Law and Business Review of the Americas Volume 2 Number 3 Article 3 1996 International Syndicated Lending: The Legal Context for Economic Development in Latin America Joseph J. Norton Southern Methodist University, Dedman School of Law Follow this and additional works at: https://scholar.smu.edu/lbra Recommended Citation Joseph J. Norton, International Syndicated Lending: The Legal Context for Economic Development in Latin America, 2 LAW & BUS. REV. AM. 21 (1996) https://scholar.smu.edu/lbra/vol2/iss3/3 This Article is brought to you for free and open access by the Law Journals at SMU Scholar. It has been accepted for inclusion in Law and Business Review of the Americas by an authorized administrator of SMU Scholar. For more information, please visit http://digitalrepository.smu.edu. Summer 1996 21 International Syndicated Lending: The Legal Context for Economic Development in Latin America Josephj Norton* International syndicated lending remains an important financing component in the ongoing economic development of Latin America. Many of these syndicates will be domi- nated by non-Latin American lending institutions. Latin financial institutions will, how- ever, often be involved in the syndicate and in some instances, may serve as lead and/or agent bank for the syndicate. The non-Latin syndicate members will invariably seek to have the loan arrangement and the intercreditor relationship governed by New York or English law. Even where local law may be the governing law, U.S. and London loan syndi- cate structures and practices generally will remain highly influential. This article is concerned with international syndicated lending in Latin America and the extent that it may be governed and/or shaped by U.S. law and practice. After a brief discussion of the current strength of the international syndicated lending market, consid- eration (with the primary emphasis on U.S. law and practice) is given to the following:. (i) the differences between syndicated loans and loan participations; (ii) the syndicated loan arrangement itself, (iii) the intercreditor arrangement; (iv) the nature of loan transfers; and (v) the liability of the agent bank to syndicate members and to participating banks. I. Background: The International Syndicated Lending Market' The environment for syndicated lending underwent significant changes from the peri- od of 1970 to 1990. These changes have facilitated the development of the massive syndi- cated borrowings that currently dominate international lending markets. In the 1970s, international banks were flush with petrodollars following the oil price shocks introduced by the OPEC countries, but faced weak corporate loan demand. Latin American borrowers were thus able to obtain loans at favorable rates at the expense of syn- dicated lenders, albeit at floating interest rates. In addition, in the 1970s and early 1980s the US money center banks were under political pressure to recycle petrodollars to lesser developed countries (LDCs) and, after the international debt crisis of 1982, to continue lending to Latin American sovereigns as part of a strategy to stabilize international finan- S.J.D., D.Phil., Director of SMU NAFTA Law Centre; James L.Walsh Distinguished Faculty Fellow in Financial Institutions Law and Professor of Law, SMU School of Law; and Sir John Lubbock Professor of Banking Law, Centre for Commercial Law Studies, University of London. The author appreciates the substantial assistance of C.D. Olive, Research Fellow, Centre for Commercial Law Studies, University of London (QMW) in the preparation of this article. 1. For a comparison to domestic U.S. Commercial lending practices, see Joseph Norton & Terry Conner, COMMERCIAL LOAN DOCUMENTATION GUIDE (1995). 22 NAFTA. law and Business Review of the Americas cial markets and banking systems (by keeping distressed sovereign debt current through new loans, bankers and regulators were able to claim that the loans were performing and that the large lending banks were still solvent).2 In the 1980s, the explosive growth of takeover finance in the US accelerated the increased use of loan syndications and participations by banks as they competed for busi- ness in the mergers and acquisitions (M&A), leveraged buyout (LBO) and real estate development loan markets. Although these categories of loans were facilitated in large part by issuances of junk-bonds, the large money center banks nonetheless fully participat- 3 ed in the speculative debt financing boom of the 1980s. In the 1980s experts predicted that the process of financial disintermediation com- bined with the development of the interest rate and currency swap markets would render syndicated lending obsolete. The flexibility of the syndicated loan market has ensured its survival in the international financial community. As compared with the international bond or commercial paper markets, however, a syndicated loan facility remains a relatively inexpensive means of obtaining financing and allows the borrower to develop multiple banking relationships. 4 The continued growth of the syndicated loan market is nonethe- less largely attributable to the more conservative lending practices of the 1990s. The primary benefit of syndicated loan arrangements to banks is that banks can diver- sify credit risk by limiting their exposure to any one borrower, industry, or geographical region. In other words, banks can develop a diversified portfolio of high-quality commer- cial or real estate loans of modest size through loan syndications and participations, rather than through a handful of large loans where the failure of only one loan could have pro- found consequences on the bank's credit risk position. Diversification has also been facili- tated by US bank regulators and credit rating agencies, which have placed informal pres- sure on banks to diversify their loan portfolios to minimize the impact of large defaults so that the massive bank and savings and loan (S&L) and bank failures of the 1980s are not repeated. 5 Hence, the common motivation of risk diversification in loan portfolios has been a driving force in the evolution of international syndicated lending. The syndicated lending market has exploded in size and liquidity from 1990-1995. In 1994 alone, borrowings on international capital markets increased for the fifth straight year, increasing by a record 30 percent to US$1,258.3 billion, according to an Organization for Economic Cooperation and Development (OECD) report issued in March 1995,6 with international syndicated loan and note facilities accounting for a majority of the increased borrowings. In fact, the increase was primarily due to a surge in medium-term bank loans to US$368.4 billion in 1995 from US$236.2 billion in 1994, and a 51 percent increase in 2. See William L. Megginson et al., Syndicated Loan Announcements and the Market Value of the Banking Firm, 27 J. MONEY, CREDIT & BANKING 457, at 457-59 (1995). 3. See Robert O. Wienke, Loan Syndications and Participations:Trends and Tactics, 9 COMMERCIAL LENDING REVIEW, at 4-24 (1994). 4. See Robert Hitchings, Syndicated Loans, BANKING WORLD No. 7, at 32 (July 1994). 5. Wienke, supra note 3. 6. See Organisation for Economic Cooperation (OECD), FinancialMarket Trends (Mar. 1995). See also Organisation for Economic Cooperation, InternationalSyndicated Credits, in FINANCIAL MARKET TRENDS, (June 1995). Summer 1996 23 medium-term Euronotes (EMTNs) to US$340.6 billion in 1995 from US$222.1 billion in 1994. With regard to syndicated loan facilities, these arrangements established a new record, totalling almost US$367 billion, an increase of 56 percent from the US$235.3 bil- 7 lion arranged in 1994. In addition, the International Finance Corporation (IFC), a private sector affiliate of the World Bank, reported that its syndicated lending programs with commercial banks increased almost 42 percent to US$2.6 billion in 1995, from US$1.8 billion in 1994.8 In Latin America, where the fallout from the Mexican liquidity crisis9 and peso attacks tight- ened access to international capital markets for firms in the region, IFC still approved investments of more than US$ 1 billion for 53 projects, in addition to US$1.2 billion in syndicated loan facilities. 10 The principal reason for this recent rise in syndicated lending 7. See Borrowing On InternationalCapital Markets Rose For Fifth Straight Year, 66 BNA BANKING REPoRT, 383 (1996). Of this total, OECD countries and resident corporations accounted for US$326.9 billion, up from US$211.5 billion, and non-OECD countries increased their loans to US$41.5 billion in 1995, up from US$24.4 billion in 1994. In addition, all committed and uncommitted borrowing facilities increased to US$388.3 billion in 1995 from US$257.8 bil- lion in 1994. This increase was due almost entirely to an increase in EMTNs to US$340.2 bil- lion in 1995 from US$222.0 billion in 1994. Finally, Eurocommercial paper (ECP) programs expanded to US$44.6 billion from US$30.8 billion, and net issuances under existing EMTN facilities equalled US$174.6 billion, while under existing ECP facilities accounted for US$6.1 billion. Id. See also Richard Lapper, Syndicated Loans Surged to Record in 1994, Says BIS, The FINANCIAL TIMES (Feb. 17, 1995). 8. See Diana I. Gregg, World Bank Private Sector Affiliate Approved $2.88 Billion in 1995 Financing,BNA BANKING DAILY (Sept. 28, 1995). 9. According to estimates from the World Bank, private capital flows to developing countries rose in 1995 to US$167.1 billion, a mere 5.23 percent increase from the US$158.8 billion in 1994, compared with annual increases of over 50 percent in each of the years from 1990-1993. See Private Capital Flows to Developing Countries Slowed in 1995, World Bank Says, BNA BANKING DAILY (Mar. 13, 1996). The total external debt of the developing countries rose in 1995 by almost 8 percent, to over US$2 trillion.