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Bilateral loans

A bilateral loan is a loan provided by a single lender to a borrower under the terms of a facility agreement. Our banking lawyers have many years of experience working on both sides of transactions, and can provide you with expert advice whether you’re a borrower, lender, investor or bank.

Bilateral vs syndicated loans

Corporate lending falls into two main categories of lending; bilateral loans and syndicated loans. The difference between bilateral and syndicated loans is the number of lenders involved. Bilateral loans involve a single lender whereas syndicated loans have multiple lenders.

What is a bilateral loan?

A bilateral loan is a loan from a single lender to a borrower. Bilateral loans are provided under bilateral facility agreements and are generally simpler than syndicated loans. The distinguishing feature of a bilateral loan is that it is a loan from a single source. However, multiple borrowers may be party to a bilateral facility and in some transactions a borrower may have two or more bilateral loan agreements with different lenders.

What is a bilateral soft loan?

A soft loan is a loan provided on preferable terms to the borrower. Often soft loans are loans with a below-market rate of interest. Soft loans are sometimes known as ‘soft financing’ or ‘concessional funding’.

Differences between a syndicated loan and a bilateral loan

The major difference between a syndicated loan and a bilateral loan is the number of parties to the transaction. A bilateral loan may involve as few as two parties whereas a syndicated loan will involve multiple lenders. In a syndicated loan the key players to the transaction are the lead manager, the underwriter, the bookrunner and the agent.

In a bilateral loan, a borrower’s main contact is the lender. By contrast, in a syndicated loan a borrower’s first point of contact is the lead manager or arranger. The lead manager will then engage other lenders to join the syndicate.

A key legal difference between syndicated loans and bilateral loans is that syndicated lenders’ obligations are several. If a lender fails to perform its duties then other lenders are not responsible.  In other words, a lender is only responsible for its own obligations. In a bilateral loan, the lender will be responsible for the entirety of the loan.   

Bilateral revolving facilities  

A revolving facility allows a borrower to draw down money and repay amounts (up to a limit).  Amounts repaid can be re-borrowed by a borrower during the life of the facility.  Revolving facilities are similar to term loans in that they provide a maximum amount that may be borrowed over an agreed period but allow a borrower to re-draw down money like an overdraft.

Revolving facilities tend to be used where a borrower requires a substantial advance of money. Revolving facilities are not normally used to fix short-term cash flow problems.

The advantage of a bilateral revolving facility for a borrower is that it provides flexibility over the amount of money borrowed. A borrower can draw down money when required and pay interest on the money drawn. If the money is no longer required, a borrower can repay the money and reduce its interest payments.

Typically revolving facilities require minimum notice periods before a sum is advanced and a bank may set upper and lower limits on the amount of money that may be withdrawn at any one time. A bank may also impose a repayment schedule and commitment fees can be substantial.

Collateral stock loans

A collateral stock loan is where a borrower uses shares (aka ‘stock’) as security for its loan. Stocks are a form of financial collateral and the use of financial collateral is regulated by the Financial Collateral Arrangements Regulations.

Financial collateral is defined as ‘cash, financial instruments or credit claims’.

What is a security financial collateral arrangement?

A security financial collateral arrangement is where a collateral-provider creates a security interest over financial collateral to secure amounts owed to a collateral-taker. There is no requirement that the arrangement is strictly bilateral.

Security interests may include:

  • A fixed charge
  • A floating charge
  • A lien
  • A mortgage
  • A pledge

In some circumstances, the collateral-taker may become the beneficial owner of the assets. In these circumstances, the collateral-taker may discharge its obligations to the collateral-provider by transferring equivalent but different assets to the collateral-provider.

How is a security financial collateral arrangement different?

The Financial Collateral Arrangements Regulations modify certain statutory formalities that would ordinarily apply. The regulations remove the requirement to register a financial collateral arrangement with Companies House and limit some insolvency provisions.

For example, the regulations:

  • Remove restrictions on enforcing security
  • Disapply provisions on the order of payment of creditors
  • Prohibit avoidance of the arrangement by a liquidator or administrator.

Enforcing a financial collateral arrangement

Broadly speaking, the Financial Collateral Arrangements Regulations, provide additional security to holders of a floating charge over financial security.

Under the Financial Collateral Arrangements Regulations, neither the consent of the administrator nor the permission of the court is required to enforce a security interest. Furthermore, a company’s preferential creditors will not be paid in priority to the claims of a floating charge holder if the floating charge is created under a financial collateral arrangement.

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