The paragraph from this Irish Times article highlighted here understates the problem for SMEs whose loans are for sale. In fact in most cases pillar banks sell an entire connection's loans good and bad to the loan acquirer. And the loan acquirer is usually not interested in the assets securing the bad loan. It's only interested in taking possession of the assets securing the performing loan. The loan acquirers in the main are not here to establish long term lending relationships: they are here to realise as much money as they can before moving on.
If part of the loan being sold is in default, for example there are missed payments, breaches of LTV covenants or other facility terms or if it goes into default after the sale, the loan acquirer will almost always have the same rights as the selling bank under the terms of the loan facility. The issue for SMEs is that this can allow the loan acquirer to demand repayment of the loan and appoint a receiver, increase interest payments and fees and amend the terms to the detriment of the SME.
This is where SMEs need to examine very closely what cross-security provisions exist between the assets securing the performing loan and those securing the non-performing loan. Because if there is cross-security then in many cases an event of default in respect of the non-performing loan will allow the loan acquirer appoint a receiver over the asset securing the performing loan. This scenario has played out numerous times since the crash and is well documented in several high profile court cases recently.
That scenario can have severe implications for group companies. As I say loans are usually sold with the benefit of all the security available to the original lending bank. This includes any cross-company or personal guarantees as well as debentures or charges over shareholdings in associated companies. If the loan relates to a company which is part of a wider group of companies, enforcement action such as the appointment of a receiver by a new lender may have serious consequent implications for other companies in the group. This is due to common provisions which allow other lenders to the group to treat that type of enforcement action as an event of default allowing them to call in their own loans and/or apply increased rates of interest/fees.
Given the number of publicised cases and the number of actual cases that Leman Solicitors is currently advising on it seems that this activity is standard practice for loan acquirers.
When confronted with the prospect of assignment and/or legal enforcement SMEs need to know their position.
- Review your facilities’ provisions and concentrate on the security and cross-security provisions.
- Review the covenants so that you can avoid minor defaults.
- Review any assignment provisions to ensure they are lawful or if it can be opposed.
- Ascertain if your consent is required to assign.
- Ascertain what has been disclosed about you in the data room prior to the sale of your loan.
- Ascertain what has been disclosed in the sales memorandum. Does the loan agreement allow it?
- Where you have verbal agreements with the original lender get them in writing if you can before they are sold or take some action on foot of them.
- Remind the original lender if there is any information you require disclosed as part of the loan sales process.
One Munster legal practice said several of its clients were told that even their performing loans would be sold if they were unable to refinance their distressed loans.