Secondary Debt Trading – Part 3

Assignment

In an assignment, the seller’s rights as the existing lender (including not only repayment rights but also, for example, voting rights) are transferred to the buyer, but the lending obligations remain with the seller. In order to remedy this, the buyer and the seller enter into an agreement where the buyer agrees to take on the obligations of the seller – although the seller remains the lender recorded on the loan agreement. A consequence of an assignment is that security does not need to be renewed or retaken and that the borrower’s consent is not required.

The borrower must, however, be notified of the assignment – therefore, even though their consent is not necessary, assignment cannot occur without the borrower’s knowledge. In circumstances where a buyer and a seller wish for the trade to remain confidential, this may not be the most appropriate method. Further, because the seller officially remains the lender under the original loan documentation, an assignment may not remove that loan from the seller’s balance sheet, which may be relevant for the purposes of regulatory capital weighting.

Borrower questions:

Q: I have received a notice of assignment – what do I need to do?

A: Read the notice to ascertain who the buyer (sometimes known as the ‘assignee’) is, as you will now need to make all your payments to them instead of the original lender. The notice of assignment is likely to contain details of the buyer’s account where payments should be made and you should therefore ensure that all your direct debits in relation to payments to be made in connection with the loan are amended so that the correct recipient is paid. The notice may contain an acknowledgement of receipt, which you should complete, sign and return to the address indicated in the notice. If the new lender is a non-UK resident entity, as per part 2 of this series of articles, you may need to seek permission from HMRC to make gross interest payments.

Q: Who will let me know if my debt has been assigned to a new lender?

A: You will receive the notice of assignment from the existing lender or (where one has been appointed by the lenders) from the agent. If LMA documentation is used and the assignment was made by way of an assignment agreement between the seller, the buyer and the agent, you will also receive a request for consent from the original lender or from the agent.

Q: Can I object to the assignment?

A: The borrower’s consent is not legally required for an assignment and the only requirement is for the borrower to be notified in writing that the assignment has taken place. However, if LMA standard form documents were used for the original loan agreement your consent will be required – although it is likely that consent must not be unreasonably withheld or delayed and will be deemed granted if no response is given 5 business days after consent is requested.

Q: I have not yet utilised the whole loan amount – who should I get in touch with for further drawdowns?

A: You should contact the existing lender because it will have retained all of its obligations under the facility agreement. In practice, however, the original lender may have entered into a separate agreement with you to release them from their obligations, or the facility agreement may contain provisions whereby, pursuant to an assignment, you automatically release the original lender from its obligations – in which case you should contact the buyer instead. Where an agent has been appointed under the terms of the loan agreement, you should continue to liaise with the agent until notified otherwise.

Q: If the borrower defaults on the loan, who can take steps to enforce the security?

A: The buyer is entitled to enforce the loan as all rights under the original finance documents will have been assigned to it.

In our next article, we will discuss sub-participation (both funded and risk) which, although not technically a transfer, is nevertheless a common method of debt trading.