Today, global financial markets in crisis are once again focusing on counterparty credit risk, as was the case after the collapse of Lehman Brothers a decade ago. The European secondary credit market uses a standard “loan participation” form to transfer borrowers` risk and the profitability of a loan to the secondary market. The London-based Loan Market Association (lmA) publishes several forms of loan participation. In addition to the underlying borrower`s credit risk, the credit risk of the lender selling the loan on the market is a particular problem for investors who hold stakes in the LMA. The seller is called “Grantor” of the participation. 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. It is customary for loan contracts to allow lenders to build guarantees on their loan assets in order to secure the lender`s obligations, but loan documents must be verified to ensure that they are receivable. If these guarantee orders are limited, another option is to levy a fixed fee on the donor`s rights on payments under the credit contract that would be outside the transfer/transfer provisions of the credit contract, since it does not transfer ownership to the member. Under English law, the purchase price paid by the participant under an LMA participation agreement is referred to as a member`s loan to the fellows, which is repaid only to the extent that the borrower makes payments for the underlying loan. As a result, the participation agreement creates a debtor-creditor relationship between the donor and the participant. Under such an agreement, the lender is required to pay the member a proportionate amount equal to the capital, interest, fees and other distributions that lenders received under the credit contract.
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.
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