SSRN Id3472102

SYNDICATED LENDING IN NIGERIA: QUESTIONS AND ANSWERS

Ose Adeoluwa Binitie
Queen Mary, University of London
18th October 2019
Working Paper Series

This is a question and answer styled report with regard to syndicated lending in Nigeria.

1. What laws govern syndicated loans in Nigeria?

There is no singular law governing syndicated lending in Nigeria. Also, the agreement
may specify the preferred/applicable law in the syndicated loan agreement.

However, certain laws in Nigeria may place requirements on parties to syndicated
lending facilities, especially as regards taxation, as well as lending rates.

a. The Companies and Allied Matters Act 2004, where the loan/debenture has to be
registered under the Act
b Banks and Other Financial Institutions Act 2002
c. Central Bank of Nigeria Act 2007
d. CBN Rules and Guidelines
e. Stamp duties Act

2. Who are the parties to a syndicated loan agreement?

a. The Borrower
b. The Arranging Bank
c. Participating Banks
d. Agent bank (Security trustee)

3. What documents are required for a syndicated loan agreement?

a. Mandate Letter
b. Information Memorandum
c. Facility Document
d. Letters of Guarantee and Collateral Agreements

4. What kind of funds can be provided to a borrower in a syndicated loan facility?
1
Electronic copy available at: https://ssrn.com/abstract=3472102

It could be a credit line, a fixed amount or a combination of both.

5. What are the different types of loan syndications available?

a. Underwritten Deal-‐ This is a situation whereby the arranger guarantees the whole
loan and then proceeds to syndicate the loan. Where the arranger cannot fully subscribe
the loan, they are forced to absorb the difference and they may later try to sell to
investors.

b. Best Efforts Syndication:-‐ This is a syndication whereby the arranger commits to
underwrite less than the entire amount of the loan.

c. Club Loan:-‐ This is a smaller loan that is pre-‐marketed to a group of relationship
lenders.

6. What is the role of a mandate in syndicated lending?

A mandate is a document granted by the borrower to an arranging bank setting out the
financial terms of the proposed loan, authorizing the arranging bank to arrange the
syndication and confirming the exclusivity of the mandate.

7. On what conditions is the offer set out in the mandate?

a. The negotiation of a credit agreement and other documentation being satisfactory to
the syndicate.
b. There being no material adverse change.
c. There being no concurrent syndication by the borrower’s group.
d. Final credit approval by the bank.
e. Legal and financial diligence by the banks.

8. Are there any limits under Nigerian Law to which individual lenders may lend a
borrower?

According to the Central Bank of Nigeria Revised Guidelines for Finance Companies in
Nigeria, April 2014, the maximum loan by a finance company to any person or
corporate organization or maximum investment in any venture shall be 20% of the
finance company’s shareholders’ funds unimpaired by losses.

9. What are the standard covenants in syndicated loans?

a. Supply of information
b. Negative pledge
c. Restriction on disposals
2

d. Pari passu clause

10. How can it be ensured that there is an equal sharing of risk among participating
banks?

By inserting a sharing clause to ensure there is an equal sharing of default risk. It must
be couched in such a way that the Lead/Arranging Bank does not exploit its possession
of the borrower’s deposits and that there is a pro rata share of the borrower’s returns
with other banks in the syndicate.

11. What are the different forms of the pro rata sharing clause?

The different aspects include double dipping, subrogation or assignment, syndicate
equality, etc.

12. How may banks guard interest in the case of a default by the borrower?

By the use of a default interest clause, which increases the interest rate which is payable
on amounts that are not paid when they are due.

13. Is it possible for the borrower to make an early payment on the loan? How?

Yes, with the use of a prepayment clause.

14. Are there any guarantees that need to be obtained with regard to syndicated
lending?

Optionally, the underwriting bank could guarantee that the entire loan amount would
be made available to the borrower.
There is usually a guarantee agent, in charge of the implementation of guarantees for
the syndicated loan.

15. Are there any tax exemptions in syndicated lending in Nigeria?

There are withholding tax exemptions for companies that are incorporated in Nigeria, as
well as where the lender is a company incorporated in one of the 14 countries that have
double taxation treaties (DTTs) with Nigeria. There are also no provisions under Nigerian
laws for anti treaty shopping rules.

16. What transactions are syndicated loans used in?

For the construction of major infrastructure projects by government, projects by public
and private companies, and so forth.

3

17. When is underwriting to be advised on a syndicated loan facility?

It all depends. An underwritten loan incurs a higher premium to be paid to the arranging
bank, and it is also beneficial to the profile of the arranging bank. However, it would
increase borrowing costs for the lender. But the underwriting may ensure greater
efficiency in the administrative duties of the arranging bank.

18. What role does foreign exchange play in syndicated loan transactions?

It functions to preserve the value of the lenders’ currency. In addition, it is easier to
raise loans in foreign currency especially because the London Interbank Rate (LIBOR),
which has become the benchmark rate for about $350 trillion in financial transactions
globally is relatively low.

19. What are the advantages of syndicated lending?

Borrowers get access to large financing amounts, long financing terms, a large number
of participating banks and low financing thresholds.

20. What clauses are peculiar to syndicated lending agreements?

Pro rata sharing clauses

This clause specifies how lenders share or allocate payments from the borrower under
the facility agreement.

21. What is the legal effect of pro rata sharing clauses used in syndicated loan
agreements?

It is to ensure equality in the repayment of loans by the borrower. It provides that all
payments must be distributed pro rata to each lender according to their participation
percentages.

22. What does a pro rata sharing clause provide for?

It provides that if any bank receives a greater proportion of its share, it must
immediately pay the excess to the agent, who redistributes to the banks pro rata and
the paying bank is subrogated to the claims of the banks that are paid.

23. What are the advantages of the pro rata sharing clause in a syndicated loan
agreement?

4

a. It is a clause to uphold equality among the lenders. It is also an indirect protection for
the borrower.

b. It functions to discourage a syndicate member from unilaterally enforcing its rights
under the loan syndication since it will be liable to share the proceeds of the litigation.

24. Is it possible to extend the sharing clause to give a contractual right to a syndicate
member, that has shared funds with the other syndicate members to be subrogated to
the rights of the other syndicate members?

Yes, in a situation where a third party satisfies a debtor's debt owed to a creditor, the
third party is entitled to be subrogated to the rights of that creditor.

25. Should the syndicate lenders' rights under the sharing clause be subject to prior
equities or affected by bankruptcy and insolvency laws?

This should not be an issue if the conditions precedent to the facility agreement are
properly complied with and no asset of the borrower is secured by other loans. Also, if
there is a fixed charge in place, the lenders rank high on the insolvency ladder should
the occasion arise.

26. Is it advisable to allow double dipping from the deposit agreement to offset the
unpaid proportions of the other syndicate members?

We may find the borrower resisting the inclusion of a provision that allows for double-‐
dipping, but it is to the advantage of the lenders that any excess deposit funds held by a
recovering member with regard to the borrower be discharged to offset the unpaid
proportions of the other syndicate members.

27. What does a mandate letter contain?

Term sheet containing the financial terms of the proposed loan and the offer, which
would be subject to conditions. It contains things like amount, term, repayment
schedule, interest margin, fees, special terms, and a general statement that the loan will
contain representations and warranties, covenants and events of default, etc.

28. Is it possible for the arranging bank to unilaterally revise the pricing terms and
structure of the syndication facility?

Yes, it can, to ensure the overall success of the facility, using the market flex clause.

29. When should the market flex clause be used?

It should be used when the arrangers are assuming a massive underwriting risk.
5

30. Are there any circumstances in which a mandate can be legally binding?

Yes, as long as the legal terms are clearly delineated, and if it is not expressed to be
subject to contract.

31. Are there any circumstances in which an arranging bank’s underwriting
commitment legally binding?

No, it is not usually legally binding.
Yes, as long as the legal terms are clearly delineated, even if it is not expressed to be
subject to contract.

32. What are the functions of the arranging bank? What must the arranging banks be
seen to do?

i. Assist the borrower in preparing information memorandum
ii. Solicit expressions of interest from other banks
iii. Negotiate loan documentation

33. How can individual lending banks protect themselves with regard to the principle
of syndicate democracy?

Ensuring the borrower has an account in the individual bank.

34. What legal defects may arise to make the participating banks not liable to lend?

a. Introduction of exchange control prohibiting the borrower from making payments to
foreign creditors, if it is a matter of time before the default occurs
b. If an event of default occurs
c. If there is a material adverse change
d. Where the borrower’s certificates are found to be defective

35. What charges created would require registration at the Corporate Affairs
Commission?

A floating charge over the assets of the borrower, book debts etc. The floating charge
must also be registered with FIRS.

36. How can a borrower deal with high interest rates in Nigeria?

6

He can do several draw downs or ask for floating rate, instead of fixed, bearing in mind
the present economic conditions and also take into account the currency to be used for
the loan.

39. Will the borrower be discharged if it pays the agent but the agent fails to pay the
banks?

Yes.

40. What happens if the borrower does not apply the proceeds of the loan toward the
stated purpose?

It could trigger an event of default if that is stated in the facility. It could be made a
warranty, which may suspend certain rights of the borrower, as provided in the
agreement

41. Do investment grade borrowers have an advantage over individual borrowers?

Yes, they can usually obtain better documentary terms than borrowers rated
speculative

42. How can individual borrowers make up the shortfall?

By registering as a company or by borrowing through a company.

43. What must be done for banks to be obliged to make a loan to a borrower?

a. The representations and warranties must be true and up to date.
b. No event of default or which with giving of notice, lapse of time or other conditions
that would constitute an event of default has occurred.
c. No material adverse change with the borrowers financial condition.
d. The borrowers’ certificates are made available.

44. What condition precedents should be included in syndicated lending agreements?

a. Evidence of corporate authorisations and copies of the borrower’s documents.
b. Borrower’s most recent financial information.
c. Copies of relevant insurance policies.
e. Copies of any reports presented by any third parties.
f. Copies of executed transaction documents, including security and inter-‐creditor
agreements.
7

45. What could prevent participating banks from lending?

a. If an event of default occurs, like representations and warranties are not true/kept or
breach of other material terms.
b. If there is a material adverse change.
c. Breach of conditions precedent-‐Where the borrower’s certificates are found to be
defective, If the borrower has breached a financial ratio or granted security in breach of
a negative pledge.
d. Where there is an illegality.
e. If a subsequent defect has arisen
f. If it is only a matter of time before a default occurs

46. What remedies are open to the borrower where the banks refuse to lend?
Suing the banks based on promissory estoppel
Also where loss suffered by failure of banks to lend arises in the ordinary course of
things, they are recoverable

47. How can a borrower deal with high interest rates in Nigeria?

He can do several draw downs or ask for floating rate instead of fixed, bearing in mind
the present economic conditions and also take into action the currency to be used for
the loan.

48. What are the usual warranties in a syndicated loan agreement?
They are usually standardized representations and warranties by the borrower.
Warranties are in 2 divisions-‐legal and commercial

a. Legal warranties
The borrower will make warranties as to his legal status, his powers and authorisations,
the enforceability of his obligations, that his company is duly incorporated.

b. Commercial warranties
Warranties as to no litigation, whether actual or threatened, borrower’s last group
accounts are materially correct, the information memorandum is correct and not
misleading, projections are reasonably based, no material omissions, no material
adverse change, the financial conditions since the date of last accounts, no material
defaults on contracts or other debt.

49. What is the function of the evergreen clause?

It renders the representations and warranties as promises for the future.
8

50. Is a security document relevant to a syndicated facility?

Yes, it is advised in order to secure the assets of the borrower in the interest of the
lenders.

51. What security is advisable to take in a syndicated lending?

a. A full debenture containing fixed and floating charges over all the assets of the
borrowing company

52. What is the function of negative pledge?

This clause provides that that the borrower is prohibited from creating subsequent
charges or security interests over the property it wishes to use as security in the
syndicated facility agreement.

53. What market practice clauses are found in LMA agreements?

a. Market Disruption Clause
This clause requires the borrower to compensate the lenders for actual costs of funds in
the event of a market disruption. It could be that LIBOR cannot be determined (because
no screen rate is available) or where one of the lenders (30-‐50% participation) informs
the facility agent that the cost of funding at LIBOR exceeds the LIBOR rate that applies to
that loan, according to the terms of the agreement. To cover the cost of the lenders’
funds, a substitute rate that is binding on all lenders will apply or the rate could be
calculated on a lender-‐by-‐lender basis.

However, the borrower could insert a clause in the agreement to ensure that the
market disruption clause is only triggered or invoked where the bank is unable to fund
the loan as a result of circumstances affecting relevant interbank market generally.

54. What legal defects may arise to make the participating banks not liable to lend?

Introduction of an exchange control prohibiting the borrower from making payments to
foreign creditors, if it is a matter of time before the default occurs.

55. What determines the scope of financial covenants in syndicated loans?

a. The nature of the borrower determines the scope – loan to a corporate versus
government borrower.
b. It covers/determines the kind of risk that can be undertaken by the lenders.
c. It determines whether the loan is secured or unsecured.

9

56. What clauses should borrowers look for in their other syndicated loan
agreements?

Loans that put a restraint on prejudicial management of the borrower’s business.

57. What clauses are designed to protect the margin or the banks gross profit or the
whole of the loan?

a. Tax grossing up clause
Grossing up protects the bank against withholding taxes on interests and ensures that
the bank receives 100% of its funds. Under this clause, if the borrower must deduct
taxes or if tax is withheld at source, the borrower will pay extra so that the bank
receives the full loan amount. It could be provided that the borrower may prepay that
bank.

b. Increased risks
If any law or official directive increases the bank’s underlying costs, the borrower must
compensate as certified by the bank and may prepay that bank.

c. VAT Clause
Here, payments chargeable as regards VAT shall be paid by the borrower to the bank.

58. What quasi security clauses may be added to the syndicated facility agreement in
addition to securing some parts of the loan with the borrower’s assets?

Sale and leaseback, set off, financial leasing, recourse factoring, retention of title
clauses, sale and purchase (repos), stock borrowings, etc.

59. What powers do majorities of banks have in a syndicated loan agreement and how
can the syndicate democracy principle protect it?

Majority members have the following powers:

a. Waivers of breaches of covenants or consents to the relaxation of covenants such as
negative pledge.
b. Determining whether an incorrect representation or an adverse change in financial
condition is material enough for the purposes of events of default.
c. Directing the agent bank to accelerate the loans, following an event of default.
d. Clauses can be amended once consent is obtained by majority of lenders.
Basically, the majority of the banks will decide whether to forgive a slow borrower or a
borrower inefficient in repaying his loans.

10

60. Are there amendments by the majority that are not permitted?
Yes.
a. Waiver of conditions precedent to the advance of loans.
b. Power to extend maturities or reduce the amounts of payments or the interest rates,
or to change the currency, extend commitment, change obligors, certain matters.

61. Do banks have other options when an event of default occurs other than making
the whole loan immediately payable?

Some of the banks can sell their participating interests to hedge funds or other
specialized recovery firms, like AMCON.

62. Can implementation of changes in the loan agreement cause any kind of
problems?

Yes, it can impede private restructuring and cause problems in the case of insolvency.

63. Should there be a clause to ensure a restraint on prejudicial management of the
borrower’s business?

Yes, if the borrower’s business will contribute to funding the repayment of the loan. For
example, a sale by the borrower of all its assets, provisions for early termination if the
borrower does not comply with the terms of the agreement or events happen which
make it likely that the borrower will not be able to perform.

64. Can banks individually sue for unpaid amounts?

Yes, but they may have to share under the pro rata sharing clause.
In cases of project finance, with a no action clause, the trustee may have the sole right
to take out proceedings on behalf of the lenders.

65. What are the methods of enforcement in the case of an event of default?
a. Taking possession of the borrower’s security.
b. Winding up of the borrower’s company.
c. Appointment of a receiver/manager for the security.
d. Bringing an action for foreclosure.
e. An action for debt recovery.
f. Exercising a power of sale of the secured asset.
g. Taking possession of the security.

66. What are the various remedies for the breach of conditions or warranties in a
syndicated loan facility?

Trigger of an event of default, Suspension, cancellation, acceleration, rescission, and
11

suing for damages.

REFERENCES:
1. Legal Vision, 8 Key Terms to Consider When Reviewing a Loan
Agreement,https://legalvision.com.au/8-‐key-‐terms-‐to-‐consider-‐when-‐reviewing-‐a-‐loan-‐
agreement/

2. Lexology, https://www.lexology.com/library/detail.aspx?g=d3cfd2c1-‐7887-‐4184-‐
9945-‐b1e50966407d

3. Sharing Clauses in Syndicated Loan Agreements, http://v1.lawgazette.com.sg/2002-‐
2/Feb02-‐focus3.htm

4. Pinsent Masons, Preconditions to Lending, https://www.pinsentmasons.com/out-‐
law/guides/pre-‐conditions-‐to-‐lending

5. Lexology, Structuring a Lending Transaction in Nigeria
www.lexology.com/library/detail.aspx?g=f817a82f-‐67ce-‐4871-‐b506-‐956d658acad8

6. Central Bank of Nigeria Revised Guidelines for Finance Companies in Nigeria, April
2014

7. Finweb, The 3 Types of Syndicated Loans https://finweb.com/loans/the-‐3-‐types-‐of-‐
syndicated-‐loans.html

8.Investopedia, Upstream Guarantee www.investopedia.com/terms/u/upstream-‐
guarantee.asp

9. https://ukpracticallaw.thomsonreuters.com

10. Gluchowski J, Tax Clauses in Syndicated Loan Agreements
www3.mruni.eu/ojs/intellectual-‐economics/article/view/view/4/998/4537

11. Mondaq, What to Expect When You’re Expecting the End of Libor
www.mondaq.com/unitedstates/x/817716/Commodities+Stock+Exchanges/What+to+E
xpect+When+Youre+Expecting+the+end+of+Libor

12.https://www.lexisnexis.com/uk.lexispsl/bankingandfinance/document/391290/55KX
-‐XBB1-‐F185-‐SOMM-‐00000-‐00/Market_disruption_clauses_in_facility_agreements

13.https://heinonline.org/HOL/LandingPage?handle=hein.journals/lawfinancemr3&div=
12

8&id=&page=

14. Investopedia, Libor, https://www.investopedia.com/terms/l/libor.asp

13

SSRN Id3472102

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

SSRN Id3472102

Uploaded by

Copyright:

Available Formats

SYNDICATED LENDING IN NIGERIA: QUESTIONS AND ANSWERS

Queen Mary, University of London

18th October 2019

Working Paper Series

Electronic copy available at: https://ssrn.com/abstract=3472102

Electronic copy available at: https://ssrn.com/abstract=3472102

Electronic copy available at: https://ssrn.com/abstract=3472102

Electronic copy available at: https://ssrn.com/abstract=3472102

Electronic copy available at: https://ssrn.com/abstract=3472102

Electronic copy available at: https://ssrn.com/abstract=3472102

Electronic copy available at: https://ssrn.com/abstract=3472102

Electronic copy available at: https://ssrn.com/abstract=3472102

Electronic copy available at: https://ssrn.com/abstract=3472102

Electronic copy available at: https://ssrn.com/abstract=3472102

Electronic copy available at: https://ssrn.com/abstract=3472102

Electronic copy available at: https://ssrn.com/abstract=3472102

Electronic copy available at: https://ssrn.com/abstract=3472102

You might also like