4.7 Particular Remarks on Syndicated Loans 125the principal purposes of TEFRA is to discourage the issue of bearer bonds in the
US and to encourage US investors to hold bonds in registered form.^214 TEFRA
does not apply to: (a) registered debt securities; (b) debt securities with a maturity
of one year or less (that is, commercial paper); or genuine secondary market trans-
actions.^215
4.7 Particular Remarks on Syndicated Loans
As described earlier in Volume II of this book, syndicated loans are an important
form of multi-party contracts. All multi-party contracts raise particular legal ques-
tions on: representation; the rights and duties of the agent representing two or
more parties on the same side; the rights and duties of parties on the same side; the
distribution of power generally; the distribution of risk; and exit and entry.
From the perspective of the borrower, syndicated loans are special because of
their very nature: there are many lenders, and there typically is a party who repre-
sents the interests of all lenders. The identity of that party can change during the
course of the negotiation process and during the terms of the contract. This acts as
a constraint both during the pre-signing negotiation phase (it is difficult to agree
on other than the usual terms) and during the term of the syndicated loan (it is dif-
ficult to agree on amendments if they have to be agreed by all or many lenders).
Furthermore, syndicated loans are increasingly traded on secondary markets.
The liquidity of syndicated loan instruments is increased if the terms of syndicated
loans are standardised. In Europe, the standardisation of documentation initiated
by the Loan Market Association has contributed to improved liquidity on secon-
dary markets.
The rights and duties of banks are regulated in two main contracts: the syndi-
cated loan agreement (the contract with the borrower); and the intercreditor
agreement (the contract between lenders).
The syndicate. In a syndication procedure, a group of banks (the syndicate) in-
termediates between the issuer and investors. In virtually all cases in the European
market, the syndicate banks also act as underwriters. Syndication on an underwrit-
ten basis means that the syndicate banks firmly buy from the issuer the issued se-
curities and keep on their own books those securities that they cannot sell on to fi-
nal investors. The placement risk is thus borne by the syndicate. Syndication
where the placement risk is borne by the issuer is called “syndication on a best-
efforts basis”. It is very rare.^216
For example, when German ball bearing maker Schaeffler made a hostile bid for Continen-
tal AG in 2008 (see section 19.3), the bid was backed by a large syndicated loan. The loan
was fully underwritten and consisted of a term loan facility and a revolving loan facility.
(^214) Fuller G, op cit, paragraph 14.6.
(^215) Ibid, paragraphs 14.6 and 14.34.
(^216) ECB, The euro bonds and derivatives markets (June 2007) p 34.