Distressed And Par Trade Investments – A Case Study

Fieldfisher recently held a joint seminar with New York law firm Kramer Levin Natfalsis & Frankel LLP, which focused on a case study on the life cycle of a synthetic distressed Investment, comparing and contrasting the different issues and approaches we have seen on real transactions under both English and New York law. The talk focused both on the transfer of loan interests and related hedging agreements.

From a banking perspective, a number of interesting points were drawn from the discussions, of interest both to readers involved in the secondary debt markets, as well as those involved in loan origination, structuring and negotiation of loan documentation:

Transfer Provisions

Obviously a review of the transfer clause of a facility agreement is essential and one of the first issues that should be undertaken as part of any due diligence exercise when reviewing such a document for a secondary market sale or purchase, to check to whom a loan or part of a loan can be transferred and if borrower consent is required.

There are clear differences between the New York and English markets as to what is acceptable or not acceptable when negotiating these clauses at loan origination stage.

English law loan documentation tends to be more restrictively drafted so that it will be very clear if consent is, or is not required for any transfer (which can result in protracted discussions at loan origination stage, and in some cases the creation of a "prohibited persons" list of non permitted transferees), whereas the practice in the US tends to allow more discretion to the borrower to withhold consent (including in some cases a consent "not to be unreasonably withheld" concept).

The practice of following a more precise approach under English law versus the consent "not be unreasonably withheld" approach is in part driven by the English courts allowing a commercial party to withhold consent if it can show that a reasonable commercial person in its position might have reached the same decision; but it does not need to show that the decision was justified. See for example Barclays Bank plc v UniCredit Bank AG and another [2012] EWHC 3655 (Comm). Given this interpretation, the consent "not be unreasonably withheld" concept does not really provide any party under a facility agreement with much protection against another party withholding consent, thus alternative solutions are required. However, any consent mechanism whereby the borrower can withhold consent...