Major real estate, industrial and infrastructure projects require colossal financing. A single bank can rarely shoulder them alone. This is where the syndicated loan comes in.

Definition and typology of syndicated loans

Definition and legal framework

A syndicated loan is a transaction in which several banking institutions join forces to extend financing to a single borrower. This technique dates back to the 1930s in France but developed in the 1970s with the rise of euro-credits.

The legal framework remains minimalist. To better understand the complexities of the legal qualification of these transactions, please refer to our detailed analysis. The French ministerial order (arrêté) of 18 February 1987 simply defines « tours de tables » (literally « round tables », referring to syndication circles) as « the gathering of various capital providers, without a public offering, for the purpose of allocating the capital contributed ».

CRBF Regulation No. 91-01 of 16 January 1991 (issued by the French Banking and Financial Regulation Committee) specifies that a « consortial transaction » exists « where several regulated institutions decide to join forces in order to extend financing by sharing funding, risk and interest ».

Direct syndication: immediate risk-sharing

Direct syndication organises risk-sharing from the outset on the primary market. All banks sign the common contractual documentation. Each institution directly grants a loan for an amount expressed in nominal terms or as a percentage of the overall amount.

As the French Cour de cassation (Supreme Court for civil and commercial matters) specified (1st Civil Chamber, 2 October 2002, No. 00-10.675), « the joint but not several obligation arising from a plurality of creditors entails a splitting of the obligation between the creditors without affecting the debtor’s undertaking ».

Conversely, sub-participation allows for the subsequent transfer of the risk attached to a loan. For an in-depth analysis of this hidden risk-transfer mechanism, please see our dedicated article. A signatory bank transfers all or part of its claim to other institutions.

Banks’ motivations

Three main reasons explain the recourse to syndicated loans:

  1. Compliance with prudential ratios: Basel rules require banks to hold own funds proportionate to their risk-weighted exposures. The total exposure to a single entity must not exceed a certain percentage of their net own funds.
  2. Risk division: The rising amount of loans pushes banks to share risk, even in the absence of any regulatory obligation.
  3. Tax optimisation: Sub-participation may allow for certain taxes to be avoided or for tax advantages to be obtained depending on the jurisdictions involved.

The key players in syndication

The arranger: role and responsibilities

The arranger structures the transaction on behalf of the borrower. It performs several essential functions:

  • Forming the banking syndicate
  • Negotiating and drafting the contractual documentation
  • Preparing the information memorandum in cooperation with the borrower

Its liability may be incurred vis-à-vis both the borrower and the participating banks. The Versailles Court of Appeal (12th Chamber, 2nd Section, 5 December 2002, No. 01/01203) held that an arranger breaches its duty of good faith when it provides « erroneous information, likely to mislead the banks as to the decisive elements of the transaction ».

The signing of the loan agreement marks the end of its mission.

The facility agent: functions and limits

The agent administers the loan throughout its performance, a task that involves crucial legal and operational issues. Its main duties include:

  • Centralising payments between the banks and the borrower
  • Forwarding information between the parties
  • Filing proofs of claim in insolvency proceedings

In the absence of active joint and several liability, the agent must hold a special and written mandate to file the global claim (Cour de cassation, Full Bench, 26 January 2001, No. 97-15.943).

Unlike the arranger, the agent is not systematically the banks’ representative. The Paris Commercial Court (1st Chamber, 29 May 1989) specified that « the obligations of a lead bank in a banking pool can only be those of an agent where the existence of an agreement entrusting it with such a mission is established ».

Participating banks: rights and obligations

Participating institutions bear the risk up to the amount of their contribution. Their rights include:

  • Set-off
  • Immediate acceleration of the sums due
  • Individual enforcement of security interests pro rata to their claim

Case law is a reminder of their duty of vigilance. The Montpellier Court of Appeal (13 October 1983) held that, where financial statements are not certified, « the banks were bound, in order not to grant their support recklessly, either to refuse their support or to require that the accounts be examined ».

The syndication process

Initial phase (request for proposals, loan offer)

The borrower begins by approaching several banks, thereby creating competition. The institutions submit different types of offers:

  • Firm commitment (fully underwritten commitment): the bank guarantees the full amount
  • Best-efforts commitment (best effort): the bank undertakes only to attempt to put together a syndicate

The selection of one of these offers confers a mandate on the arranger to structure the syndication.

Formation of the banking syndicate

The arranger selects the participating banks according to several criteria:

  • Financial strength
  • Reputation
  • Country of origin (for tax optimisation)
  • Sector experience (particularly in project finance)

It sends them an invitation letter together with the information memorandum. This document contains key data on the borrower and the transaction.

The contractual documentation covers:

  • The bank-to-borrower relationship (the loan agreement)
  • The relationship between the banks themselves (the syndicate agreement)

Liability of the arranger

The arranger’s liability may be incurred for:

  • Communicating inaccurate information
  • Failing to disclose essential information
  • Breaching the duty to verify information

The Cour de cassation (22 May 2001, No. 98-22.430) held that the arranger had provided the sub-participant with erroneous information « by presenting it as if it had verified it », when that verification was in fact its responsibility.

This liability is, however, tempered by the participating banks’ own duty of prudence. Case law emphasises that « in relationships between professionals in the same field, the existence of a lead bank did not relieve the other participants of their duty of discernment » (Versailles Court of Appeal, 12th Chamber, 2nd Section, 5 December 2002).

Specific legal issues

Absence of joint and several liability between banks

The defining feature of a syndicated loan is the absence of joint and several liability between the lenders. Each bank commits only for its own share, without guaranteeing the undertakings of the others.

Contracts generally include a non-solidarity clause. The Paris Court of Appeal (15th Chamber, Section B, 13 June 1985) confirmed that « the formation by several banks of a pool […] cannot have the effect, in the absence of joint and several undertakings, of extending to the other banks the obligations subscribed by one or more of them ».

Substitutes for joint and several liability nevertheless exist:

  • The « substitution effort » clause in the event of a bank’s default
  • The increase of the remaining members’ participations

Juxtaposition of loan agreements

A syndicated loan is a juxtaposition of individual loans granted on identical terms. This structure has several consequences:

  1. Individualised contractual protection: Certain clauses protect each member individually (illegality clause, increased costs clause).
  2. Sharing of payments clause: It requires banks that have received a payment exceeding what was due to them to share it proportionally.
  3. Qualified majority for decisions: Key decisions require the approval of a qualified majority (generally between 66 2/3% and 90%).

The Paris Court of Appeal (15th Chamber, Section B, 7 November 2002) held that the majority clause has « effects that are both horizontal, between the lenders, and vertical, between the lenders and the borrower ».

Transfer of participation and enforceability of rights

Banks may transfer their participation using several techniques:

  • Civil-law assignment (French Civil Code, articles 1689 et seq.)
  • Novation (with the borrower’s consent)
  • Sub-participation (hidden transfer)

For an assignment to be enforceable against the assigned debtor, it must be notified to the debtor in accordance with article 1690 of the French Civil Code. The Cour de cassation (1st Civil Chamber, 4 March 2003) specified that « the absence of notification of the assignment of the claim to the principal debtor does not affect the existence of the debt ».

The transfer of the benefit of the security interests raises particular difficulties. Under article 1692 of the French Civil Code, « the sale or assignment of a claim includes the accessories of the claim, such as suretyship, privilege and mortgage ». Yet certain additional formalities are required to ensure enforceability against third parties.

Are you developing a project that requires complex financing? Syndicated loans demand sharp legal expertise. Legal support from the pre-contractual stage onwards is essential to avoid litigation risks. Our team analyses your needs and helps you secure your financing transactions. Contact us for an initial discussion about your project.

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