Structuring Cross-Border Lending Transactions: Mitigating Legal, Economic and Political Risks

Description

Cross-border lending has increased dramatically over the last few decades, from about $1.7 trillion in 1995 to over $7 trillion today. There are political, economic and legal risks associated with lending to foreign borrowers with foreign-based collateral. Structuring around these risks should be a threshold concern of finance counsel.

Choice of law provisions determine a contract’s validity and interpret the language of the contract if there is a dispute. The governing law in most international transactions has been either New York or English law, each considered sophisticated, stable and predictable, but there may be reasons to choose local law depending on the transaction.

A lender to a borrower in a jurisdiction with high legal risk may require a U.S. affiliate to act as the named borrower and/or guarantee the loan. The lender may also want to ensure that the guaranty is one of “payment” and not of “collection,” since the latter requires a lender to exhaust all remedies against a borrower before obligating the guarantor to pay.

With secured loans, if the legal risk of a borrower’s home country is high, lenders will often structure an “exit strategy” enforceable without reliance on the legal institutions of the borrower’s jurisdiction. Where political risk is high, a lender may purchase insurance on a risky loan, in the form of political risk insurance or a credit default swap.

Listen as our authoritative panel discusses how to structure around various risks associated with cross-border lending. The panel will examine choice of law provisions, structuring for foreign collateral and foreign guarantors, credit default swaps, and other risk mitigation strategies.