Post by Sapphire Capital on Jul 11, 2008 23:46:17 GMT 4
Endorsement and delivery of negotiable instruments
The straightforward endorsement and delivery of negotiable instruments on a non-recourse basis in exchange for payment is a traditional technique which has been used for centuries to spread risk in trade financing. Effectively it can be used as a means of both primary and secondary distribution. It is commonly used in forfaiting transactions, especially in relation to promissory notes. Depending on the circumstances, there may be a formal sale agreement, although often there is no need for one. The characteristics of a negotiable instrument mean that it can be sold simply and quickly with a high degree of protection for the participant. However there are obvious limitations to its use in syndications if, for example, there is only one promissory note for a transaction, rather than a series which can be sold to different people.
Primary syndication
A traditional syndicated loan agreement can, of course, be used for a primary trade finance syndication. Examples of such agreements exist, particularly in relation to the commercial portions of transactions involving ECGD or other ECA-related funding as well as the ECA-backed funding itself. Often these sorts of syndicated agreements form one part of a larger package for a large-scale project finance. Syndicated loan agreements can also be used in other areas of trade finance, such as short-term commodity financing. They have been used in relation to the financing of Africa-Caribbean-Pacific sugar exported into the European Union under the Lomé Convention. In such cases, the arranger will act as agent and will hold any related security on behalf of itself and the other participants who become party to the loan agreement with the borrower.
Special provisions are needed to deal with the dual role of agent and security trustee both in the loan agreement and the security documents themselves. In some countries, the concept of a trust is not recognised, in which case alternative arrangements may have to be made for the holding of security governed by local law. This can make future transfers by the initial participants in the loan more difficult.
Other distribution techniques
Other techniques can be used in isolation or, if relevant, in conjunction with the endorsement and delivery of negotiable instruments, for secondary market distribution where:
• there are no negotiable instruments involved; or
• there are negotiable instruments but there are also other documents (such as guarantees rather than avals) which have to be transferred separately by another method such as assignment or which cannot be transferred when a sub-participation will be needed; or
• the high value of a transaction means that there are a number of third parties who wish to ‘purchase’ one negotiable instrument which cannot be split between them.
If there is only to be a risk participation, rather than an outright sale on a funded basis, other techniques will have to be used to achieve the right level of protection for the arranger with an ability for it to demand funds from the participants on the happening of specified events. As a result, risk participations generally operate to provide the arranger with a silent guarantee or indemnity against loss and, for example, can be used in relation to letters of credit.
Methods
Outright sales in the secondary market can be effected in various ways:
• an assignment can be used to transfer rights from an arranger to a participant (in exchange for payment) either on a disclosed or undisclosed basis as far as the borrower or the primary obligor is concerned. The arranger will not be able to transfer any on-going obligations to the participant (which can only be done where a novation is used). However it can require the participant to give it undertakings to put it in funds if any on-going obligations arise;
• a sub-participation agreement generally operates as a back-to-back non-recourse funding arrangement between the arranger and a participant, generally on an undisclosed basis;
• although this may not always be necessary, transactions documented as novations, assignments or sub-participations in the UK for arrangers who are banks are usually drafted to satisfy the Financial Services Authority’s guidelines on securitisation and loan transfers;
• a trust can also be used although the related fiduciary duties may make it a less appealing method as far as the arranger is concerned.
Agency
Trade finance transactions can be distributed on a bilateral or a syndicated basis depending upon the circumstances. As with any other form of syndication, the arranger may have to assume some form of agency role with appropriate agency provisions in the syndicated loan agreement or the ‘sale’ agreement between it and all its participants. Alternatively, distribution to a number of different participants can be effected by means of a series of bilateral agreements between the arranger and each individual participant. In the latter case the agreements will often effect sub-participations with the arranger retaining wide discretions for the on-going management of the transaction – otherwise it would potentially receive different instructions from individual participants on the same issue which would be impossible to follow.
Use of capital markets instruments
Capital markets instruments and derivatives can be used to make trade finance transactions more attractive to potential participants. An example is the use of interest rate swaps to effectively enable fixed rate receivables to be distributed by an arranger as floating rate receivables. This can mean that an arranger is able to syndicate a transaction among a wider range of banks and financial institutions than might otherwise be the case. Here it is important to ensure that the relevant documents tie in with each other to achieve the desired result.
Deciding factors
The choice of a particular technique for a transaction can depend on many factors. For example the question of whether the syndication is to be effected on a disclosed or undisclosed basis will dictate the use of a primary syndicated loan agreement or an undisclosed secondary distribution. Other issues such as any relevant stamp duties and local law requirements may affect the way in which assets are transferred or security taken. Tax implications can also be relevant with issues such as the existence of appropriate double taxation treaties being important in cross-border transactions. However in general, trade finance transactions can be syndicated comparatively easily to fit in with the commercial situation. They are a good example of bankers and their lawyers working together efficiently to satisfy the requirements both of borrowers and participants.
The straightforward endorsement and delivery of negotiable instruments on a non-recourse basis in exchange for payment is a traditional technique which has been used for centuries to spread risk in trade financing. Effectively it can be used as a means of both primary and secondary distribution. It is commonly used in forfaiting transactions, especially in relation to promissory notes. Depending on the circumstances, there may be a formal sale agreement, although often there is no need for one. The characteristics of a negotiable instrument mean that it can be sold simply and quickly with a high degree of protection for the participant. However there are obvious limitations to its use in syndications if, for example, there is only one promissory note for a transaction, rather than a series which can be sold to different people.
Primary syndication
A traditional syndicated loan agreement can, of course, be used for a primary trade finance syndication. Examples of such agreements exist, particularly in relation to the commercial portions of transactions involving ECGD or other ECA-related funding as well as the ECA-backed funding itself. Often these sorts of syndicated agreements form one part of a larger package for a large-scale project finance. Syndicated loan agreements can also be used in other areas of trade finance, such as short-term commodity financing. They have been used in relation to the financing of Africa-Caribbean-Pacific sugar exported into the European Union under the Lomé Convention. In such cases, the arranger will act as agent and will hold any related security on behalf of itself and the other participants who become party to the loan agreement with the borrower.
Special provisions are needed to deal with the dual role of agent and security trustee both in the loan agreement and the security documents themselves. In some countries, the concept of a trust is not recognised, in which case alternative arrangements may have to be made for the holding of security governed by local law. This can make future transfers by the initial participants in the loan more difficult.
Other distribution techniques
Other techniques can be used in isolation or, if relevant, in conjunction with the endorsement and delivery of negotiable instruments, for secondary market distribution where:
• there are no negotiable instruments involved; or
• there are negotiable instruments but there are also other documents (such as guarantees rather than avals) which have to be transferred separately by another method such as assignment or which cannot be transferred when a sub-participation will be needed; or
• the high value of a transaction means that there are a number of third parties who wish to ‘purchase’ one negotiable instrument which cannot be split between them.
If there is only to be a risk participation, rather than an outright sale on a funded basis, other techniques will have to be used to achieve the right level of protection for the arranger with an ability for it to demand funds from the participants on the happening of specified events. As a result, risk participations generally operate to provide the arranger with a silent guarantee or indemnity against loss and, for example, can be used in relation to letters of credit.
Methods
Outright sales in the secondary market can be effected in various ways:
• an assignment can be used to transfer rights from an arranger to a participant (in exchange for payment) either on a disclosed or undisclosed basis as far as the borrower or the primary obligor is concerned. The arranger will not be able to transfer any on-going obligations to the participant (which can only be done where a novation is used). However it can require the participant to give it undertakings to put it in funds if any on-going obligations arise;
• a sub-participation agreement generally operates as a back-to-back non-recourse funding arrangement between the arranger and a participant, generally on an undisclosed basis;
• although this may not always be necessary, transactions documented as novations, assignments or sub-participations in the UK for arrangers who are banks are usually drafted to satisfy the Financial Services Authority’s guidelines on securitisation and loan transfers;
• a trust can also be used although the related fiduciary duties may make it a less appealing method as far as the arranger is concerned.
Agency
Trade finance transactions can be distributed on a bilateral or a syndicated basis depending upon the circumstances. As with any other form of syndication, the arranger may have to assume some form of agency role with appropriate agency provisions in the syndicated loan agreement or the ‘sale’ agreement between it and all its participants. Alternatively, distribution to a number of different participants can be effected by means of a series of bilateral agreements between the arranger and each individual participant. In the latter case the agreements will often effect sub-participations with the arranger retaining wide discretions for the on-going management of the transaction – otherwise it would potentially receive different instructions from individual participants on the same issue which would be impossible to follow.
Use of capital markets instruments
Capital markets instruments and derivatives can be used to make trade finance transactions more attractive to potential participants. An example is the use of interest rate swaps to effectively enable fixed rate receivables to be distributed by an arranger as floating rate receivables. This can mean that an arranger is able to syndicate a transaction among a wider range of banks and financial institutions than might otherwise be the case. Here it is important to ensure that the relevant documents tie in with each other to achieve the desired result.
Deciding factors
The choice of a particular technique for a transaction can depend on many factors. For example the question of whether the syndication is to be effected on a disclosed or undisclosed basis will dictate the use of a primary syndicated loan agreement or an undisclosed secondary distribution. Other issues such as any relevant stamp duties and local law requirements may affect the way in which assets are transferred or security taken. Tax implications can also be relevant with issues such as the existence of appropriate double taxation treaties being important in cross-border transactions. However in general, trade finance transactions can be syndicated comparatively easily to fit in with the commercial situation. They are a good example of bankers and their lawyers working together efficiently to satisfy the requirements both of borrowers and participants.