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Supervisory Policy Manual - Hong Kong Monetary …

Supervisory Policy ManualCR-S-2 Syndicated module should be read in conjunction with the Introduction and with theGlossary, which contains an explanation of abbreviations and other termsused in this Manual . If reading on-line, click on blue underlined headings toactivate hyperlinks to the relevant module. PurposeTo provide guidance to AIs on the management of risks associatedwith syndicated lendingClassificationA non-statutory guideline issued by the MA as a guidance notePrevious guidelines supersededThis is a new all in syndicated rate riskSupervisory Policy ManualCR-S-2 Syndicated over syndicated and appraisals, review and compliance with credit management Syndicated lending constitutes a significant type ofbusiness for some AIs.

Supervisory Policy Manual CR-S-2 Syndicated Lending V.1 – 29.06.01 3 This does not represent an exhaustive checklist but rather is intended to indicate the types of …

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Transcription of Supervisory Policy Manual - Hong Kong Monetary …

1 Supervisory Policy ManualCR-S-2 Syndicated module should be read in conjunction with the Introduction and with theGlossary, which contains an explanation of abbreviations and other termsused in this Manual . If reading on-line, click on blue underlined headings toactivate hyperlinks to the relevant module. PurposeTo provide guidance to AIs on the management of risks associatedwith syndicated lendingClassificationA non-statutory guideline issued by the MA as a guidance notePrevious guidelines supersededThis is a new all in syndicated rate riskSupervisory Policy ManualCR-S-2 Syndicated over syndicated and appraisals, review and compliance with credit management Syndicated lending constitutes a significant type ofbusiness for some AIs.

2 The participation of multiplelenders and other parties adds a layer of complexity tosuch activity. Syndicated loans, which are often sizeablein amount, tend to attract a higher level of publicity fromthe Syndicated loans are not necessarily riskier than othertypes of lending. Indeed, the distribution of lendingamong participants is designed to reduce risk by sharingit. In the syndicated loan market, lenders can managetheir risk exposures through various means such assecondary loan sales and credit derivatives. Furthermore,the presence of multiple lenders strengthens theirnegotiating power with borrowers by harnessing thecollective wisdom and experience of the participants andenables risk mitigating measures such as protectivecovenants to be put in place.

3 Nevertheless particulartypes of risk may be incurred, depending on what role anAI plays in a syndicated loan. For this reason the HKMA considers it beneficial to offergeneral guidance to AIs on the risks associated with suchbusiness, on how to manage them and on the types ofsafeguards, processes and procedures which it wouldexpect to find in place in AIs engaging in such business. Supervisory Policy ManualCR-S-2 Syndicated does not represent an exhaustive checklist but ratheris intended to indicate the types of measures AIs The term "syndicated lending" in this module refers toarrangements whereby multiple lenders advance fundsjointly to one or more borrowers ( in the case oflending to different funding vehicles within a borrowinggroup) While the structure, pricing, repayment schedule andother terms of syndicated loans can vary, the followingcommon characteristics are usually present.

4 Syndicated loans are normally governed by one setof documentation describing the rights andobligations of the signatories - the borrower and allthe lenders (or syndicate members). The latter sobligation to lend is usually several; one or more lenders are mandated by theborrower to arrange credit facilities on termsagreed between the arranger and the arranger may underwrite ( undertake toprovide) all or part of the facility amount; typically, the total amount of a syndicated deal isrelatively significant, even though the creditextended by each participant does not generallyexceed what it would be prepared to lend on abilateral basis.

5 The tenor may well be medium- or long-term,although short-term (under one year) facilities arealso common, particularly for trade-relatedtransactions; the credit facility typically takes the form of a termloan, a revolving credit or a standby letter of credit;and 1 References to the borrower in the remainder of this module should be read as includingmultiple borrowers. Likewise, other parties such as the arranger may be Policy ManualCR-S-2 Syndicated syndicated lending involves multiple parties (alsosee subsection below), , arrangers,underwriters, sub-underwriters, agents (facility andsecurity), legal counsel and participating is no standard terminology, however.

6 Titlessuch as co-arranger, lead manager and co-leadmanager are also found. Such titles do notnecessarily correspond to or define the taskscarried out by the parties bearing such titles. Although the functions of the arranger in syndicatedlending vary according to the set-up of each deal, theynormally include: structuring and negotiating the terms of thetransaction with the borrower; preparing the information memorandum orpackage for potential lenders; if applicable, forming the underwriting group; developing a syndication strategy, including thestrategy for soliciting participants and securingtheir commitments; coordinating the drafting of documentation by legalprofessionals.

7 And handling signing of the facility and any Co-arrangers may support the arrangers in carrying outthe above functions, or may simply be accorded theirtitles by virtue of the scale of their As the term indicates, underwriters undertake to provideall or part of the syndicated loan if any portion remainsunsold, subject to satisfactory documentation. Sub-underwriters underwrite up to the limit of their sub-underwriting. Underwriters and sub-underwriters mayalso be arrangers, lead managers, co-arrangers or co-lead Policy ManualCR-S-2 Syndicated The functions and obligations of the agent2 are outlined inthe facility agreement.

8 They normally include: obtaining and perfecting any collateral (see below); verifying compliance with pre-conditions by theborrower (and guarantor, if appropriate) based onguidance given by legal counsel and issuingconfirmation thereof to the lenders; vetting any drawdown notices from the borrowerand informing the lenders; coordinating payments by the lenders and re-routing the funds to the borrower; distributing repayments by the borrower to thelenders; and advising the lenders of any default, actual orpotential, by the borrower of which it becomesaware as regards repayments and compliance withcovenants and other terms of the loan becoming aware of any default shouldalso inform the agent so that the latter can informthe other The agent usually performs the function of obtaining andperfecting any collateral with the assistance andconfirmation of legal counsel appointed on behalf of thearranger and lenders.

9 A security agent may be appointedto hold or administer collateral on behalf of the The lenders will require the borrower's auditors, whoseappointment must be satisfactory to them, to monitorcompliance with financial covenants and to examinecompliance A syndicate member which is not engaged in the abovefunctions will mainly be a participating lender. Themember may employ its own legal and financial advisorsto give professional advice on the deal, in addition tothose appointed to advise the syndicate. A syndicatemay also appoint other professional advisors such asvaluation, insurance and engineering companies.

10 2 Unless otherwise specified, the tem agent in this module refers to the facility Policy ManualCR-S-2 Syndicated Given the above characteristics, AIs engaging insyndicated lending business may be exposed not only tocredit risk but also to market risk, interest rate risk,liquidity risk, operational risk, legal risk, reputation riskand strategic risk (also see section 2 below). These risksare not specific to syndicated lending (see para. ) but the nature or degree of risks assumed may beaffected by the special features of syndicated AIs risk exposures in a syndicated deal will vary,depending on their particular role in the transaction andthe extent of their participation.


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