INTERNATIONAL FINANCIAL LAW

International Financial Law

International Financial Law

1 -DB requires your advice as to whether they may have cause of action against KCC and lead manager of the issue, and the United Gulf Bank (UGB) to the issue for any loss in value of the bonds which DB had purchased. Assume that the bonds of issue documentation were governed by English law.

Ans. Syndication is required, it is important that the transaction is structured to facilitate it both from the commercial and the legal viewpoint. Banks and their advisers in the major financial centres have developed the necessary expertise in this area. They often adapt structures and techniques used in the capital markets and other structured finance activities. The term 'arranger' is used throughout to mean the originator of the trade financing transaction and the term 'participant' is used to mean the party in the primary or secondary market to whom the transaction is to be distributed. In general, the risks relating to trade finance transactions can be passed to third parties either by a primary syndicated loan or by a secondary distribution. Secondary distributions can be effected by outright sales (where a purchase price is paid or funding is provided) or by risk participations.

In this context, there is a large and useful literature studying the impact of ratings on market prices and bond spreads. Focusing on market prices, Tennekoon et. al. 1991 find that downgrades and upgrades have an impact on country risk and stock returns: these rating changes are transmitted across countries, with neighbour-country effects being more significant. They conclude that rating agencies may contribute to heighten financial instability. Special provisions are needed to deal with the dual role of agent and security trustee both in the loan agreement and the security documents themselves. In some countries, the concept of a trust is not recognised, in which case alternative arrangements may have to be made for the holding of security governed by local law. This can make future transfers by the initial participants in the loan more difficult.

Other distribution techniques

Other techniques can be used in isolation or, if relevant, in conjunction with the endorsement and delivery of negotiable instruments, for secondary market distribution where:

there are no negotiable instruments involved; or 

there are negotiable instruments but there are also other documents (such as guarantees rather than avals) which have to be transferred separately by another method such as assignment or which cannot be transferred when a sub-participation will be needed; or the high value of a transaction means that there are a number of third parties who wish to 'purchase' one negotiable instrument which cannot be split between them.

If there is only to be a risk participation, rather than an outright sale on a funded basis, other techniques will have to be used to achieve the right level of protection for the arranger with an ability for it to demand funds from the participants on the happening of specified events. As a result, risk participations generally operate to ...