credit exposure.
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John J. Hanley focuses his practice on first and second lien financings; private placements of debt and equity securities; and the purchase and sale of loans, securities, trade claims and other illiquid assets. His clients include business development companies, specialty lenders, investment banks, hedge funds, actively managed CLOs, special purpose vehicles, and other financial institutions.
Douglas Schneller handles a broad range of complex transactional matters involving bank finance and lending; restructuring, bankruptcy and insolvency; inter-creditor and subordination arrangements, including for mezzanine, leveraged, multi-lien and unitranche financings; claims analysis and reconciliation; and purchases and sales of par and distressed assets such as bank loans, notes, accounts receivable, trade claims, bankruptcy claims, and equity interests.