Any banking lawyers out there

Just had an odd converstion and I does nt sound right. I know banks lend other peoples money all the time that's kind of how it works but

 

I am being told that the bank is lending a specific clients money ( loads of millions of $) on behalf of the client, kind of fronting up and badging  the loan. Also the same bank are providing a dd report for their client whose money they are lending.

 

My head is exploding, but am not a banking expert so am I wrong to be cynical about this set up , my bs radar is spinning fast

 

any views?

Can't see why it wouldn't happen if you're a super rich client with some kind of special private banking relationship.  I've certainly come across a group of individuals investing in a fund the aim of which is to lend money to property developers which is not entirely dissimilar.  It's also not totally dissimilar to handing money to someone to invest on your behalf and instructing them what kind of things you want to invest in.

Bankers are taking on the risk because a) they are comfortable with both their client and the recipient and b) they are actually authorised so to do and the client presumably isn’t.

Unusual, but it happens.

Thanks Sail, that almost exactly describes the situation explained to me, this is for a specific prop development ( mega money ), but why involve the bank as surely they will need a fee for this and it wont be cheap 

Also the borrower of the mega funds is the guy that told me about the arrangement and I don't know anyone who would lend him money/

I certainly don't think any bank would lend him 100 usd let alone 100s of M

you don't need UK authorisation to lend money to corporate entities. Might need it in the jurisdiction the participant is located in or have constitutional restrictions on who they can lend to. Who are you acting for? Does the borrower know who the participant in the loan is going to be?  Sounds like a glorious money laundering opportunity. 

fortunately not acting for anyone, but the borrower owes me a considerable amount of money.

 

Its not UK, it Caribbean , my first though was ML,  yes the borrower knows who the ultimate lender is and will not care if it came from Pol Pot

It could happen.  Unusual, but it could.  Presumably the bank would declare a trust of the loan and associated security and treat it as client money.  More likely with a private bank, as the clearers are too commoditised/thick to cope with it.

The ultimate lender might want to do it via the bank because the bank has all the systems in place already for administering the loan and calculating interest, etc.  Development loans tend to be drawn down in stages against completion of certain works with the bank employing a surveyor to sign the stages off and the bank is probably also used to dealing with that and has relationships with surveyors and the like that the ultimate lender might not have.  It's a bit like some of the big lenders who outsource management of their mortgage portfolios to specialist loan servicers.

Surely this is just syndicated lending, where the syndicate has a membership of 1?

I think ( if its real) it is to hide the identity of the lender, not a private bank but a subsidiary of a large Canadian outfit. A rated in most sectors

The way you describe it sounds absolutely bonkers.

OTOH sub-participations (which is what this sounds like) are a very normal occurrence.  Its not a syndication because the person with the money isn't on the legal docs which is what makes it a sub-part.

So normal the LMA has docs for it.

Thanks guys I feel a load better and think paranoia was taking over, as I said a m not a banking lawyer, and the guy who told me , the borrower has a long and sorry history of bank related BS, to the level if he told me Barclays was a bank I would feel I had to check 

Yes, it is like syndicated lending, but unusual for banks to act as agent and security trustee for a lender who is not also a bank.  If undisclosed agency, it raises some legal issues of its own.  Otherwise it's usually done because the underlying lender does not have regulatory permissions required to make the loan directly.  V v unusual for a bank to agree to do this though.

Sub-parts are usually done because there is foreign security where security trusteeship isn't available, and so the lender can't claim it counts for capital adequacy (CRD IV) purposes.  So it's better to have full credit risk against the lender or record than against the borrower.  It's NOT routinely used to hide the identity of the real lender.

Exactly Badman, There is no regulatory reason on the face of it why the lender cant just lend, the only reason I am getting is privacy and if they wanted to do that they could lend through a BVI or similar SPV.

Its the Vv unusual for a bank (as you put it ) that alarms me and its 100s of M of $

I am calling BS particularly with the bank doing the DD on the deal internally with the lender seemingly relying on it

Badders - there are tons of non-bank lenders in the secondary market.  Generally with a bank at the front because they don't have the agency / administration facilities - there aren't regulatory permissions required for the lending side once you move any significant distance from a bog standard resi-mortgage.

(Ignoring for the moment that this is a disclosed sub-participation) You also don't really have agency issues in a sub-participation.  For one the LMA docs allow it fairly explicitly (IIRC, haven't seen LMA docs in a while admittedly) although I expect the ACT guidelines suggest excluding sub-participation explicitly.  

More to the point a sub-participation is just contractual as between the two 'lenders' - the sub-participant isn't acting as principal and doesn't get rights against the Borrower in the way it would for a true agency.

Not that I'm saying this specific transaction isn't dodgy - but I don't think there is anything based on what you've said that means it definitely is.

And whilst I did say above there isn't a regulatory permissions aspect that's coming at it from a UK perspective - maybe regulatory or otherwise the Canadian entity is allowed to own debt securities but isn't allowed to be a "lender"?

People do weird things for weird reasons.  This could be the banks client and somebody may be keen to inflate their desk's loans where they are lender of record?

Jesus, Arbiter, you are very good at repeating parts of what I have said and completely misconstruing others.  A few points for the hard of reading:

 

1. There is no suggestion that this is secondary debt trading.  It sounds like it is being set up ab initio with a concealed lender as (effectively) a sub-participant (although we have no idea what structure is being used - presumably some variant on a sub-part with a background trust).

 

2.   I know there are no (UK) reg permissions for corporate lending.  I routinely write and review suites of regulated and non-regulated loan documentation.  It was just an example of why a lender might want to set up a loan with someone else as the lender of record.

 

3.  I never said there were agency issues in a sub-participation.  In fact I said that credit risk was lender : lender.  So yes, of course a lender with beneficial ownership of a loan can dictate to the lender of record what they should do.  That's what happened with a load of the post-credit crunch sell-off of defaulted debt by the banks.

 

Now is there anything else you need beaten into you, or is it past your bedtime, kid?

So will  the bank be quite light on DD requirements and led by the ultimate lender as I guess they will make it all at the risk of the ultimate lender.

In my experience of these size loans in the property sector also inc a going concern and revenue stream that there would be a whole team if not teams of lawyers doing dd eg property, tax, employment, tax , environmental, pensions etc, not just a quick 3 week internal bank DD exercise, but if they pass the risk to the ultimate lender I guess they don't care as its not their money and I guess they get a whopping fee

Jesus, Arbiter, you are very good at repeating parts of what I have said and completely misconstruing others.

You are jumping around between trusts, imaginary non-disclosed agency and sub-participations so yes I may well be misconstruing you.

Actually the more I think about it this is (assuming true) probably just a small bank who wants to hide who the funder is to avoid being cut out as a middle man.  Depending on where the property is it could well be impossible to prove so I can see someone just deciding that the simplest option is not to let the borrower and the funder speak to one another - that way the bank gets the fee but doesn't have to take the risk on the borrower.

don’t worry arbiter

badman’s well known for being a spectacular moron

ultimate funder is an individual, front bank a very large Canadian out fit with AA ratings

 

Ultimate lender and borrower are talking, the whole thing at the very least is to hide the identity of the lender

 

BTW thanks again guys, whilst not confident that this crock of shit will go forward and I will get paid I am glad its not as bad as I thought but I always have ringing in my ears the words of the head of compliance at a major bank, my job isn't to make the bank a profit its to keep it open. I think when it gets to compliance they will dance all over it. Of coarse may be paranoid and they may have already signed it off

BTW there is a substantial chance that this is not true or at the very best grossly misrepresented 

Sounds dodgy to me

 

 

 

 

 

Note: I have no expertise whatsoever in this area 

A lot of Term Loan B / institutional tranches work this way. The lender of record is normally a different bank entity to when the bank is lending its own money too.

It’s not that unusual, particularly for US banks.

 

While we are on the topic, what is the regulatory constraint on corporates making loans to individual or other corporates?  Surely they do this all the time.

I understand the reasons for regulations for deposit-taking, but why for lending?

@Elfffi, as others have said, in the UK lending to corporates is unregulated. They are considered big and ugly enough to look after themselves. 

Lending to individuals is highly regulated under e.g. Consumer Credit Act etc. because debt can really ruin people's lives and not everyone has the skills to make good decisions about the debts they take on.  

Thanks CT.  How does that work for corporates lending to employees?  Or private mortgages?

You have to fit within an exemption.

e.g. there is a specific exemption for cycle to work schemes so (some) employers can offer what would otherwise be a regulated consumer hire agreement without the need to be regulated.

Interest free loans with 12 payments over up to 12 months are also exempt (so season ticket loans, though there may be something more specific there as well).

Private mortgages you'd probably only be legally able to do if it wasn't "by way of business" e.g. friends and family you could probably get away with.  Similarly if you went for an exempt product such as BTL or HNW owner occupier (but then you'd have to jump through some hoops).

What arbiter said.

I don't do CCA work (too hard for me thanks) but I work v closely with the amazing people in my shop who do. 

Really, really easy to mess up and render all your agreements unenforceable so not something one can dabble in. Also quite easy for clients to accidentally blunder themselves into a consumer credit problem. 

The first GC I ever worked for in a bank refused to let the bank do CCA stuff as she said nobody ever got it right.

I passed on this advice when my current employer was looking to buy a CCA firm, the advice was ignored and then proven 100% correct.

The first GC I ever worked for in a bank refused to let the bank do CCA stuff as she said nobody ever got it right.

I passed on this advice when my current employer was looking to buy a CCA firm, the advice was ignored and then proven 100% correct.

It is tough to sustain a practice at an "elite" aka "expensive" firm, but probably a licence to print money if you are good and a bit further down the chain of fashinable law firms.