China Banking Association in January 2010 released the Model Documentation for Transfer of Syndicated Loans (the "Model Documentation"). It is intended that the Model Documentation will serve as reference documents to be applied by market participants in the secondary loan market for sales and purchases of loans. The release was preceded by the promulgation in 2007 of two other sets of model documentations: the Model Front-end Documentation for Syndicated Loans (《银团贷款前端文件示范文本》) and the Model Documentation for Syndicated Mid-long Term and Working Capital Loans (《中长期及流动资金银团贷款合同示范文本》).
The volume of loan transfer transactions in the domestic market has shown an overall trend of increase over the recent years. Admitted, significant differences exist in terms of magnitude, driving forces and performance where loan transfer transactions in the domestic market and in the more developed markets are compared.
Structure of the Model Documentation
The Model Documentation consists of a Confirmation, a set of Standard Terms and Conditions, a schedule and an appendix. The Confirmation provides for matters including the basics of the loan the subject of the transaction, settlements and fees, and dispute resolution, and will be signed upon agreement to transact. The Confirmation is not intended to stand alone as a complete contract for a transaction of loan transfer. Instead, it should be construed together with the Standard Terms and Conditions. The Standard Terms and Conditions specify essential terms that are integral to a loan transfer transaction and address matters of transfer procedures, notice giving and consents obtaining in respect of obligors under the loan, issuance of transfer certificates, price calculation and payments making, risk and credit appraisals, disclaimers, representations and covenants, default and remedies. Unless the parties otherwise agrees expressly, the Standard Terms and Conditions will, together with the Confirmation, form one agreement in relation to a loan transfer transaction. The schedule and appendix deal with notices that according to the underlying loan documentation are required to be given to relevant parties, e.g., the borrower, the security provider and the agent bank.
In case the parties hope to make arrangements other than those already included in the Standard Terms and Conditions, a supplemental agreement may be separately negotiated and signed for modification, addition or deletion purposes, and such supplemental agreement will also become part of the documentation.
It is not difficult to see that the Model Documentation has borrowed from the model transaction documents of Loan Syndications & Trading Association (LSTA) and those of the Asia Pacific Loan Market Association (APLMA), while it at the same time tries to accommodate the peculiarities with the transaction parties, transaction subjects and transaction customs in the Chinese market.
Applicability
The scope of application of the Model Documentation is relatively limited. In terms of the underlying transactions, the Model Documentation primarily applies to transfer of outstanding loans and loan commitments where the loan documentation itself follows the Model Documentation for Syndicated Mid-long Term and Working Capital Loans. Confusions and inter-document discrepancies will occur if the Model Documentation is applied to transfers of otherwise documented loans. In terms of the transfer transaction itself, the Model Documentation was designed for domestically syndicated loans where lenders involved are all residents in China and the transferee is also a resident bank. For transactions involving an offshore bank, significant adjustments need to be in place before the Model Documentation could be utilized.
Therefore, notwithstanding all the benefits the Model Documentation promises to bring to the development of the domestic secondary market of syndicated loans, the parties still need to be very careful when dealing with specific transactions and are advised to pay close attention to choices of modifications, additions or deletions with respect to provisions of the Model Documentation so as to avoid confusions and conflicts of all sorts.
Security
Security is a matter that raises serious concerns for every party involved in a loan transfer transaction, especially where the security rights require registration in order to become effective against the transferor, the borrower or the world, and then amendments or renewal to the original registration is a must. For example, before the completion of such amendments or renewal, which may take quite some time, which party shall be entitled to the security rights? No conclusion could be drawn in practice without any doubts, and the current registration system does not provide a mechanism to help avoid the risk of fall-through of the security rights.
Contacts
For further information on the matters covered in this newsletter, please contact:
BEIJING OFFICE
Liu Zhigang
King & Wood
40th Floor Office Tower A,
Beijing Fortune Plaza
7 Dongsanhuan Zhonglu,
Chaoyang District, Beijing, China
Tel: +86 10 5878 5126
Fax: +86 10 5878 5599
Email: liuzhigang@kingandwood.com
SHANGHAI OFFICE
Lee Shaun
King & Wood
28-30/F, Huai Hai Plaza
1045 Huai Hai Road (M)
Shanghai 200031, China
Tel: +86 21 2412 6050
Fax: +86 21 2412 6250/6251
Email: shaun.lee@kingandwood.com