Let's Do Lunch: The Changing Dynamics of Bank Groups in Insolvency Proceedings and Workouts
Suppose you wanted to borrow a billion dollars. Where would you go? Who would you see? Who has a billion dollars they would be willing to lend to you? Even if you knew someone with a billion dollars, would they lend it all to you and no one else? Not likely. But, what if you knew someone who had a few hundred million dollars available to lend to you and, had some friends with a couple of hundred million dollars available to lend to you as well, and for a fee your friend would help put together his group of friends to loan you a billion dollars. Sound impossible? Not at all. It happens all the time. If your friend with the money is an agent bank and his friends are banks that participate in syndicated loan transactions. After they loan you the billion dollars, they will play golf with you and pat each other on the back, praise each other for how brilliant they all are for making you the billion dollar loan and collect interest and fees until . . . until one day you can’t pay them back. On that day this fast group of friends may deteriorate into a gang of alley cats fighting over a half empty can of tuna. Today’s world of bank loan syndications is somewhat like that. This paper will discuss and describe the changing world of bank loan syndications and what happens when insolvency and bankruptcy spoil the mix.
Multiple lender transactions arise when two or more lenders enter into an agreement to loan money to a borrower. These loan transactions are a common way of doing business. Banks and other financial institutions enter into syndicated loan transactions to accommodate the large amounts of capital that businesses require to operate in today’s economy. Because banks are also businesses, they are interested in finding ways to maximize their profits while minimizing their exposure to risks involved in making large loans. Participation in “Bank Groups” allows syndicate banks to have exposure to multiple large borrowers to whom such banks can market non-credit services. Moreover, agent banks can reduce their credit exposure, collect fees for being the agent and market non-credit services to the same borrower. Additionally, the participation in Bank Groups has become necessary for many lenders because of the domination of the lending market by a handful of agent banks.
Relationships between the members of a Bank Group have changed over the years. Bank Groups generally have an arranger who structures the lending transaction and markets the loan to other lenders. Bank Groups typically consist of institutional banking and lending entities. The bank institution affiliated with the loan arranger often has the largest percentage of the credit exposure and typically serves as the agent of the Bank Group. The agent’s primary responsibility is to administer and maintain the loan on behalf of the Bank Group. Other Bank Group members may initially consist of foreign and domestic commercial banks, savings and loan associations, and other financial institutions often introduced to the loan transaction and the borrower by the arranger. Over the last ten years, long standing relationship banking has been replaced by transaction oriented banking to a large extent. The end of relationship banking has resulted in the sale and assignment of interests in syndicated loans to non-banks. The entry of non-banks into Bank Groups has altered the dynamics of Bank Groups, especially when bankruptcy and insolvency arises.
Presented at the 13th Annual Global Insolvency And Restructuring Conference, IBA Section on Insolvency, Restructuring and Creditors’ Rights, Presentation of the Enforcement of Creditors’ Rights Committee, Zurich, Switzerland, May 13-15, 2007.