LEGAL PARSPECTIVE: Syndicationnof Loans by Dr AbdelGadir Warsama, Legal Counsel

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It is a common fact that big and corporate business is now undertaken through loans from banks. Generally speaking, to avail for credit facilities there are certain arrangements to be followed and documents to be signed. The required documentation, nature and volume varies from one transaction to another, also, varies according to the parties relationship. Loans, in most cases, given by one bank and the legal relation is between the parties only and third parties are excluded according to the doctrine of “privity of contract”.

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Due to commercial expansion, spread of mega activities and multinational companies, we notice emergence of giant projects. This creates the need to look for joint forces in credit sectors through syndicated loans to be given for one project by many banks. Moreover, basic rule in banking known as a “single obligor limit” provides for not exceeding certain ceiling in facilities to single borrower. This is, to spread the risk and not keep all eggs in one basket of single borrower.

To meet business requirements and stick to the legal requirements in the banking laws, syndicated loans are taking place where big amounts are needed. Herein, group of banks join forces with the aim of giving collective service to one entity. Legally speaking, syndicated loans documentation should contain certain points, inter alia, names and place of banks forming the syndication, name of loan recipient and other necessary info, name of the bank managing the loan or appointed to manage the facility, duties of lead or manager bank, amount or share percentage to be taken by each participating bank and its duties, the law governing the syndication contract, jurisdiction of courts and exclusivity of court’s jurisdiction as there could be issues of conflict of laws, terms of payment and repayment, obligations of the borrower, conditions precedent, nature or type of guarantees or securities by the borrower and other general or special legal issues.

In addition to above, syndicated loans may require prior approval of authorities. This applies wherein certain banks, according to laws and regulations, are not allowed to exceed certain credit limits to one single borrower. Or, in case there are certain restrictions regarding payment of interest or other related indigenous issues.

Due to the development of the banking, nowadays there are special banks almost specialized in giving or managing syndicated loans. It would be more safe and appropriate to deal with those specialized agencies because syndication requires know-how and professionalism.

With reference to participating banks, they are required to undertake their own evaluation before joining. In other words each party should undertake its homework and arrange for all measures that are needed to protect and safeguard its interests.

No doubt, syndicated loans open doors for banks for lucrative business and spreads the network of clients and correspondent banks, however, this development is not free from risk and this necessitates utmost duty of care and joint diligence by prudent qualified bankers and skillful lawyers.

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