Syndicated loans in International Trade
With the globalization of the economy, a new divide has been set into motion where trade has moved away from the more common localized trade and into the sphere of the international market. This birthed what has evolved into the phenomenon that is international trade which simply put is an exchange of goods and/or services across national jurisdictions. As can be expected, taking part in trade across national jurisdictions requires gargantuan amounts of money and as such, financial institutions are largely involved in what is referred to as project finance which is the premise of syndicated loans.
A syndicated loan, also known as a syndicated bank facility, is financing offered by a group of lenders, collectively termed as a syndicate, who work together to provide funds for a single borrower. These are usually investment banks, multilateral development banks, and commercial banks.
Syndicated loans are largely employed where a borrower seeks a facility that a financial institution considers quite large to handle on its own thus engaging other institutions to source the funding necessary. The loans are also employed by financial institutions where they seek to limit their exposure given the complexities or risks involved in financing the amounts sought by the borrower.
This methodology of financing is preferred amongst financial institutions given the differing tax regimes, foreign exchange rates, legal implications, and political environment among other factors present across different jurisdictions. This also enables the institutions to secure collateral and reduce the risk they are opened up to when issuing charges, debentures, and other security instruments. The borrowers on the other hand are also enabled to spread their exposure across multiple securities to include those which on their own would not have the required market value to secure a loan facility.
With this, real-time solutions are provided to a clientele that is to partake in international trade without over-exposure of the financial institution and given the high amounts of interest to be received from issuing such a facility and participation fees charged by banks sourced to provide the financing, syndicated loans are beneficial to all parties involved.
It is also important to note that syndicated loans do not have particularized statutes that govern their implementation but are largely under the premise of contract law thus giving parties a substantial amount of freedom to pre-determine the terms of the facilities. Be that as it may, it is vital that the parties comply with the applicable laws in the jurisdictions within which said syndicated loans would be granted, registered, and operationalized. As such, the practice is that a panel of Legal Counsel from the jurisdictions in question is convened to ensure legal compliance.
Process of securing a syndicated loan
Different financial institutions provide for different mechanisms but the following is largely the process to be expected to secure a syndicated loan.
a) The pre-mandated stage: A borrower approaches a financial institution to negotiate a loan facility. The institution is appointed a Mandated Lead Arranger (MLA) with the mandate to negotiate the key loan terms with the borrower, appointing the other lenders and structuring the syndicate.
b) The post-mandated stage: This is where the required loan amounts are mobilized and collateral secured. To do so, the MLA coordinates documentation preparation that covers all aspects of the project to be financed and information on the borrowerâs creditworthiness and the loan terms. To secure other lenders, the MLA invites other lenders to join the syndicate depending on interest or previous experience with the borrower in question.
c) The post-signing stage: This is after the completion date when the loan becomes active and is operational, binding the borrower and the syndicate members by the debt contract. An agent is often contracted to monitor the implementation of the project and the loan reimbursement.
Case study of syndicated loans in East Africa
On 7th October 2020, the High Court of Uganda issued a judgment in Ham Enterprises Ltd & 2 Others v Diamond Trust Bank (U) Ltd & Diamond Trust Bank (K) Ltd (Miscellaneous Application-2020/654)  UGCommC 32.
The Borrowers sought a loan facility of UGX 34,295,951,553 and USD 23,467,670.61 from DTB Uganda. DTB Kenya provided the loan facility with the pre-condition that DTB Uganda act as a facility agent that was to debit the Borrowersâ Accounts in DTB Uganda. The loan facility being procured in Kenya was also subject to Kenyan law.
The Borrowers defaulted on the repayment of the loan amounts prompting DTB Kenya to issue statutory notices of its intention to enforce the securities over the Borrowersâ property. The Borrowers then instituted the suit claiming that DTB Kenya contravened Ugandaâs Financial Institution Act of 2004 as it had conducted financial institutions business in Uganda without a license issued by the Bank of Uganda (BOU) and, further, DTB Uganda engaged in the agent banking business in Uganda without the approval of BOU.
The Honourable Judge in rendering his decision, albeit erroneously, found that DTB Kenya had issued credit facilities without the approval of BOU as required under Section 117 of the Financial Institutions Act. He further found that DTB Uganda illegally acted as an agent of DTB Kenya and conducted financial institutions business on behalf of DTB Kenya without a license issued by BOU as required under the Financial Institutions (Agent Banking) Regulations 2017.
To emphasize the error in the decision, the Honourable Judge stated that syndicated loans were designed to avoid the seeking of a license from the relevant authority hence an illegality. As a result, the loan facilities were rendered void.
The impact of this decision was that all financing that is sourced outside Uganda would amount to carrying out financial business thus deeming the concept of syndicated loans moot.
In reversing the High Courtâs decision, the Court of Appeal on 5th May 2021 found that the nature of the transaction was a syndicated loan and therefore the provisions of the Financial Institutions Act and the Regulations were not applicable in the instant suit.
In reaching that decision, the Court of Appeal found that the loan transaction possessed all the elements of a syndicated loan, that is, DTB Uganda was the MLA and Facility Agent and DTB Kenya was the security trustee holding the security of the property of the borrower.
The Court of Appeal further opined that syndicated banking is a common international practice in the sphere of international trade that governments too, partake in, and thus rendering such facilities void would negatively affect the strides taken in the globalization of trade.
In as much as the High Court decision was set aside, it emphasizes the need for regulation or some form of regularization of syndicated loans. The lack of the same puts not only those that partake in international trade but also financial institutions that provide the facilities in jeopardy as different legal regimes come with different legal implications that could have the impact of ousting the concept of syndicated loans.
As it stands, however, acquiring Legal-Counsel that is competent in banking and financial practice is invaluable as the protection of all parties in such cross-border transactions rides on their expertise. Overlooking said expertise could have significantly adverse implications given the volumes of money involved and the securities employed in securing said facilities.