Syndicated Loans Resemble Shared Taxis
The market for loan participation is brisk - so brisk that borrowers sometimes do not know exactly which bank is financing them

Slovak bankers are still seeking their answer to the question whether to adopt a 'Western-style' approach to loan documentation or not, usually accompanied by two further questions: Shall we make use of the services offered by renowned international law firms - or save costs and have in-house lawyers prepare our loan agreements? And: Is legal security at all affordable?

Recently, more and more Slovak banks have been facing these and similar questions as they begin to deal with loans in the range of hundreds of millions, if not billions, of Slovak crowns, which are then granted by a pool of banks.

In such loans, also known as 'syndicated loans', the structure of mutual relations between bank and borrower is highly complicated. Consequently, foreign banks have answered all of the three questions above with 'yes' from the very beginning of their market presence in Slovakia, relying on the services of international law firms.

In a syndicated loan, a group of several banks acts as a single financier. The borrowed funds are granted jointly (insofar as the provision of funds is based on a single loan agreement), yet at the same time individually. This may be likened to the situation of several people in the street, each one waiting for his or her taxi: as they discover that they share the same destination, they flag down only one cab. As a result, everyone arrives at their respective destination, while the costs are split among all of them.

Syndicate or Consortium of Banks
The basic concept behind the syndicated loan agreement is a syndicate, or consortium, of banks. The joint provision of funds saves time and cuts expenses that the individual bank would otherwise have to invest if it negotiated the transaction on its own. At the same time, the participating banks split and allocate the risks connected with the loan. After negotiations with the borrower have been initiated, the consortium of banks will usually authorize one from their ranks, the so-called arranger, or several banks (then called co-arrangers), to act on the consortium's behalf.

The thus authorized banks take all steps related to the syndicated loan, such as the in-depth assessment of the borrower's credit rating, the compilation of the loan documentation, the commissioning of the assisting legal firm, and the negotiations with the borrower that follow the first contact. The borrower communicates exclusively with the arranger (or co-arrangers). Usually, the only obligation of the other banks participating in the syndicate is to execute the loan documentation - and to provide the borrowed funds, which is the moment when the (co-)arranger(s)'s task is complete.

After the loan agreement has been concluded, the syndicate character of the loan is most prominent in the administration of the loan: all of the participating banks undertake to comply with majority decisions of the consortium, even if they do not consent to the respective measure as an individual entity. The required majority of credit grantors is laid down in the loan agreement and is usually fixed at 50% or 66%.

Such decisions may include, for instance, declaring the loan's accelerated maturity, granting forbearance in various events of default, changing the purpose of earmarked loans, or extending the term of maturity. Such decisions will actually result in a modification of the loan agreement. If, say, the consortium has agreed on a 50% majority vote and four of the six participating banks pass a decision whereby the loan's maturity is accelerated, the remaining two banks must comply.

The Agent — A Partner to the Borrower
Another feature of the syndicated loan agreement is the so-called agent, usually an officer from one of the participating banks. Upon the compilation of the loan documentation, he/she is in charge of the entire loan administration until the loan has been repaid in full. The borrower then communicates exclusively via the agent and is not required to canvass all the involved banks. This concerns namely requests for drawing on the borrowed funds, repaying them prior to the maturity date, extending the term of maturity, or possibly the disclosure of the agreed documentation or other information. In all these activities and for the entire life of the loan agreement, the agent is the borrower's partner, a fact which also has an impact in the reverse direction.

If any of the participating banks wants to communicate with the borrower, they must do so by means of the agent, not on their own account. The loan is drawn upon and paid back through the agent. Furthermore, the agent is also in charge of the actual transfer of funds from the bank (when drawing upon the loan) or to the bank (when acquitting the loan). For her performance, the agent receives an agreed remuneration fee, usually to be paid by the borrower once per year.

The advantages for the borrower are that he may negotiate a higher total sum of borrowed funds, that it is not necessary to enter personal negotiations with each and every one of the financing banks, and that the terms and conditions agreed in the syndicated loan agreement equally bind all of the participating banks. At the same time, the accrual of funds is more stable, since the drawdown of loan tranches is not at the discretion of a single bank, as is the case in a bilateral relationship, but depends on the decision of the syndicate majority.

Flexibility and Anonymity
As is the case with anything in life, a consortium of banks also has its limits: the proportion of the loan granted by a given bank based upon the syndicated loan agreement, for instance, represents that bank's direct liability which does not bind the other participating banks. In the event that one bank, for whatever reason, fails to provide their proportion of the loan, the other banks are not obliged to remargin from their own funds. Likewise, if the borrower fails to acquit the drawn loan, each of the banks is entitled to assert their claim individually, without having to collect their partners' approval first.

Syndicated loan agreements are marked by their flexibility, paired with anonymity: the participating banks are usually entitled to transfer their proportion of the loan to a third party without the borrower's consent. It may thus happen that a bank that originally participated in the syndicate sells its share, and a new bank - the transferee - enters the syndicate, without the borrower being aware of these transactions.

Given the brisk loan participation market, it is not unusual that the borrower, at a given time, is unable to name his 'actual' financier. His rights and liabilities from the loan agreement remain unaffected, though, since each 'new' bank that enters the existing syndicated loan agreement must comply with the conditions laid down in the latter, and since any modification of the loan agreement requires the borrower's consent.

Of course, the contractual arrangement for transferability may take different forms, so that the scope of rights the borrower achieves depends on his financial standing, i.e. whether he may condition the transfer with certain prerequisites or, as it were, with his consent. Syndicated loans that do not provide for the transfer of portions of the loan to third parties are also called club deals.

Banks Begin to Trust Slovak Courts
Similar to the syndicated loan agreement, the consortium creates a security documentation for the syndicated loan. Again, an agent is appointed, called the security agent. This role is somewhat different from that of the facility agent, as the security agent is in charge of administrating the security documentation after it has been concluded. Security is usually asserted upon the banks' directive, where, again, the agreed majority vote decides. The funds obtained by the security agent are then distributed pro rata among the participating banks, according to their proportion of the borrowed funds.

Compared to Slovak courts, the general courts and arbitration courts in other states have greater experience with syndicated loans. Hence, foreign law, especially the laws of England, often governs syndicated loan agreements, though Slovak law for domestic syndicated loans has recently been on the advance.

Slovak law does not recognize the term 'syndicated loan agreement'. However, since the syndicated loan agreement is, after all, an instance of a loan agreement, it is governed by the provisions of section 497 to 507 of the Commercial Code. With one exception, these statutory rules are non-obligatory.

In other words, the contractual arrangement of the syndicated loan is at the banks' and the borrower's discretion - with the aforementioned exception contained in s. 499 CC, which stipulates that a handling or license fee may be charged only if such fees are part of the lender's scope of business (which is always the case for banks anyway).

Syndicated loan agreements tend to make full use of the freedom of contracts, being, as a rule, very extensive documents that precisely define any and all details of the loan, from its provision to the terms for its drawdown, from its acquittance to contact addresses, not to forget the terms and conditions for the settlement after the loan's expiry.

Due to the general nature of the discussion, this memorandum should not be regarded as legal advice.

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