Structuring Participation Agreements in Commercial Finance: Lender Due Diligence

Strategies for Lead Lenders and Participants to Minimize and Manage Risk; FDIC Guidance

A live 90-minute premium CLE webinar with interactive Q&A


Wednesday, October 7, 2020 (in 10 days)

1:00pm-2:30pm EDT, 10:00am-11:30am PDT

or call 1-800-926-7926

This CLE webinar will examine current trends in the loan participation market, critical provisions of participation agreements, and best practices in due diligence for participating lenders. The panel will also discuss FDIC regulatory guidance regarding risk management for purchased loans and purchased loan participations.

Description

Banks and other lenders have historically purchased loan participations to achieve growth, employ funds, diversify credit risk, and deploy liquidity. Litigation between originating and participating banks highlight the critical nature of the loan participation agreement in protecting the interest of all parties to the transaction.

Primary provisions of the participation agreement include, among other things, lender voting and other rights and obligations of each party to the participation, seller representations and warranties, transfer provisions, and reclaiming or buying back the transferred participation. Getting these terms right and understanding the necessary diligence reviews are crucial for successful participation.

The FDIC, in its Financial Institution Letter 492015, sets out the risks of loan participations originated by non-bank lenders and guides lender due diligence in managing risks associated with these transactions. The agency's concern is that banks rely on these alternative lenders to underwrite the loan origination without proper review and analysis of the underwriting models of these alternative lenders.

Listen as our authoritative panel of finance practitioners looks at the current state of the loan participation market, and discusses best practices for drafting or reviewing high priority provisions of participation agreements and sufficient due diligence for lenders. The panel will also discuss the FDIC guidance on risk management for purchased loans and purchased loan participations and some recent case studies related to loan participations.

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Outline

  1. Overview of loan participations
    1. Market trends
    2. What is a "participating interest"?
    3. What are the essential characteristics?
  2. High priority participation agreement provisions and how they differ from syndications
    1. Lender voting rights
    2. Defaulting lenders
    3. Borrower workouts, foreclosures
    4. Seller reps and warranties
    5. Reclaiming or buying back transferred participation
  3. Considerations
    1. Circumstances where loan participation is a "true sale" of the underlying loan
    2. Situations in which a participated loan may be subject to another's security interest
    3. Automatic perfection
    4. Settlement conventions/implications of delayed settlement; how loan sellers may obtain settlement liquidity coverage
  4. Due diligence by the participating lender
    1. Understanding and reducing the selling counterparty risks
    2. Considering the participation structure and lender rights risks
    3. How much do you review the borrower group deal and how much do you rely on representations?
  5. FDIC FIL492015
    1. Understanding the advisory on Effective Risk Management Practices for Purchased Loans and Purchased Loan Participations
  6. Workouts in participations: What is the effect on and effect of participant rights?

Benefits

The panel will review the issues that arise from these concerns, among other critical questions:

  • What are the crucial points to address in a loan participation agreement?
  • What are the lessons from recent litigation regarding loan participation agreements?
  • When will loan participation be regarded as a "true sale" of the underlying loan, and why does it matter?
  • What specific information should participants or purchasers obtain from the lead lender or seller before entering into the transaction, and what other diligence is essential?
  • What guidance does the FDIC provide banks in performing due diligence to minimize risks of participations from alternative non-bank lenders?

Faculty

Manzer, Alison
Alison R. Manzer

Partner
Cassels Brock & Blackwell

Ms. Manzer is a member of the Firm's Financial Services Group. Her practice encompasses a broad range of commercial...  |  Read More

Schulwolf, James
James C. Schulwolf

Partner
Shipman & Goodwin

Mr. Schulwolf represents senior and mezzanine lenders, venture capital investors (including SBIC’s), private...  |  Read More

Wurst, Jeffrey
Jeffrey A. Wurst

Partner
Armstrong Teasdale

Mr. Wurst has more than 30 years of experience and is well recognized for handling significant commercial finance and...  |  Read More

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