The new BAFT Master Participation Agreement (English law version) – All you need to know!
Presentation by Geoffrey Wynne, Partner and Hannah Fearn, Managing Associate - Sullivan & Worcester UK LLP 20 September 2018 New Broad Street House 35 New Broad Street London EC2M 1NH
25713
What this presentation will cover
What is a Participation – a bit of background
Current English and NY law BAFT MPAs
Optionality and issues with current English law BAFT MPA
The changes
Article 194 opinion
Ways forward
Conclusions and the future
2
25713
What is a participation? › A way of buying and selling risk
Types of participation › Unfunded participation › Funded participation
Distinction between English and New York approach › Independent debtor / creditor relationship or transfer of direct interest
in the underlying transaction › True sale treatment › Transfer of risk and derecognition of the asset
3
Participations
25713
Unfunded participation
Participations – when to pay
4
Funded participation
Underlying obligor
Grantor institution
Participant institution
1. $100m loan 2. Sells 50% risk
participation
3. Defaults on $10m repayment
instalment
4. Pays share of defaulted amount -
$5m
Underlying obligor
Grantor institution
Participant institution
1. Utilisation of $100m loan
2. Participant with 50% participation pays share of utilised amount -
$50m
3. Repays $10m instalment
4. Pays share of repaid amount - $5m
25713
What BAFT Agreement tries to achieve?
Two way agreement › Party A, Party B structure
Definition of Trade Transaction › See clause 2 › Less emphasis on loans - more on letters of credit, payment
undertakings, contingent trade obligations › Ability to choose other transactions
Template is described as “recommended form”
Choice noted in certain clauses › Where lack of consensus at the time › Option chosen to reflect whether seller or buyer of risk
5
25713
NY law BAFT MPA Based on English law original MPA but quite a few
differences › Seen by some as an update › Driven by accounting treatment
New York law compliant (waiver of jury trial etc.., different dispute resolution options)
More US approach generally, e.g.: › Terminology › Seller not Grantor
Trade-related loans added as Transaction type
Most important change is structure
6
25713
NY law "true sale" BAFT MPA Aimed at supporting a true sale accounting treatment (Seller-
Participant relationship is not debtor-creditor - Seller grants Participant an undivided proprietary interest in the underlying Transaction (recital, clause 21.22))
Documentary dispute provision changed so more pro-Seller (clause 14)
No general debt restructuring provision (was clause 15) but extra provisions (clauses 7 and 13) about action Seller can take if Participant disagrees with Seller's proposed course of action and assignment to Participant not possible
7
25713
The BAFT MPA BAFT English form Master Participation Agreement (the BAFT MPA)
is a template master agreement for risk participations and funded participations in trade transactions › Parties can be grantor or participant › Unfunded and funded participations › Underlying exposure is trade finance risk
The BAFT MPA is widely used by members to distribute trade assets
Governed by English law with options to submit to English courts or arbitration
Institutions use participations to “sell” trade finance risk › Trade loans, letters of credit, demand guarantees and other trade instruments
Bank might want to take participations into account as credit risk mitigation for the purposes of calculation of capital requirements under CRR (see later)
8
25713
Structure of the original BAFT Agreement
Operates by offer and acceptance of each transaction
Form of Offer and Acceptance as appendices
Completion of Offer and delivery of Transaction Documents are important
Payment Mechanics – clauses 6-8
Reflects debtor/creditor relationship
Variations to protect Participants – clause 13
Limited representations and warranties – clause 19
Right to terminate Master – clause 21
Choices (optionality) › Fraud risk – seen as a key issue
9
25713
How could BAFT Agreement be changed (improved)? Where have there been tensions in the past?
› Banks used slightly different forms
Improvements based on what has been changed by market
Cover changes in law and practice
Update the English law to cover true sale?
Efforts by ITFA to list possible changes › Member survey on changes › Approach to BAFT
What has happened? › Working Group from the industry including ITFA members
S&W appointed to provide revised English law BAFT › Followed extensive discussion
New English law BAFT launched
10
25713
Changes discussed over the years Wider ambit of underlying transactions Cover multi branches (and affiliates?) Add provisions to cover certain US regulations Cover Bail-in?
› Necessary?
Deal with true sale (of underlying transaction) Protect payment flow Cover rights for participant to assignment in specific cases Deal with Fraud Risk Restructuring – streamline wording Technical drafting – tidy up and updating Our mandate
› Keep same format › Evolution not Revolution
11
25713
What has happened in the new English law BAFT?
New clause order › More logical
Definitions updated and tidied up › New definitions to reflect some structural changes
It is now multiparty › Concept of Master Party › Multi branch › Affiliates can sign offer or acceptance
Offer and Acceptance creates separate agreement between those parties incorporating terms of Master Agreement
Optionality removed › View taken on all options
12
25713
A Key Change Grantor has become Seller
› Consistent with NY law BAFT › More importantly no longer debtor/creditor › BUT instead …
Transfer of ownership rights › Transfer by way of equitable assignment (where legally possible) › Used for Funded Participations only › Works under English law › Clarification clause to show intention to transfer
Reflects what the Drafting Group (and the market) required › Place beneficial interest in underlying transaction beyond reach of Seller’s
creditors › Improvement of current position › Derecognition of asset on books of seller for funded participations
13
25713
Changes to payment mechanics Clearer divide between Unfunded and Funded Participations
› Separate provisions
Reflect how and when payments should be made › Timing reduced to help CRR compliance › Attempt to avoid abuses when demand can be made
Strengthens payment obligation of Seller over Funded Participation receipts › Trust and obligation to pay over
Clause dealing specifically with Income Payments › Makes it easier to split out returns between the parties › Covers fees › Cover any skim (or incentive payments)
All provisions on Recoveries now in same clause (Clause 9)
Clause dealing with payment mechanics (Clause 12)
14
25713
Elevation Provision for full legal transfer to Participant
Designed to give Participant direct recourse rights
Specific circumstances when Elevation can be demanded › Disagreement › Following documentary dispute › Following default › Following withholding tax imposition
Mechanics of how to deal with Elevation
Previous version and NY version did not fully cover this
Position if Parties cannot agree terms of Elevation, or not practically possible
15
25713
What about the fraud risk? No optionality
No separate fraud clause
Adequately dealt with elsewhere › Seller has obligation to examine documents › Seller’s obligation to administer the transaction › Duties expanded/clarified
If Seller breaches above and there is, for example, fraud, then Participant has recourse
If Seller in compliance, risk is shared
16
25713
Expansion of some provisions (or removal) Confidentiality
› Clearer › Avoids further documentation
Representations and warranties - some added › Ownership of asset › Retention share › Sanctions
Communication clause › Updated
Some miscellaneous clauses removed
Governing law clause updated › Waiver of immunity added
No debtor/creditor wording › Consistent with ownership transfer
17
25713
What else? Optional clauses
› ERISA › BRRD (bail in) › Receivable transactions › Wording found in Guidance annexes
Guidance and Comparison
› Comparison with existing BAFT and guidance notes provided separately › Help parties to gain familiarity
18
25713
Article 194 CRR Principles governing the eligibility of credit risk mitigation techniques
Key requirement:
Article 194.1: The technique used to provide the credit protection together with the actions and steps taken and procedures and policies implemented by the lending institution shall be such as to result in credit protection arrangements which are legally effective and enforceable in all relevant jurisdictions.
“The lending institution shall provide, upon request of the competent authority, the most recent version of the independent, written and reasoned legal opinion or opinions that it used to establish whether its credit protection arrangement or arrangements meet the condition laid down in the first subparagraph”.
“upon request of the competent authority”
“independent, written and reasoned”
Possible to use generic opinions?
19
25713
The current position on legal opinion What can a generic legal opinion be used for?
Unofficial opinion of the Directorate General published by European Banking Authority: “[i]f an institution engages in the same type of transaction, with counterparties located in the same jurisdiction and uses the same credit risk mitigation technique, then it can rely on the same opinion”
PRA consultation paper cast doubts on generic opinions
S&W refreshed its opinion on the 2008 BAFT
Equivalent opinion to be issued on new BAFT
Will be generic
Applicable to › Unfunded › Funded? – consider effect of derecognition of asset
20
25713
The Way Forward
Hopefully easier to use
Up to date, clarifies issues, facilitates transactions
Need to move to it? › No need immediately › Both versions will run in parallel › Consider ways to bring provisions into new transactions
Advantages in using the new one
21
25713
Conclusions
What do you think?
Initial views are positive
Where to next? › Fintech? › Smart contracts?
22
25713
Geoffrey L Wynne Partner Geoffrey Wynne is head of Sullivan & Worcester’s London office and also head of its Trade & Export Finance Group. He has extensive experience in banking and finance, specifically trade and structured trade and commodity finance. He also advises on corporate and international finance, asset and project finance, syndicated lending, equipment leasing and workouts and financing restructuring.
Geoff is one of the leading trade finance lawyers and has advised extensively many of the major trade finance banks, multilateral financers and companies around the world on trade and commodity transactions in virtually every emerging market including CIS, Far East, India, Africa and Latin America. He has worked on many structured trade transactions covering such diverse commodities as oil, nickel, steel, tobacco, cocoa and coffee. He has worked on warehouse financings in many jurisdictions and advised on how to structure involving warehouse operators and collateral managers. He has also advised on ownership structures and repos for commodities and receivables financings.
Geoff sits on the editorial boards of a number of publications and is a regular contributor and speaker at conferences. He is also the editor of and contributor to The Practitioner’s Guide to Trade and Commodity Finance published by Sweet & Maxwell and A Guide to Receivables Finance, a special report from TFR published by Ark.
Geoff has recently been recognized as the only UK lawyer included in the Trade Finance section of the UK Legal 500's all new UK 'Hall of Fame.' Trade & Forfaiting Review (TFR) honoured Geoff with the TFR Fellowship Award in its 2017 TFR Excellence Awards.
Sullivan & Worcester Tower 42 25 Old Broad Street London EC2N 1HQ
T +44 (0)20 7448 1001 F +44 (0)20 7900 3472 [email protected]
23
25713
Hannah Fearn Managing Associate
Hannah Fearn is a managing associate in the Trade & Export Finance team in the London office. Hannah’s practice area covers trade and export finance. Hannah has advised on a wide range of cross-border trade finance transactions in a variety of jurisdictions, with an emphasis on emerging markets.
She has acted for leading banks in the market and her experience includes advising on syndicated and bilateral secured pre-export commodity financings, commodity repo structures, letter of credit facilities, trade instruments and receivables financings. Hannah has advised clients on related regulatory issues, including sanctions arising out of cross-border finance transactions. She regularly advises on risk sharing techniques, including guarantees, sub-participations, insurance policies and payment instruments such as standbys and demand guarantees, and on the use of such agreements as credit risk mitigation under the EU’s Capital Requirements Regulation (implementing Basel III).
Hannah is a contributor to A Guide to Receivables Finance, a special report from TFR published by Ark, and has contributed practice notes on a variety of trade finance topics, including commodity financing and capital adequacy for trade finance, to Lexis PSL. In 2011, Hannah spent six months on secondment to the London-based trade finance legal team of a major US bank.
Sullivan & Worcester Tower 42 25 Old Broad Street London EC2N 1HQ
T +44 (0)20 7448 1008 F +44 (0)20 7900 3472 [email protected]
24
25713
Awards & Recognition TFR: “Best Law Firm in Trade Finance”
Trade & Forfaiting Review (TFR) named Sullivan & Worcester "Best Law Firm in Trade Finance" in its 2014, 2015 and 2016 TFR Excellence Awards.
Global Trade Review: "Best Trade Finance Law Firm"
Global Trade Review (GTR) named Sullivan & Worcester "Best Trade Finance Law Firm" in the GTR Leaders in Trade Awards 2016 and 2015.
Sullivan & Worcester also advised on two ‘Deal of the Year Awards’ in the GTR Leaders in Trade Awards 2016.
The Legal 500 UK, 2017
Sullivan & Worcester is ranked in Tier 1 for Trade Finance by The Legal 500 UK, 2017.
Partners Geoffrey Wynne, Simon Cook and Mark Norris are listed as Leading Lawyers for Trade Finance by The Legal 500 UK, 2017.
Sullivan & Worcester is also ranked for Commercial Litigation by The Legal 500 UK, 2017. The Legal 500 UK’s all new UK “Hall of Fame”
Geoffrey Wynne has been recognised as the only UK lawyer included in the Trade Finance section of the Legal 500’s all new UK “Hall of Fame.”
TFR Fellowship Award 2017
Trade & Forfaiting Review (TFR) honoured Geoffrey Wynne with the TFR Fellowship Award in its 2017 TFR Excellence Awards.
Chambers UK, 2018
Chambers UK, 2018 ranks Sullivan & Worcester in its Commodities: Trade Finance (UK-wide) listing.
Partners Geoffrey Wynne and Simon Cook are Ranked Lawyers in Tier 1 and Tier 2 respectively by Chambers UK, 2018.
25
www.sandw.com
Offices Boston Sullivan & Worcester LLP One Post Office Square Boston, MA 02109 Tel: 617 338 2800 Fax: 617 338 2880
London Sullivan & Worcester UK LLP Tower 42 25 Old Broad Street London EC2N 1HQ Tel: +44 (0)20 7448 1000 Fax: +44 (0)20 7900 3472
New York Sullivan & Worcester LLP 1633 Broadway New York, NY 10019 Tel: 212 660 3000 Fax: 212 660 3001
Washington, D.C. Sullivan & Worcester LLP 1666 K Street, NW Washington, DC 20006 Tel: 202 775 1200 Fax: 202 293 2275
26
© 2018 Sullivan & Worcester Sullivan & Worcester is the collective trade name for an international legal practice. Sullivan & Worcester UK LLP is a limited liability partnership registered in England and Wales under number OC381549 and is a practice of registered and foreign lawyers and English solicitors. Sullivan & Worcester UK LLP is authorised and regulated by the Solicitors Regulation Authority (“SRA”). The term partner is used to refer to a member of Sullivan & Worcester UK LLP. A list of the names of all the partners is available for inspection at our registered office, Tower 42, 25 Old Broad Street, London, EC2N 1HQ. Please see sandw.com for Legal Notices, including further information on our professional obligations. This presentation is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. We are providing information to you on the basis you agree to keep it confidential. If you give us confidential information but do not instruct or retain us, we may act for another client on any matter to which that confidential information may be relevant.
25713
