Because of the structure of the AML (i) participation agreement of the participants, no direct party to the credit agreement that governs the underlying loan, (ii) the Grantor does not transfer or transfer to the participant any rights or obligations under the credit documentation, and (iii) the participant has no interest in the ownership of the loan or credit documentation. The participant therefore has only a contractual relationship with the lender and has no direct rights to the underlying borrower. In the event of the lender`s insolvency, the participant therefore has only the right, if there is no agreement to the contrary, to demand, as an unsecured creditor, in the event of the lender`s insolvency, unpaid amounts earned under the participation contract. This structure is very different from the form of “true sale” participation agreements used in the U.S. market. In theory, a duly developed fiduciary participation agreement should provide a participant with protection against a lender`s credit risk, since it grants the participant an advantageous or fair participation in the underlying loan, which should in future be free from attacks from creditors of an insolvent donor. Not only would loan assets that depend on participation not be included in the lender`s insolvency mass, but the participant may also collect the loans on his or her behalf after the lender`s insolvency application. Conversely, an increase in the LMA`s form of participation after the lender`s insolvency is not an option, as participation does not provide the participant with a specific shareholding in the loans or underlying credit documentation. As a result, any post-insolvency increase would result in the withdrawal of assets from the lender`s insolvent estate and challenging it as a preference (as was the case in Lehman`s bankruptcy).
One solution used in the secondary credit market in Europe is the use of a form of us participation to obtain a real sale, but this involves a lot of re-engineering of the standard form of participation published by The Loan Syndications and Trading Association, Inc. in the United States, and it is not certain how its use would be interpreted by the courts in Europe. In addition, the transfer of economic ownership of the loan assets generated by a real stake in the sale could be interpreted by a European court as a transfer of the title (and not as a mere economic (economic) interest and, therefore, the nature of the transfer required by the borrower`s written agreement under the credit contract. In addition, the use of U.S. participation would have the negative effect of transferring the tax debt from the donor`s transaction to the participant. Where consent is required, it is customary for the agreement of facilities to provide that consent is not improperly accepted and that the agreement is considered to be issued in the absence of refusal within a specified period (usually five working days). The question of when it makes sense for a borrower to refuse authorization in the context of a credit transfer has not been directly considered by an English court. In similar cases, where the Tribunal was required to conduct an appropriate review in an economic context, the courts have tended to interpret these clauses in such a way as to allow the party to refrain from agreeing to act in accordance with its own business interests. Another method frequently used to protect against a lender`s insolvency is the creation of a security interest through the loan by the lessor for the benefit of the participant. Security interest can take many forms, but the most effective method is the transfer of rights (i) to payments made under the credit contract and (ii) from the account on which the proceeds of the loan are paid, to the benefit of the member.