Loan buy-backs

It makes good press to express doubt over the legality of borrowers buying back their borrowing cheap.  There has been a flurry of articles about debt buy-backs.  “Debt” in the language of our trade journals - really “loan buy-backs”: to distinguish them from the practice in the securities world which raises no eyebrows.

The discussion has arisen because of the cheapness of secondary debt available for purchase.  The pricing has been driven by the crisis in liquidity and not by the credit status of the borrower.  Yesterday afternoon, the LMA’s (Loan Market Association) seminar on the problem was packed out.  What it boils down to is that buy-backs might be in breach of the terms of the original loan agreement on the facts of the particular transaction.  There is, too, a principle in syndicated lending that lenders should be treated equally by the borrower.  Perhaps as a result of the buy-back, the lenders will not receive a pari passu distribution.

Does a buy-back amount to a “prepayment”?  Does it matter?  Yes, if prepayment is prohibited by the loan agreement or if very specific conditions are imposed on prepayment.  Has a covenant been breached? Does it affect the financial covenants?  All these questions are matters of basic contract law and specific to the transaction and its documentation.  Counsel’s advice has been sought as to whether by implication a buy-back is a prepayment and understandably, Counsel has sat very firmly on the fence (”it’s too close to call”).  he suggests that only the House of Lords will be able to decide.  Some pointers though: the greater the discount, or the non-cash consideration, the more likely it is not to be a prepayment.  If it is not a prepayment and the contract only permits prepayment, the contract is breached.

Alternatives to buy-backs that don’t carry these anxieties are funded participations or total return swaps.

The Loan Syndications and Trading Association  (in America) prohibits buy-backs outright.  The LMA proposes instead to amend its standard form loan documentation so that parties have a choice either to prohibit buy-backs or to permit them provided specific conditions are met and processes are followed.

A storm in a tea-cup? 

 

 

Silver linings and other cliches

In the period of Christmas quiet , it has been easier than usual to spot patterns of publishing in the trade rags. It’s a rare disaster that brings no good to lawyers, and the credit crunch is no exception. On the surface it is more surprising that it also benefits bankers. An article in “Hedge Fund Week” (23.11.07) by P Feinberg, “Turning misfortune into a fortune - easy if you know how” shows the credit collapse means big business for the distressed debt investors, especially those in the Asset-backed Securities market. And “ABL: Beneficiaries of the Credit Crunch?” by Swillman & Cropley in the Journal of International Banking and Financial Law, Issue 11 follows a similar theme for Asset Based Lending.

Land Registry removes mortgages from online service

In response to concerns about the potential misuse of scanned documents on the service, Land Register Online, the Land Registry has decided that documents referred to on the register, for example mortgage deeds and leases, will no longer be available electronically.  Are the concerns justified, I wonder? 

If you wish to inspect or have copies of any such documents, you now have to apply in writing to the Land Registry.

Home credit competition

On 4 October 2007, the Home Credit Market Investigation Order 2007 will come into force. It contains provisions relating to the sharing of data on customers’ payment records, publication of prices, provision of information in client statements and rebates for early repayment of loans. It puts into place the remedies the Competition Commission identified as needed in their final report on the home credit market.

Consultation on pensions clearance guidance

The Pensions Regulator has begun a consultation process to revise the clearance guidance first published in 2005.  The guidance is for (amongst others) finance lawyers advising on transactions involving defined benefit pension schemes that might be affected by the Pensions Act 2004.  The draft guidance gives an indication of how the Regulator will use its powers in such cases as M&As.  The consultation document can be seen here.

Key facts about BBA LIBOR

The BBA has put together this briefing note for journalists as economists scour the markets for signs of a credit crunch.  Attention is turning to BBA LIBOR as an indicator of what the market is thinking. Changes in the overnight LIBOR rate suggest short term volatility in the markets.  LIBOR was first developed in the 1980s as demand grew for a measure of the rate at which banks would lend money to each other. Because LIBOR rates are calculated daily from the rates at which banks agree to lend each other money, it is a more accurate measure of how global markets are reacting to market conditions. Recently the overnight borrowing rate has been moving significantly. BBA LIBOR is calculated by assembling the interbank borrowing rates from 16 contributor panel banks at 11am, looks at the middle 50 per cent of these rates and uses these to calculate an average, which then becomes that day’s LIBOR rate.

Guarantee - effect of change to principal contract

If you are relying on a guarantee, there is usually an anxiety in the back of your mind that a change to the terms of the underlying arrangement that gave rise to the need for the guarantee in the first place, might destroy or reduce the effectiveness of the guarantee.  The Court of Appeal have decided in Wittman v Willdav Engineering that where the defendant had guaranteed payment of the price of goods being bought by its subsidiary, arrangements made later by the claimant (who was selling the goods) and the subsidiary with finance companies, did not discharge the principal contract and the guarantee remained effective.

Syndication’s Arranger had no duty to bond purchaser

The Court of Appeal have upheld a decision that the arranger of a syndicated investment did not make implied representations or owe a duty of care to disclose misleading information in an information memorandum where they believed the error to be of no importance.  The IFE Fund had purchased bonds and warrants as part of a provision of syndicated credit facilities in an acquisition;  it later transpired the target’s financial position was not as shown in the audited accounts.  The court upheld the finding that there was no express representation that the bank would review the information  before the claimant acquired the bonds.  There was of course an implied representation of good faith (which was not breached) but there was no duty of care by the bank to the claimant.

The defendant bank had had cause to doubt the reliability of the audited accounts after receiving two reports from investigating accountants but as the claimant could not establish the bank had actual knowledge of information which had caused the two reports to be misleading, the first instance decision was correct that there had been no duty of care.

The case is linked on BAILII, here.

Law-Now has a piece on the first instance case here.

Administration expense - empty rates?

Trident cast a chill by suggesting that business rates incurred on empty properties should be an administration expense.  Given that the Department of Communities of Local Government (DCLG - is Banklawblogger alone in having trouble remembering the names and acronyms of all these shiny new Departments?) is to review the business rates structure including the potential abolition of empty rate exemption, except for liquidation, this may become a real problem for administrators - and floating charge holders. 

The Rating (Empty Properties) Bill  can be seen here.  If the government manage to push this through, the changes to the business-rate relief for empty properties would come into effect in April 2008.

Undue influence in bank lending

If you remember, as Banklawblogger does, the heady days of Barclays Bank v O’Brien and, later, RBS v Etridge (no.2) and the nice warm feeling that so long as your branch manager (remember them?) followed the practical advice given in the O’Brien judgment about making sure that Mrs (it usually was “Mrs” - the identity has become more elaborate with time) properly understood with the benefit of independent legal advice that she stood to lose the matrimonial home if Mr’s latest business enterprise went the way of all flesh, then the bank’s security would hold. 

An article published in this month’s Journal of International Banking Law & Regulation by N I Yaakub and A McGee [([2007] JIBLR Issue 7 page 394 ff] suggests that we should not be feeling quite so comfortable.  They quote not so much a string of recent cases as a ship’s plaited coil of rope’s worth of cases to underline their point that the doctrine of undue influence is not easy to define and the principles in the cases are not always clear.

The article is detailed and carefully reasoned and concludes rather bleakly that “the nature of undue influence in bank-lending transactions remains obscure”. 

 At a practical level, surely, banks should continue to operate their careful, O’Brien-inspired policy of ensuring the dependant in question is given independent legal advice and uses particular caution where there is an obvious imbalance of power between the borrower and the dependent giving security.