Shortcomings and recommendations for regulations on syndicated loans by commercial banks

There are also many other extensive articles as well as scientific works, which worth time and effort to ponder such as: Yener Altunbas, Blaise Gadanecz and Alper Kara 2006, Syndicated l

HO CHI MINH CITY UNIVERSITY OF LAW

-*** -

MANAGEMENT COMMITTEE OF SPECIAL PROGRAMS

NGUYEN THUY TRANG

SHORTCOMINGS AND RECOMMENDATIONS

FOR REGULATIONS ON SYNDICATED

LOANS BY COMMERCIAL BANKS

BACHELOR OF LAW – GRADUATION THESIS

FALCUTY: COMMERCIAL LAW ACADEMIC YEAR: 2013 – 2017

HO CHI MINH CITY

2017

HO CHI MINH CITY UNIVERSITY OF LAW

-*** -

MANAGEMENT COMMITTEE OF SPECIAL PROGRAMS

NGUYEN THUY TRANG

SHORTCOMINGS AND RECOMMENDATIONS

FOR REGULATIONS ON SYNDICATED

LOANS BY COMMERCIAL BANKS

BACHELOR OF LAW – GRADUATION THESIS

FALCUTY: COMMERCIAL LAW ACADEMIC YEAR: 2013 – 2017

SUPERVISOR: LLM TRAN THANH BINH

AUTHOR: NGUYEN THUY TRANG STUDENT ID NUMBER: 1353801011254 CLASS: CLC38B

HO CHI MINH CITY

2017

STATEMENT OF GUARANTEE

I hereinafter guarantee that this bachelor thesis is definitely attributed to my own research and are implemented under the supervisory guidance of LL.M Tran Thanh Binh All of information other than my opinions to be used or quoted has been acknowledged by means of complete references I am faithfully and completely responsible for this guarantee

LIST OF ABBREVIATIONS

issued by National Assembly dated 25 November 2015

No.47/2010/QH12) issued by the National Assembly dated 16 June 2010

No.51/2014/QH13) issued by National Assembly dated 19 June 2014

issued by National Assembly dated 29 November 2013

Decree 163/2006/ND-CP Decree No 163/2006/ND-CP on security

transactions issued by the Government dated 29 December 2006 amended by Decree 11/2012/ND-CP dated 22 February 2012

prescribing lending transactions of credit institutions and/or foreign bank branches

to clients issued by the State Bank of Vietnam dated 30 December 2016

regulating the syndicated loan by credit institutions to customers issued by the State Bank of Vietnam on 15 December

2011 amended by Circular

24/2016/TT-NHNN dated 30 June 2016

Decision 1627/2001/QD-NHNN Decision No 1627/2001/QD-NHNN on

issuing regulations on lending by credit institutions to clients issued by the State Bank of Vietnam dated 31 December

2001

Decision 1160/2004/QD-NHNN Decision No.1160/2004/QD-NHNN

issued by the State Bank of Vietnam dated 13 September 2004 on the issuance of the regulation on savings deposits amended and supplemented by Decision 47/2006/QĐ-NHNN dated 25 September 2006 and Circular 04/2011/TT-NHNN dated on 10 March

2011

LIST OF TABLES AND FIGURES

Table 1: List of projects financed by syndicated loans from 2008 to 2017 15

Table 2: Comparison table of types of syndicated loans 19

Figure 1: Syndicated loans since 1980s 11

Figure 2: Diagram on syndicated loan transactions 28

TABLE OF CONTENTS

STATEMENT OF GUARANTEE i

LIST OF ABBREVIATIONS ii

LIST OF TABLES AND FIGURES iv

INTRODUCTION 1

CHAPTER I 7

THE CONCEPT OF SYNDICATED LOANS BY COMMERCIAL BANKS 7

1.1 Definition and Historical background of syndicated loans by commercial banks 7

1.1.1 Definition of syndicated loans 7

1.1.2 Historical background of syndicated loans 9

1.2 Types of syndicated loans by commercial banks 15

1.2.1 Underwritten deals 16

1.2.2 Arranged or best efforts deals 17

1.2.3 Club deals 18

1.3 The major principles of syndicated loans by commercial banks 19

1.3.1 Principle of Independent Obligation 19

1.3.2 Agent bank 19

1.3.3 Principle of Democratic Decision-Making 20

1.3.4 Pro rata sharing 21

1.4 The roles of syndicated loans 22

1.4.1 For the lenders 22

1.4.2 For the borrower(s) 24

SUB-CONCLUSION FOR CHAPTER I 27

CHAPTER II 28

REGULATIONS, PRACTICAL ISSUES AND PROPOSED RECOMMENDATIONS ON SYNDICATED LOANS IN VIETNAM 28

2.1 Parties to a syndicated loan 28

2.1.1 Regulations and practical application 28

2.1.2 Shortcomings of regulations and practical application on parties to a syndicated loan 33

2.2 Taking security for syndicated loans 38

2.2.1 Regulations and practical application 38

2.2.2 Shortcomings of regulations and practical application on taking security for syndicated loan 43

SUB-CONCLUSION FOR CHAPTER II 49

CONCLUSION 50

BIBLIOGRAPHY

APPENDIX 1 Table of ratings for debt securities

APPENDIX 2 Clause on Covenants

APPENDIX 3 Clause on Agent in syndicate

APPENDIX 4

INTRODUCTION

1 Rationale for Research

Since the implementation of Đổi mới (Renovation), which was initiated by

the Vietnamese Communist Party in 1986, the Vietnamese legal system in general and its banking area in particular have been significantly reformed to accommodate the transition process In the period of this innovation, the commercial banks (“CMBs”) have been considered not merely as the storehouses of the country’s wealth but also the reservoirs of resources necessary for economic development, especially in case of developing country like Vietnam One of the fundamental functions of CMBs is the source of finance and credit for industry and trade However, nowadays, due to the rapid growth in volume, the escalating size and complexity of the loans, CMBs have been forced to further develop methods to adequately diversity their risk Indeed, when a borrower’s need for funds exceeds the amount which any single bank is able to lend or exceeds the limit on credit extension for each client set by the State Bank of Vietnam (“SBV”), it becomes necessary for banks to find the way to provide the required funds In order to handle these restrictions, besides unilateral credit extension, the CMBs nowadays may finance projects; production and business plans together with other credit institutions for the purpose of risk sharing and increase in the possibility of fund mobilization This type of credit extension is so-called syndicated lending

In the recent time, the numbers of projects and economic organizations, which have been financed by syndicated loans, have gradually increased In 2016 and 2017, syndication agreements worth hundreds million United State dollars (“USD”) entered by large corporations as Vingroup1 and Novaland2 mark a milestone in the process of development of syndicated loans in Vietnamese financial market Be aware of the importance of the syndicated loans, SBV has enacted a new circular3 to amend and supplement Circular 42/2011/TT-NHNN

1 Binh An, “Vingroup vay 300 triệu USD từ nước ngoài bằng hình thức vay hợp vốn” [Vingroup borrowed

300 million USD from abroad by mean of syndicated loan], 300-trieu-usd-tu-nuoc-ngoai-bang-hinh-thuc-vay-hop-von-20160707093531209.htm , last visited on 14 May

http://vietnamfinance.vn/tai-chinh/vingroup-vay-2017

2 “Maybank và Vietinbank Filiale Deutschland giải ngân 30 triệu đô la cho Novaland” [Maybank and Vietinbank Filiale Deutschland disbursed USD 30 million to Novaland],

la-cho-Novaland.html , last visited on 14 May 2017

http://www.thesaigontimes.vn/160530/Maybank-va-VietinBank-Filiale-Deutschland-giai-ngan-30-trieu-do-3 Circular No.24/2016/TT-NHNN issued by the State Bank of Vietnam dated 30 June 2016 on amendment and supplement to a number of articles of Circular No.42/2011/TT-NHNN regulating provisions of syndicated loans for clients by credit institutions

issued by the State Bank of Vietnam dated 30 December 2016 regulating provision

of syndicated loans for clients by credit institutions which revealed many shortcomings in the process of application

Syndicated loan is not a new lending method in the world, but it has just been introduced to Vietnam since the emerging of investment capital’s needs for large-scale projects However, after looking at the Vietnamese laws relating to syndicated loans, the author still explores defects around this kind of transactions which may incur substantial risks, in the worst case where the CMBs’ risk management does not work effectively, can lead to systemic risk4-the collapse of an entire financial system, initially from the first weak bank in trouble Therefore, building a legal framework to ensure the safety of syndicated lending activity in particular and to create the stability for banking activities in general is very urgency

Based on the fact that current laws do not adequately protect the benefits of CMBs due to the shortage of effective legal mechanism, there are still rooms for improvement of regulations on syndicated loans For this reason, the author wishes

to conduct the thesis with topic “Shortcomings and recommendations for

regulations on syndicated loans by commercial banks” for the purpose of

contributing to perfect the legal foundations for implementing “successful” syndicated loans in Vietnam

2 Literature review

As of this moment, the topic of syndicated loans has attracted the attention of many legal practitioners, policy-makers and, more recently, academic researchers in Vietnam in particular and in the world in general The scientific works on this topic which have been referred by the author will be divided into materials written in foreign language and in Vietnamese as bellows for convenience of the readers

2.1 Materials in foreign language

In the developed countries where the international syndicated loan market has been evolving most such as America, Europe, Eastern Europe, a large number

of research works on syndicated loans have been conducted by specialists as well as scholars in banking and finance field The author is pleased to summary some remarkable points relating to syndicated loans in these works as follows:

The book The Law and Practice of International Finance of Phillip Wood in

2008 covers practical and doctrinal aspects, comment and analysis on this type of lending activity in typical legal instruments to both international and domestic

4 Systemic risk, Investopedia, http://www.investopedia.com/terms/s/systemic-risk.asp , last visited on 14 May

2017

extents Due to his long period acting as a lecturer at many universities and an experienced lawyer in several leading law firms, this author provides and introduces

a logical approach to the terms loan of syndicated loan agreement as well as his comments on the process of performing this lending activity The books also illustrates a detailed pictures of how syndication process of a international loan funded by the lenders come from many different legal system is conducted, which is very useful with respect to the international nature of syndicated loan

The book Syndicated Lending-Practice and Documentation chiefly edited by

Mark Campbell and Christoph Weaver in 2013 is also the essential material when researching the topic involving syndicated loans This book concludes with a summary of the way in which banks organize their syndication, syndication process and the methods for the effective transfer of syndicated loan

The book Syndicated Lending written by Andrew Fight in 2004 illustrates the

basic matters of the syndicated loans such as the rights and obligations of parties, loan terms… and the variety of benefits and risks involving taking part in the syndicated lending- one of the most important activities of banks

The Guide to Syndicated Loans&Leveraged Finance Transactions sheet of LMA serves for the general understanding on basic elements existing in any syndicated loan transaction which the parties or the lawyers of parties to syndicated loan must be aware of before doing it

There are also many other extensive articles as well as scientific works, which worth time and effort to ponder such as: Yener Altunbas, Blaise Gadanecz

and Alper Kara (2006), Syndicated loans A Hybrid of Relationship Lending and

Publicly Traded Debt, Palgrave macmillan; Toluwani Ajayi, Magaret Sosan (2014),

“Solving Issues of Default under Syndicated Loan- Transactions: A detailed Legal

Analysis”, Equity Research and Legal Consult; Michael Chui (2010), “The

Collapse of international bank finance during the crisis: evidence from syndicated

loan markets”, BIS Quarterly Review; Robert P Donald (1982), International

Syndicated Loans, Euromoney Publication; Lawrence B Gutcho (1994),

“Syndicated Lending: Lead Banks and Syndicate Members”, International Business

Lawyer, March 1994; Charles L Menges (2003), “An agent’s liability to Co-lenders

in Syndicated loan transactions”, Probate& Property (January/February 2003); Yueqin (Cathy) Wu (2013), “Overview of syndicated loans”, Watson& Band Law

Offices; etc

2.2 Vietnamese materials

In the recent years, due to the increasing utilization of syndicated loans for

financing large-scale projects in Vietnam, there are more and more works focusing and analyzing legal issues around this transaction Accordingly, the author is pleased to list several outstanding research works, which are considered as cardinal materials for author to complete this thesis

In the scope of legal aspects; the following theses, articles are should be noticed according to the author’s opinion:

The book “Thị trường vốn nợ-luật và hợp đồng” [Debt capital market: Laws

and contracts] released by Nguyen Hong Nang in 2016 is one of the indispensable

materials for researching on the syndicated loan transactions in the domestic market With his intensive knowledge and many-year experience in finance and banking field, Nguyen Hong Nang provides readers the comprehensive background

of syndication as well as the detail instruction on the loan terms of LMA sample contract However, the general readers may get confused when approaching this book as it is mostly written for the use of the lawyers, banking staffs who already have the basic background in this field

In the scope of Ho Chi Minh University of Law, regarding this sense, the

master thesis “Pháp luật về cho vay hợp vốn bởi ngân hàng thương mại”

[Regulations on syndicated lending by commercial banks] of Dang Thi Luyen in

2014 thoroughly analyzes and discusses many specific legal issues related to the doctrinal aspects as well as practical applications of syndicated loans by CMBs, which have not been solved or solved incompletely However, the regulations cited

in this article have already obtained many changes since the Decree No.24/2016/TT-NHNN issued by the State Bank of Vietnam dated 30 June 2016 on amendment and supplement to a number of articles of Circular No.42/2011/TT-NHNN and Decree 39/2016/TT-NHNN issued by the State Bank of Vietnam dated

30 December 2016 prescribing lending transactions of credit institutions and/or foreign bank branches to clients take effect

All aforementioned materials are the helpful resources for the research on syndicated loans in international syndicated loan market as well as in the domestic market of the author The other materials also serve as supplementary elements of the necessity for the thesis However, from researching these scientific works, the author figures out difficulties emerging in the application of international standards

in the syndicated loan transactions conducted in Vietnam due to differences between the international practice and the specific characteristics in the domestic market Therefore, it is needed to build a scientific work which contributes to

improvement of Vietnamese regulations in order to not only satisfy the standards of international market but also eligible to be applied in the domestic transactions

3 The objectives of research

The research is carried out in both theoretical and practical aspects for the purpose of clarification of the legal nature and the structure of the syndicated loan transactions The author also figures out the shortcomings of Vietnamese prevail regulations on syndicated loans and, accordingly, combined with experience learned form international practices, offers appropriate recommendations and resolutions to enhance Vietnamese laws These recommendations are carefully given in respect of specific features of domestic banking sector

4 The object and scope of research

4.1 The object of the research

The thesis aims to provide the comprehensive background of syndicated loans and the important issues arising in this kind of loans However, not all legal issues relating to syndicated loans are fully analyzed in the thesis, the author only focus on the points, which are considered essential in a syndicate loan transactions and are not completely and fully regulated in Vietnamese laws

4.2 The scope of the research

The author will limit the research under the certain scope to suitable with page capacity of the thesis and to ensure that the selected legal issues are accurately and deeply analyzed Accordingly, the author focuses on describe syndicated loans with participating lenders being CMBs, other credit institutions will not be mentioned Further, due to the unavoidable restrictions, the thesis cannot completely cover all other relevant issues arising around chosen topic; it only can illustrate legal issues arising in two fundamental matters, which are parties to syndicated loans and security transactions in syndicated loans As the parties mostly subject to risk are the banks due to the shortcoming of laws, most of recommendations and resolutions are proposed with an aim to mitigating the banks’ risks by the way of enhancing regulations controlling it

5 Research methodology

For the thesis’s objectives mentioned above, the author will combine various kinds of legal methods as follows:

Firstly, as regards to the analytical method, this is the most mainly used

method Under this method, the thesis analyze and assess regulations in relation to syndicated loans and experience from laws of foreign countries to reach a conclusion on the appropriateness and effectiveness of Vietnamese current laws

Secondly, in term of synthetic method, this method is mostly used in Chapter

I which help the author collect relevant information from different resources, both primary and secondary: books, legal journals, online material, etc

Thirdly, comparative method, under this method, the thesis figures out the

similarities and differences between Vietnamese law and English laws to draw a conclusion on which the best resolution for issues arising in Vietnamese market Chapter 1 of the thesis takes advantage of the analytical and synthetic method as well as historical method Chapter II of the thesis follows the analytical and synthetic method along with comparative method

CHAPTER I

THE CONCEPT OF SYNDICATED LOANS BY COMMERCIAL BANKS

1.1 Definition and Historical background of syndicated loans by commercial

banks

1.1.1 Definition of syndicated loans

In the social-economic life, lending is the common term in the financial relationships, which were formed among individuals and organizations Lending activity originated from the reality where there existed the temporary financial difficulties of people who have capital deficits, the needs of borrowing from the people with the surpluses budget therefore arose In order to mismatch these needs, the banking system was born as a remarkable invention of the modern society Through its operations, banks connect borrowers and lenders, as the intermediaries,

to transfer the idle cash flow to invest in the necessary places The linking is cheaper, quicker and more accessible if via banks5 Lending activity is then considered as one of the fundamental functions of a CMB Accordingly, in general understanding, the term “lending” by CMBs can be interpreted as an activity whereby a bank or other organizations grant to customers the use of money on the understanding that it shall be returned, usually with extra interest added to the original amount6

Approaching in the similar way, under the aspects of banking law, “lending”

activity is defined as a “form of extension of credit whereby a CI provides a client

with or undertakes to provide a client with an amount of money to be used for a specified purpose within a specifies period of time as agreed, on the principle of repayment of both principle of repayment of both principal and interest”7 It can be seen that, from both general and statutory perspectives, lending activity can be considered as an effective means to boost cash flow to the trade and economy

From time to time, the basic premise behind lending and extension of credit has not changed, however, the way lending happens has changed fundamentally8 The changes are imperative in order to satisfy evolving customer expectation Particularly, due to the rapid growth in volume and the escalating size of the current loan demand, the banks have been forced to further develop their lending forms

5 Phillip Wood (2008), Law and Practice of International Finance, Sweet& Maxwell, p 9

6 Black Law Dictionary (sixth edition), p 936

7 Clause 16 of Article 4 of Law on Credit Institutions (Law No.47/2010/QH12) issued by the National Assembly dated 16 June 2010 (hereinafter referred as to “LCI”)

8 Paul Thomas, “History of Lending”, http://www.provenir.com/2016/07/history-of-lending/ , last visited on

18 May 2017

Depending on the financial capability, limit on extension and the size of loan demand, CMBs may decide to grant the credit to clients under bilateral form or syndication form The form of syndicated lending is specifically legislated in LCI, which allows credit institutions (“CIs”) and foreign bank branches to extend syndicated credit under the SBV’s regulations for a single client and affiliated persons need capital in excess of the limits9 The syndicated lending is the advanced option in case where the banks wish to adequately diversify their risks but concurrently still get profit from their lending activity Moreover, financing a project or a plan for production and business which require the investment capital larger than regulated limit on extension or its financial capability is impossible unless CMBs extend credit together with other banks under the terms of syndicated loan agreements

In order to proceed successfully this transaction, the players shall thoroughly know the structure and credit process of a syndicated loan Accordingly, a syndicated loan, also known as a syndicated bank facility, is one in which two or more institutions, which are banks or other non-bank investors, collectively the syndicate of lenders known as participants contract with a borrower to provide credit on common terms and conditions governed by a single loan agreement10 In short, syndicated loan is a loan made available by a group of lenders in pre-defined proportions under the same credit facility However, in the scope of this thesis, the author only focus on the cases where lenders are CMBs in syndicate, other CIs will not be mentioned Although the lenders grant credit under a single contract, the obligations of each lender are separate and the commitments of granting credit is independent with such of other lenders It means that each lender acts as an underwriter and/or a lender, on its own without responsibility for the other lenders

in the syndicate If a lender fails to honor its obligations as a member of a syndicate, the other syndicate members have no legal duty to satisfy these obligations on that lender’s behalf

9 Clause 6 of Article 128 of LCI

10 This term is defined in many international scientific works For more information, please refer to:

Mark Campbell and Christoph Weaver (2013), Syndicated Lending Practice and Documentation, Euromoney Institutional Investor PLC, p 23; Nguyen Hong Nang (2016), Thi truong von no Luat va hop dong [Debt

capital market Laws and contracts], Industry and Trade Publishing House, p 165; YenerAltunbas,

BlaiseGadanecz and Alper Kara (2006), Syndicated Loans A hybrid of Relationship Lending and Publicly

Traded Debt, Palgrave macmillan, p 6; Andrew Fight (2004), Syndicated lending, Elsevier

Butterworth-Heinemanm, p 1; Lawrence B Gutcho (1994), “Syndicated Lending: Lead Banks and Syndicate Members”,

International Business Lawyer, March 1994, p 131; LMA (2013), “Guide to Syndicated Loans& Leveraged

finance transactions”, p 5

Regarding this sense, according to Circular No.42/2011/TT-NHNN issued by the State Bank of Vietnam on 15 December 2011 regulating the syndicated loan by credit institutions to customers amended by Circular 24/2016/TT-NHNN dated 30 June 2016 (“Circular 42/2011/TT-NHNN”), the syndicated credit facility means

“two or more CIs jointly arrange provision of credit to a client via professional

activities of lending, discounting, finance leasing, debt factoring, bank guarantee or other professional activities of extending credit” 11 This credit shall be extended for

the “implementing a project or plan for production and business in Vietnam or an

offshore investment project” 12 It is obvious that there is the significant difference

between the international definition and definition in the Vietnamese laws Namely,

in the international definition, the lenders extend credit to a borrower, regardless of its purpose for one or more projects In contrast, Article 1 of Circular 42/2011/TT-NHNN requires the syndicated loans shall be used for implementing a specific project (an investment project or plan for production and business) by clients

In the reality, there is still the confusing between the terms “syndicated loans” [in Vietnamese: “khoản vay hợp vốn”] and “loan participation” [in Vietnamese: “khoản vay dự phần”] In order to comprehensively understand the definition of syndicated loans, the distinction between these two lending structures must be interpreted intensively Therefore, the author attends to provide readers with the respective benefits and risks affecting loan participations and syndicated

In a loan participation, the originating lender transfers all or part of its interest in a loan to a participant pursuant to a participation agreement and the participant shall undertake the obligation to fund any additional loans on behalf of the originating lender The intention of the participation is to transfer full economic rights from the originating lender to the participant, but the participant shall not become a party to the credit agreement and does not have any direct contractual relationship with the borrower On the contrary, in a syndicated loan, each of the lenders has a direct contractual relationship with the borrower and is in privity with the borrower13

1.1.2 Historical background of syndicated loans

a) The formation and development of syndicated lending activity in the world

The syndicated loan market was initially developed in London by a relatively small number of merchant banks, which had small balance sheets but large and

11 Clause 1 of Article 2 of Circular 42/2011/TT-NHNN

12 Clause 1 of Article 1 of Circular 42/2011/TT-NHNN

13 Phillips Lytle LLP (2014), “The risks and rewards of multiple lender financings: loan participations and syndicated loans”, http://www.phillipslytle.com/The_Commercial_Paper/2014_11_Nov/Page3.html , last visited on 20 May 2017

important customers It would not have been possible for these merchant banks to provide the full amounts of loans needed by their customers, and so other banks were asked to provide parts of the loans on the same terms and conditions, with the merchant bank taking a fee to arrange the loan and administer it once it was drawn14

The development of syndicated loans has a very lengthy historical background However, the evolution of global financial activities, which occurred in the early 50’s, played a crucial role in the development the present financial practice and credit arrangement15 Pursuant to McDonald, in his book, was of the view that syndicated loans evolved as a lending vehicle from the domestic capital markets in the US truly in the early 50’s but the major drama did not occur until late 1960s16 The capital market in London recorded a total volume of 11.4 billion dollars, which was the shocking development in 12 years During this time, syndicated loan become more of a sovereign business, because most of developing nations had debts resulting from it17 The evolution of syndicated lending are divided into three phases that explains the evolution of syndicated loan agreements

The first is the creation and expansion phase, which began in the 1970s Credit syndication first developed as a sovereign business18 Between 1971 and

1982, medium-term syndicated loans were widely used to channel foreign capital to the developing nations like Latin America, Asia and Africa In 1970, syndicated loans made a remarkable increase of about 23 percent between 1970 and 1984 which resulted into a steady displacement of bilateral lending19

The second phase recorded a downfall, as serious problems in relation to loans and lending arose in 1983, where Mexico and other countries like Brazil, Argentina, Venezuela and Philippines, suspended interest payments on its sovereign debt, soon followed by other countries This brought a crash down in loans and lending activities reached their lowest point at 9 billion USD in 1985 as opposed to

46 billion landmarks up-shoot between 1970 and 198220

14 Andrew Fight (2004), supra (10), p 2

15 Toluwani Ajayi, Margaret Sosan (2014), “Solving Issues of Default under Syndicated Loan Transactions:

A detailed Legal Analysis”, Equity Research and Legal Consult, p 6

16 Robert P Donald (1982), International Syndicated Loans, Euromoney Publication, p 23-24

17 Robert P Donald (1982), supra (16), p 23-24

18 Blaise Gadanecz (2004), “The Syndicated loan market: structure, development and implications”, BIS

Quarterly Review, December 2004, p 75

19 Blaise Gadanecz (2004), supra (18), p 76

20 Toluwani Ajayi, Margaret Sosan (2014), supra (15), p 7

Figure 1: Syndicated lending since the 1980s 21

The third phase was a phase that started in 1987, lead to an action plan initiated by Nicolas Brady who was the US Treasury Secretary The Brady plan was made to swap or exchange credit risk for “Brady bonds” This strategy was seen as

a useful, flexible source of funds and thereafter developed an appetite for syndicated loans Because of these developments, syndicated lending has grown strongly from the beginning of the 1990s to date

Syndicated credits have thus become a very significant source of financing in the international market In 2003, a record signing of new loans globally reached 1.6 trillion dollars, which was three times the amount in 199322, and in 2009 this amount has double, despite the effect of global economic meltdown

b) The formation and development of syndicated lending activity in Vietnam

Since the national economics made its transition to a market economy in

1986, the restructuring of the State Bank significantly changed the banking industry

to a new stage of growth and expansion The country renovation enabled the Vietnamese banking system to integrate into the international banking system and thereafter diversified its types of lending and the source of capital for large-scale projects Before the period of conducting socialist-oriented commercial banking activities, most of projects in Vietnam usually were subsidized by the State However, the number of subsidized projects from 1986 were gradually narrowed

21 Sources: Dealogic Loanware; Euromoney, BIS

22 Blaise Gadanecz (2004), supra (18), p 77

and replaced by the projects financed by CMBs The growth in the needs of scale investment capital has played an important role in the process of bringing the syndicated lending method-a common type of lending in developed countries into Vietnamese market

large-From the 1990s, there existed several short-term syndicated loans which were jointly financed by CMBs in Mekong Delta for the import activities to East Europe countries (at the time, the syndicated loans were defined as the loans of bank association)23

From 1990 to 1996, the growth of credit averaged 36% per year, contributing

to the success of restructuring towards industrialization and modernization, while promoting economic growth over many years In this period, the relationship between Vietnam and international financial and monetary institutions (IMF, WB, and ADB) was resumed In December 1996, at the Meeting of bank directors in the national scale, the SBV General Director officially set the incentive policies for the co-financing activities by CIs, thereafter laid the foundation for many syndicated loans proceeded between 1996 and 1997 Namely, Vietcombank together with Vietinbank (previous name is Incombank) granted a syndicated loans to projects constructing Ha Noi hotel, the office of Ha Noi People’s Committee and other projects of 8/3 textile company24 In 1997, the National Assembly approved the Law of the State Bank of Vietnam and the Law on Credit Institutions forming the basic legal foundation for the banking system to continue its transformation toward

a market-orientation and further international integration During this year, the syndicated lending activities in Vietnam also steadily developed Namely, under the arrangement of branch of SBV in DakLak, CMBs in the territory of this province also provided loans to the project of developing local crops as well as other projects

of local coffee planning25

After experiencing the effectiveness of aforementioned syndicated loan transactions, SBV enacted Decision No 154/1998/QD-NHNN14 promulgating the regulation on co-financing by credit institutions, forming the basic legal foundation for the syndicated lending activity in Vietnamese financial market From this remarkable landmark, the enterprises with large budget gradually developed the appetite of mobilizing capital by syndication methods from banks for the projects

23 Hong Linh (2001), “Giải pháp phát triển phương thức cho vay hợp vốn ở nước ta” [Resolutions for the

developing syndicated lending method in our country], Tạp chí ngân hàng [Banking journal,] Vol (2), p 20

24 Hong Linh (2001), supra (23), p 20

25 Hong Linh (2001), supra (23), p 20

requiring large and long-term loans During these years, there were several scale projects used syndicated loans such as: In 1998, Vietcombank and BIDV extended the credit of 18 million USD for Vietnam Electricity Corporation for importing electric machines with 8-year term loan In 1999, three CMBs namely Vietcombank, Military Commercial Bank and Vietnam International Commercial Bank provided a medium-term loan (three years) for the first time to oil and gasoline Corporation with the amount of 230 million Vietnam Dong (“VND”); Vietcombank, Vietinbank and BIDV also extended the project expanding Dien Bien Phu bridge a credit of 230 billion VND26

large-In 2001-2002, in the concept of significant growth of the economics, the increasing needs of borrowing middle and long-term loans of enterprises facilitated the development of CMBs’ lending activities The changes, which took place in the syndicated loan market are remarkable since the promulgation of Decision No 286/2002/QD-NHNN issuing the regulation on co-financing by credit institutions This Decision was enacted in time to solve the shortcomings existing in the former decision and to promote the syndicated lending activities of CMBs Between 2005 and 2010, besides the State-owned banks and Commercial Joint Stock banks, there existed the presence of foreign banks in the syndicated loans for large-scale projects conducted in Vietnam27 Hence, the syndicated credit facility in Vietnam has entered into a period of strong comprehensive development from this remarkable time For convenience of the readers, the several projects which have been financed

by syndicated loans from 2008 to 2017 are compiled in the following table

Projects

Name of CMBs granting credit

The amounts

of syndicated loans

Date of credit extension

- Cathay Bank,

- Malayan Berhad Bank,

- Bank of China- Ho Chi

USD 58 million 2008

26 Dang Thi Luyen (2014), Pháp luật về cho vay hợp vốn bởi ngân hàng thương mại [Regulations on

syndicated lending by commercial banks], Master thesis, Ho Chi Minh City University of Law, p 25

27 Dang Thi Luyen (2014), supra (26), p 26

- BIDV

VND 2.601 billion

- 13 other foreign banks

USD 430 million

- Commerzbank Aktiengesellschaft,

- ChinaTrust Commercial Bank,

- Mega International Commercial Bank,

- Nomura Special Investments Singapore

USD 65 million

28 “Vinacomin nhận khoản vay 58 triệu USD” [Vinacomin borrowed the loan of 58 million USD],

http://touch.vietstock.vn/2008/09/vinacomin-ky-khoan-vay-hop-von-58-trieu-usd-37-87136.htm , last visited

on 22 May 2017

29 “Vietnam banks in loan deal for Ban Chat”, banks-in-loan-deal-for-ban-chat , last visited on 22 May 2017

http://www.waterpowermagazine.com/news/newsvietnam-30 “Petro Vietnam affiliate signs syndicated loan”,

http://english.vietnamnet.vn/en/print/lastest-news/4507/petrovietnam-affiliate-signs-syndicated-loan.html , last visited on 22 May 2017

31 “Ký kết hợp đồng vay hợp vốn trị giá 65 triệu USD” [Signing the syndicated loan agreement of USD 65 million], http://www.tinmoi.vn/ky-ket-hop-dong-vay-hop-von-tri-gia-65-trieu-usd-011166742.html , last visited on 24 May 2017

32 “SeABank và cái duyên với dầu khí” [The connection between SeABank and oil& gasoline],

http://thoibaonganhang.vn/seabank-va-cai-duyen-voi-dau-khi-25704.html , last visited on 24 May 2017

7 Duyen Hai 3

Thermal Power

Plant Project33

-Vietinbank acted as arranger, and BIDV and Vietcombank as co-lenders

USD 65 million 2015

8 Vingroup34 Credit Suisse AG acts as

arranger, Maybank Investment Bank Berhad and Deustche Bank AG as co-lenders

on common types of syndicated loans in the world thus is indispensable to form the stable theoretical foundation for the improvement of Vietnamese regulations on syndicated loans

In other scientific works36, types of syndicated loans are divided into two

33 Anh Huy, “3000 tỷ tài trợ Dự án Nhà máy nhiệt điện Duyên Hải 3 mở rộng” [Financing Duyen Hai 3 Thermal Power Plant Project VND 3000 billion], https://www.vietinbank.vn/web/home/vn/events/15/3000- ty-tai-tro-du-an-nha-may-nhiet-dien-duyen-hai-3-mo-rong.html&p=1 , last visited on 24 May 2017

34 Binh An, “Vingroup vay 300 triệu USD từ nước ngòai bằng hình thức vay hợp vốn” [Vingroup borrowed USD 300 million via syndicated loan from abroad], http://vietnamfinance.vn/tai-chinh/vingroup-vay-300- trieu-usd-tu-nuoc-ngoai-bang-hinh-thuc-vay-hop-von-20160707093531209.htm , last visited on 24 May 2017

35 “Maybank va Vietinbank Filiale Deutschland giải ngân 30 triệu đô la cho Novaland” [Maybank and Vietinbank Filiale Deutschland disbursed USD 30 million to Novaland],

la-cho-Novaland.html , last visited on 25 June 2017

http://www.thesaigontimes.vn/160530/Maybank-va-VietinBank-Filiale-Deutschland-giai-ngan-30-trieu-do-36 For more information, please see: Dang Thi Luyen, supra (26), p 12; Nguyen Dang Don, Hoang Duc, Tran Huy Hoang, Tram Thi Xuan Huong, Nguyen Quoc Anh, Nguyen Thanh Phong (2011), Nghiệp vụ ngân hàng

categories namely direct syndicated loans and indirect syndicated loans However, this kind of classification seems not show the effectiveness in deciding which type

is appropriate cause it is easy to see that the direct syndicated loan reveals many shortcomings in its operation and as a result rarely be chosen by the parties to syndicated loans37 Whereas in the international financial market, the following types of syndication are very common with the participants, namely:

1.2.1 Underwritten deals

The underwritten deal is one of the most widely available types of syndicated loans in the international financial market This is also known as a “Bought Deal”, under which the whole amount of the facility is guaranteed to the borrower by the appointed lead arranger with all the terms and conditions agreed in advance

The loan is underwritten by an arranger who takes entire transaction risk and will be responsible for the syndicated loan process In other words, in case in which the arranger fails to mobilize sufficient the amount of the loan cause the participation of lenders or the commitment amount of participants is insufficient, it shall lend out the whole amount of syndicated loans38 However, if it cannot fully subscribe the loan, the arranger may later sell to other investors the undersubscribed part of the loan that it has absorbed This underwriting commitment is often not legally binding and is usually expressed to be subject to material changes in market conditions prior to the signing of the loan agreement39 This is the easy if market conditions or the credit’s fundamentals improve If the markets are bearish, the arranger may be forced to hold a larger position on its balance sheet than originally planned and therefore have to sell any undersubscribed portion at a discount or simply consider the whole thing as a loss Fortunately, nowadays, with flex-language40 now widely accepted, underwriting a deal does not carry the same risk as

it did when the pricing was set in stone before syndication41

Besides the potential risks associated with underwritten deals, there are several benefits, which attract both parties (lenders and borrower) to participate in

thương mại [Commercial banking operations], Nhà xuất bản Đại học Quốc gia [National University

Publishing House], p 190-191

37 Dang Thi Luyen, supra (26), p 12

38 Nguyen Hong Nang (2016), supra (10), p 168

39 Philip Wood (2008), supra (5), p 95

40 The term “flex language” can be described as the flexibility inserted into a syndicated loan agreement that allows the arranger to alter the terms of the borrowing in order to attract enough lenders to finance the loan These alternations could include increases in the interest rate, changes in covenants, or increases in prepayment penalties

41 Standard& Poor’s (2010), “A Guide to The European Loan Market”, p 8

these transactions On the one hand, from the perspective of borrower, the attraction to the borrower is the speed at which the deal can be finalized and the protection of confidential and price-sensitive information, but the borrower is expected to pay higher than normal fees to the arranger42 On the other hand, there are several reasons why a bank may decide to become the underwriter First, this type of loan can make a financial institution look more competitive Next, a syndicated debt could mean huge profits for the bank because the risks involved in this type of loan can translate to higher service fees Lastly, underwritten deals now have floating interest rates43, thus the risks are no longer as high as debts with fixed rates44

Due to the aforementioned specific elements, the underwritten deals are often found in situations where a short turnaround period is required, such as acquisition finance, and sufficient time would not be available for the normal syndication process

1.2.2 Arranged or best efforts deals

Of all the types of syndicated loans, the best-efforts syndication is the most commonly used in the world Contrary with underwritten deals, in the best efforts deals, the loans are not underwritten by the arranger In other words, the arranger does not guarantee that the whole required amount can be raised The arranger will commit to a certain amount of the loan, and undertake to find other lenders to provide commitments for the remainder on a “best efforts” basic If the loan is undersubscribed, the credit may not close or may need major surgery to clear the market The borrower therefore bears the risk that in the event that the arranger fails

to attract enough commitments for the total amount of the loan, the borrower will not receive sufficient funds45 Thereafter the borrower is forced to accept a lower loan amount or loan agreement is canceled entirely, but will be paying a smaller fee

to the arranger

This type of transaction is suited to the cases in which a borrower is

42 Andrew Fight (2004), supra (10), p 66

43 The term “floating interest rates” can be described as interest on a loan which is not fixed for the term of the loan, but which is periodically determined by an agent bank in accordance with the loan documentation The rate is usually set at a margin in relation to a specified money market rate (usually three or six months),

see at Christoph Weaver, Mark Campbell (2013), supra (10), p 553

44 “The 3 types of Syndicated Loans”,

http://www.finweb.com/loans/the-3-types-of-syndicated-loans.html#axzz4hsK0iZYe , last visited on 23 May 2017

45 LMA (2012), supra (10), p 5

confident that the full amount of the loan will be raised and would appreciate some new banking relationship

1.2.3 Club deals

Club deals are transactions under which the borrower self-syndicates the loan

to the market, using its existing relationship banks This type will usually involve a loan that is pre-marketed to a group of relationship banks46 The borrower may arrange the club loan itself, or alternatively, an arranger may be involved In case where the borrower arranges the loan itself, it may become an arranger and the agent, and the participating banks have to have the strong enough relationship with the borrower to part-finance a project without the joint strength that a syndicated loan can bring Different situations bring about different structures, but there will be identical documentation with the different banks

A “club deal” usually is a smaller loan (determined by the regional banks’ appetite for risk) Club deals are traditionally rare from the perspective of transactions syndicated across regions, but they are common regional plays in Europe, where regional banks provide the funding Club deals became much more prominent during 2008/2009 as the credit crunch sidelined the bulk of institutional investors, and banks scaled back their lending During this period, club deals of more than E150 million became common47

For convenience of the readers, the below table summaries the main contents and compares the different and same points among three common types of syndicated loans

- Borrower: The

finalized and the protection of confidential

information

- Arranger: getting higher service fee

Existing when short turnaround

a lower arrange fee

Existing when the borrower is

46 LMA (2012), supra (10), p 5

47 Standard & Poor’s (2010), supra (41), p 8

amount of loan and syndicate the loan on

“best effort” basic

- Arranger: not obliged take entire transaction risk

confident on the market conditions and assume that full loan will be raised

3 Club deal The borrower

self-syndicates the loan, alternatively, may involve

- Borrower: May saving the arrange and agent fee

Using when the borrower has strong

relationship with the banks It usually small loan financed by regional banks

Table 2: Sources: Compared by the author

1.3 The major principles of syndicated loans by commercial banks

As mentioned above, the syndicated loans involving Vietnam mostly are the cross-border transactions due to it large-scale needs of capital Therefore, for convenience of research and application of this method in the reality, the author will concurrently describe and analyze the principles of syndicated loans both under the international standard’s aspects and under the regulations of Vietnamese laws

1.3.1 Principle of Independent Obligation

When participating in a consortium of syndicated loan, complying with the principle of independent obligation is compulsory to protect the lenders from the joint legal liability among banks which may lead to the collapse of banking system

in case of the loss Therefore, statutorily, banks shall disburse and collect their loans under the same loan agreement but based on the independent relationship with the borrower Accordingly, the participating lenders are subject to their own obligations

on the disbursement of loans to the borrower48 If a lender fails to disburse its loan (the main obligation of lender) in accordance with the loan agreement, it will not influence the disbursement obligations of other lenders In other words, such lender shall be self-responsible for the results of its own credit activities49

1.3.2 Agent bank

48 Clause 4 of Article 3 of Circular 42/2011/TT-NHNN

49 Clause 1 of Article 3 of Circular 42/2011/TT-NHNN

This discipline is a specific characteristic of syndicated loan agreement For convenience of administration of syndication, normally, one of the banks is appointed to act as an agent of the syndicate through whom payments and communication are channeled The agent is an administrative agent and rarely has significant management functions This bank is the agent of the banks, not the borrower Under Vietnamese law, agent bank may concurrently play on the roles of arranger, payment agent and security agent for receipt of security assets50

The existence of agent bank originated from the reality and the desires of the participants to the loans From the co-lenders perspective, they want to control over certain key issues such as material amendments to the loan documents, including but not limited to, changes in the interest rate applicable to the loan or the maturity date of the facility or increases in the facility amount51 However, such lenders are not likely to request control over non-material issues On the other hand, in case of the borrower, they also only want to deal with one lender for day-to-day administration for the purpose of time-saving and money-saving As a result, a bank, which satisfies all statutory requirements, will be unanimously selected by other banks to act as an agent bank to the syndicated loan

On the ground of its effective functions, this principle facilitates the implement of credit extension and thus saving the time and budget for the participants

1.3.3 Principle of Democratic Decision-Making

Profit conflicts can easily arise among members of a consortium of syndicated loan agreement To operate effectively, syndicate members have to adopt the principle of democratic decision-making However, Vietnamese law does not specify the operating mechanism of such principle, particularly, Clause 1 of Article 3 of Circular 42/2011/VBHN-BTP only provides, “the provision of syndicated loan shall be implemented on the basic of voluntary participation by members, on the principle of joint evaluation and joint decision-making to extend credit to the client ” It can be seen that the lawmakers allow the participants to

loans to joint in every key step to extend credit especially on the basis of the voluntary decision-making mechanism The lenders can measure according to the amount of the banks’ participations and subsequently select the appropriate

50 Clause 3 of Article 3 of Circular 42/2011/TT-NHNN

51 Gary A Goodman (2014), “Special problems of syndicated loans”, Dentons, p 7,

https://www.dentons.com/en/insights/articles/2014/april/14/special-problems-of-syndicated-loans , last visited

on 25 May 2017

mechanism of decision-making for their loans Normally, consortium to syndicated loan agreement usually makes decision according to the principle of “majority banks” Majority banks may include any bank or banks holding at least 2/3 of outstanding principal amount52 Notwithstanding the common of principle “2/3”, alternatively, the banks may choose other rates, either 51 percent53 or 75 percent of the total amount54

Often any terms of the agreement can be amended or waived with the consent of the majority lenders and the obligors and will be binding on all the parties However, the usual terms that require a majority vote include declarations

of default, repayment acceleration, loan termination, and revision or termination of certain contract clauses Whereas, there are several amendments by majority are not permitted55 such as the waiver of the conditions precedent to advance of loans56 and power to extend maturities or reduce the amount of payments or the interest rate or

to change the currency, to increase or extend a commitment, and other matters

In conclusion, depending on case by case, the lenders shall negotiate and select the appropriate syndicate democracy for their agreements

1.3.4 Pro rata sharing

The principle of pro rata sharing appears only in syndicated loans The main purpose of this principle is to ensure that the borrower shall make all payments to an agent bank, which in turn, will distribute the payments rateably to the syndicate members according to their participation in the loan and that any receipts by a lender are to be shared proportionately with the other syndicate members In addition, the principle also requires that all consortium members share equally in the risk of default Pro rata sharing is specifically regulated in Clause 2 of Article 3

of Circular 42/2011/VBHN-BTP, which provides:

Members shall contribute capital (or obligations) at the participating ratio stipulated in the syndicated loan agreement, and shall be entitled to benefits (the regulated interest and fees) and shall share expenses and risks arising

as stipulated in the syndicated loan agreement

52 Nguyen Hong Nang (2016), supra (10), p 166; Yueqin (Cathy) Wu (2013), “Overview of syndicated loans”, Watson& Band Law, p 4

53 See more: Appendix 4

54 Martin Hughes (2007), “Transferability in syndicated lending”, Law and Financial Markets Review

(January 2007), p 21

55 Philip Wood (2008), supra (5), p 137

56 Under this term, each bank can unilaterally suspend its obligations to advance new money if a condition precedent is not fulfilled

Such principle plays an important role on ensuring the fair rights and obligations of consortium member and thereafter coordinating relationships among participating lenders

1.4 The roles of syndicated loans

1.4.1 For the lenders

a) The arranger and the agent bank

Although the arranger and the agent fulfill different roles, it is quite normal for the arranger also to be the agent in a syndicated loan facility The arranger negotiates and syndicates the facility, and the agent manages the facility when the loan agreement has been signed The arranger’s role is therefore normally completed once signing takes place, but it will often wish to continue its involvement in the facility by acting as agent bank The attraction to both the

arranger and the agent bank will be illustrated as follows:

- Being able to maintain its relationship with its borrower

As development projects become complex and expensive, developers require larger loans, which may exceed a particular lender’s loan limits on extension or the maximum amount that a particular lender is willing to extend to a sponsor Normally, they tend to want to borrow from the bank who have good relationship with them, syndicate will help bank to continue its relationship with its borrower and provide a large amount of funding, while, at the same time, remain within its credit extend limits

- Collecting additional fees (arrangement fees, administrative fees and

fronting fees)

The main attraction of the roles of arranger and agent is the increased fee which structuring and managing the loan will earn The fees are negotiable with the borrower and will generally consist of a flat fee payable at or around the date of first drawdown57, plus annual fees payable to the agent throughout the life of the loan

Other considerations for arranger and agent, which are same with other non-agent lenders will be mentioned in the next part

The banks acting as agent and arranger usually record all syndicated loans and those banks which participate in them In this way, they are able to note which banks have a particular appetite for certain types or

57 This term can be described as an actual borrowing of money under the terms of facility

structures of loans, and particularly banks which show interest in certain country risks for cross-border loans Those participants are likely to be amongst the first contacted for similar transactions in the future A bank or branch can therefore gain market presence by being seen to be an active member of the syndicated loan market58

b) Co-lenders

From the perspective of the non-agent lenders, a syndicated loan generally provides many benefits which are extremely attractive to these banks

- Risk sharing and exposure

Although the risks in financing projects are transferred to parties competent to bear them, there is uncertainty that the project may not perform according to the financing plans and the credit agreement The residual risk is also borne by all the participating banks With many banks involved in the syndicate, the risks are shared according the proportions of their contributions to the loan In case of default, each bank bears a proportion of the risk, which is offset by returns from successful projects

Moreover, even in case the loan requirement is within the banks’ limits on extension and its financial capability, instead of granting a large amount to one client, the decision of extension still be made in terms of measuring and controlling the correlation between risks and profits Inviting other banks to jointly extend credit facilitates the banks’ risk dispersion Accordingly, the potential risk on long-term and large-scale loans faced by CMBs will be reduced to the reasonable level

- Opportunities to expand the relationship and experience

By creating a syndication group and, thus, dividing the obligations to lend the entire loan amount among several lenders, participating lenders are more likely to be able to stay within their credit limits on extension They also have the opportunities to access the expertise, business relationships, and deal-flow of arranging lenders, allowing the participants to extend customer base

- Reduction in marketing costs

To the participating banks, syndication provides them with lending opportunities that have low marketing costs and chances to participate

58 Andrew Fight (2004), supra (10), p 14

in future group financing When participating in a syndicated loan, the bank does not have to rely only upon its own marketing efforts, and that its marketing team and the related expenses can be kept to a minimum Accordingly, the bank can expand its client network and other business relationship without investing large amounts for marketing costs and administrative capabilities

A participant in a syndicated loan usually receives an amount of fee income as well as an interest margin This fee income usually consists

of a participation fee and a commitment fee

The primary incentive for syndicated loans is diversifying risk and, thus, increasing the granularity of a lender’s loan portfolio

1.4.2 For the borrower(s)

a) Ability to arrange cross border transactions

The borrower need not be resident in the country in which the loan is arranged, so long as it does not breach any law or regulation (e.g foreign currency restriction or in its country of residence It can therefore make new relationship with banks from different countries

b) Structure and purpose of loan

Most of CMBs with strong capital usually have considerable experience in assessing many types of loan, and syndicated loans can be arranged for a wide variety of purposes Accordingly, the arranger can be extremely useful to the borrower in advising on the structure which would be acceptable to the overall banking market, and the margin and fees which the participants would expect to receive

c) Restriction of negotiation

The borrower usually deals with only one bank, the arranger, in negotiating the terms and conditions of the syndicated loan, rather than having separate discussions with a large number of different banks It also minimizes its accounting functions by receiving one payment from the agent when the loan is drawn and making only one payment to the agent when repayment is due

d) Uniform terms and conditions

Only one set of loan documentation is used in a syndicated loan, signed by the borrower, the agent and all the participants The borrower can therefore be certain that all the banks providing the loan have done so under the same conditions

and with the same covenants59 It can also be assured that, so long as these conditions and covenants are not breached, a single bank cannot suddenly and unreasonably decide to ask for payment If security for the loan is given, the benefit

is shared among the banks in the same percentage as their loan participations, and this can prevent one bank from realizing its own security to gain a timing advantage over other banks if the borrower falls into difficulties

e) Speed of finalization

As the borrower deals only with the arranger, which is responsible for supplying information on the borrower to potential participants in a form which the arranger is confident will satisfy their credit approval requirements, the loan can be marketed and finalized in a much shorter time frame than if the borrower were dealing with a larger number of banks

In the circumstance where the transaction is very large and speed and confidentiality are of the essence, as mentioned in Section 1.2.1, the borrower may arrange for the loan to be underwritten by a small number of banks which will provide the whole amount of the loan between them with the intention of subsequently launching the loan in the general syndicated loan market and reducing their participations to a lower level

f) Building relationships with many banks

A borrower may have only a limited number of existing banking relationships The use of a syndicated loan facility can enable a borrower to overcome this problem Generally, the borrower is rely upon the arranger to bring a number of banks into the syndicate It is likely that the borrower will not have an existing relationship with the majority of these banks Although the syndicated loan will satisfy the particular needs for the purposes of the loan, it is possible that a number of banks which do not have relationship with borrower before will prepare

to offer other facilities on a bilateral basis Thus, there can valid opportunities for the borrower to make new banking relationships, for present and for future needs, and opportunities for the participants to maximize their returns from this new connection

In case of the borrower, which has collected more bilateral facilities from various banks than it can regularly use, it can ensure that the arranger invites those banks into the syndicated loan The borrower can thus protect a relationship which may otherwise wither away from underutilization, and it can also convert what was

59 The term “covenant” can be described as an agreement by a borrower to perform certain acts (such as provision of financial statements) or to refrain from certain acts

possibly an uncommitted short-term facility into a committed medium or long-term loan

SUB-CONCLUSION FOR CHAPTER I

With the first chapter of the thesis, the author attempts to provide the general definition of syndicated loans as well as comprehensively depict the matters surrounding syndicated loan facility

In short, the syndicated loan can be described as one is provided by a group

of lenders (only lenders as CMBs are mentioned in the thesis) to a borrower under a single credit agreement This type of credit extension began existing in the early 50s and experienced many key changes before becoming one of the most common types

of facilities in the world’s financial market The syndicated loans were introduced to Vietnamese market from 1980 since the country renovation and began intensively developed in 1998, thereafter this facility has attracted a number of large-scale projects in Vietnam due to its effectiveness In the current market, there are three common types of syndicated loans, including (i) underwritten deals, (ii) best-efforts deals, and (iii) club deals Each of types has specific characteristics and different modes of extension Before conducting any syndicated loan, the borrower will consider to select appropriate type of syndication depending on their needs, financial capability and the market conditions at the time of borrowing

Besides, the thesis also provides and thoroughly analyzes the principles of syndicated loans and the functions of such principles to the banks and borrower Specifically, to smoothly proceed a syndicated loan, the participants should follow a number of statutory principles, such as pro data sharing, democratic decision-making, independent obligation and agent bank Such principles should be explicitly expressed in the agreements among parties for the purpose of their compliance Moreover, it seems that the performance of these principles is very useful in reducing the risks associated to the loans as well as facilitates the successful credit extension of the parties

At last, the roles of syndicated loans to CMBs and borrower are illustrated to explain the increasing popularity of this type of facilities in the financial market For the participating banks’ perspective, the syndicated lending plays an important role in the banking operation of both bank acting as arranger in syndicate and banks acting as co-lenders Indeed, for the lenders, syndicated loans are helpful tool for remaining and expanding business relationships, reducing potential risks and gaining profit Similarly, there is also a variety of benefits that attract the borrower

CHAPTER II

REGULATIONS, PRACTICAL ISSUES AND PROPOSED

RECOMMENDATIONS ON SYNDICATED LOANS IN VIETNAM 2.1 Parties to a syndicated loan

2.1.1 Regulations and practical application

The syndication is initiated by the borrower, who appoints a lender (usually

one with whom the borrower already has an established relationship) through the

grant of a mandate to act as the arranger on the deal In large transactions, the

arranger may be appointed jointly with other arrangers to arrange the loans and one

arranger may act as a lead arranger The arranger then will negotiate the terms of

the proposed facility with the potential banks and find more lenders to participate in the facilities In the next step, to facilitate the process of administering the loan on a

daily basis, one bank from the syndicate will be appointed as the agent bank The

agent bank acts as the agent of the lenders, not the borrower

There are many variations in the titles awarded to the loan’s parties based on the characteristics of transactions – however, the author refers to the participating

lenders as co-lenders, the bank who administers the process of syndication will be referred as the agent bank and the bank who is appointed by the borrower to arrange the syndicated loan will be referred as the arranger for the purpose of the thesis

2.1.1.1 The Lenders

a Co-lenders

The lenders in syndicated loan play the significantly important roles in the syndication due to its functions of fund provision and ensuring the projects’ operation in the reality They are usually CMBs but could be other financial institutions Nevertheless, as mentioned, under the scope of the thesis, the author only focuses on analyzing the cases where the lenders are CMBs Heretofore,

Figure 2: Diagrams on syndicated loan transactions

Lender 1 Lender 2 Lender 3 Lender 4

Article 7 of Circular 42/2011/TT-NHNN (as not amended by Circular

42/2016/TT-NHNN) required the banks participating in syndicate must satisfy:

i Being established and operated in accordance with the Law on Credit

institutions60;

ii Complying with prudential ratios after signing syndication agreement;

and iii Must not violate the limits on extension as provided in LCI

However, in 2016, the new Circular 24/2016/TT-NHNN amending and

supplementing Circular 42/2011/TT-NHNN has erased the regulation on conditions

for participating in a syndicate loan Accordingly, in order to be considered as CIs,

the organizations listed in Article 2 of Circular 42/2011/TT-NHNN already have to

satisfy the conditions on the establishment and operation as regulated in LCI, which

contains conditions required by not amended Circular 42/2011/TT-NHNN

Therefore, being regulated again in the document guiding the implementation is

unnecessary and it should focus more on other specific requirements when the

banks conduct its rights to participate in a syndicated loan

In this section, besides caring to the benefits of parties from the syndicated

loans, its responsibilities and obligations will be analyzed more deeply as its rights

already are described in the above sections The responsibilities and obligations of

the participants in a syndicated loan shall be set out in the loan agreement and must

be adhered to61

b The arranger

The arranger is key figure in a syndicated loan Bank playing the role of

arranger is usually the large bank with intensive experience, strong financial capability and good reputation in the syndicated loan market, especially; it has to

satisfy the criterion set by the borrower Normally, the arranger will carry out the

obligations as follows:

i To assist the borrower in preparing an information memorandum

about the borrower and the loan for dispatch to potential participants;

ii To solicit expressions of interest from banks; and

iii To negotiate the loan documentation

The arranger then bears most of the responsibility for coordinating formation of the

60 Under Article 24 of LCI, the CMBs shall be granted Establishing and Operating license and carry out

registration of its operation in accordance with law

61 Clause 2 of Article 12 of Circular 42/2011/TT-NHNN

syndicate62 The arranger’s position is commonly not documented in detail It is not usually stated who the arranger is acting for, the arranger is closely involved in structuring and organizing the loan and the arranger receives a significant fee for its services63 Although the rights and obligations of the arranger may be not stated clearly in loan documents, point d of Clause 2 of Article 11 of Circular 42/2011/TT-NHNN still requires that the name of arranger must be contained in the syndicated agreement

In the normal case, it is considered that the arranger is in the position of an independent contractor and is not an agent or fiduciary of either the borrower or the banks Although the letter from the borrower to the arranger authorizing it to organize the loan is expressed to be a mandate, thereby suggesting agency, this should not itself characterize the arranger as agent of the borrower In negotiating the term sheet and then negotiating the documentation, the arranger would seem to

be performing functions for the benefits of the banks and this might therefore suggest that the arranger is somehow the agent first of the borrower and then of the banks However, this is assumption of the agency duties of the arranger and the existence of such duties still remains ambiguous64

In addition, commonly, if the arranger is able to demonstrate an experience and ability to carry out the various functions of the agent throughout the life of the syndicated loan, it may act as the agent bank of syndicated loan

c The agent bank

In a syndicated loan, the agent bank serves as the representative for the lenders in dealing with the borrower even though, by the term of loan agreement, each lender has a direct contractual relationship with the borrower and makes its loan directly to the borrower In this capacity, the agent customarily assumes principal responsibility for:

co-i Determining that all precedent conditions of the borrower are

satisfied;

ii Receiving each lender’s share of advances of loan proceeds and

disbursing these proceeds to the borrower, receiving principal, interest, and other payments from the borrower and disbursing these payments prorate to the other co- lenders;

62 Philip R Pollock (1977), “Noted Issued in Syndicated Loans-A new Test to define Securities”, The

Business Lawyer (Vol.32), p 538

63 Philip Wood (2008), supra (5), p 96

64 Philip Wood (2008), supra (5), p 97

iii Monitoring the borrower’s performance of its obligations under the

loan documents and enforcing the lender’s rights upon a default, and generally dealing directly with the borrower on issues that arise during the term of the loan

To carry out these duties, the agent bank’s authority to act for the other lenders must be expressly provided in the loan documents The power of agent bank also must be defined in detail in the loan agreement Additionally, it bound to act in accordance with instructions it receives from the majority banks, or all the lenders

in those circumstances for which the loan agreement requires unanimous agreement, and in the absence of such instructions it may act or refrain from acting in what it considers to be in the best interests of the lenders The agent bank is awarded a lower fee than such of the arranger and the agent’s role is largely administrative with few powers Therefore, it is not authorized to act on behalf of other lenders unless being authorized, is not responsible for the accuracy of any information given to the lenders and is not liable for any action it is instructed to make except for gross negligence or wilful misconduct

Moreover, apart from the agent bank of syndicated loan, in some specific cases, there may exists security agent65, payment agent depends on the structure of the syndicate If foreign banks participate in the syndicate, they are not permitted to take on the role of payment agent66 Furthermore, in the loans secured by the land use rights and assets attached to land, the foreign banks are also prohibited to act as

a security agent

2.1.1.2 The Borrower

The borrower is entity who initiates the syndicated loan and also is the object financed by lenders through loan Normally, the borrowers seeking to borrow the large loans syndicated by a group of banks usually are state-owned enterprises or large organizations Circular 42/2011/TT-NHNN allows both resident and non-resident to raise fund via syndicated loan67 Besides complying with the Circular 42/2011/TT-NHNN’s regulations on extending syndicated credit, depends on each specific banking operation, the banks shall adhere to the regulations of its chosen banking field To the

syndicated lending activities, not only Circular 42/2011/TT-NHNN but also Circular No.39/2016/TT-NHNN issued by SBV dated 30 December 2016 regulating

65 This term will be analyzed more on Section 2.1.2

66 Clause 3 of Article 3 of Circular 42/2011/TT-NHNN

67 Clause 1 of Article 1 of Circular 39/2016/TT-NHNN

lending by credit institutions and foreign bank branches to clients (“Circular 39/2016/TT-NHNN”) which acts as a legal framework for general lending activities shall be complied by CMBs Circular 39/2016/TT-NHNN requires the entities entitled to borrow from CIs and foreign bank’s branches to be legal entities and individuals, which includes Vietnamese individuals, individuals with foreign nationality, legal entities established and operating in Vietnam, legal entities established abroad and legally operating in Vietnam It means, under the regulations

of Circular 39/2016/TT-NHNN, organizations with no legal entity status such as business household and private enterprises are not entitled to borrow loans from CIs

Whereas Decision No.1627/2001/QD-NHNN issued by the State Bank of Vietnam dated 31 December 2001 on issuing Regulations on Lending by Credit Institutions to Clients (“Decision 1627/2001/QD-NHNN”) heretofore provided that the borrower may be foreign and Vietnamese organizations, individuals, which include individual, business household, private enterprise… and other organizations having legal entity status68 Explaining for this key change, the representative of SBV’s Department of Legal Affairs stated that regulation on the borrower of Circular 39/2016/TT-NHNN is complying with the regulation on entities in civil relations of Civil Code (Law No.91/2015/QH13) issued by National Assembly dated 24 November 2015 taking effect on 01 January 2017 (“CC”) which only recognize individuals and legal entities as parties to civil relations69 He also

assumed “The contracts entered by CIs and other organizations with no legal entity

status contain potential risks cause it may be declared as invalid transactions due

to the lack of object status of the borrower”70

In addition, under Circular 42/2011/TT-NHNN, the borrower to syndicated loans may be: (i) Resident and non-resident implementing an investment project or plan for production and business in Vietnam; (ii) Resident implementing an offshore investment project; and (iii) Non-resident implementing an offshore investment project but being funded by domestic banks However, despite being implicitly expressed in Circular 42/2011/TT-NHNN, in case where the borrower is Vietnamese resident but the lenders in syndicate all are foreign banks, this

68 Clause 2 of Article 2 of Decision 1627/2001/QD-NHNN

69 This is implicitly expressed in Article 101 of CC

70 Kim Tien (2017), “Ngân hàng Nhà nước giải thích vì sao hộ kinh doanh không được vay vốn ngân hàng” [SBV explains reason why business family household are not entitled to borrow fund from banks],

20170213091649515.chn , last visited on 19 June 2017