Debt Buy-back - a study of recent trends in syndicated lending
(2013) JURM01 20132Department of Law
- Abstract (Swedish)
- I tider av finansiell instabilitet kan lån som handlas på andrahandsmarknaden vara prissatta till en låg nivå (under ”par”). Som ett resultat kan låntagare som har tillgång till likvida medel dra nytta av marknadsförutsättningarna genom att köpa sin egen skuld. Eftersom de inte kan vara innehavare av fordringar mot gentemot sig själva, kommer sådan skuld att släckas ut med effekten att låntagaren har ”återbetalt” sin skuld till ett pris som är lägre än kostnaden för att faktiskt återbetala den. Det är ett standardexempel på en debt buy-back-transaktion.
Detta arbete kommer att visa att debt buy-back-transaktioner kan vara ett lönsamt verktyg för att minska skuldsättningen i ett bolag och det kan också antas leda till en ökad likviditet... (More) - I tider av finansiell instabilitet kan lån som handlas på andrahandsmarknaden vara prissatta till en låg nivå (under ”par”). Som ett resultat kan låntagare som har tillgång till likvida medel dra nytta av marknadsförutsättningarna genom att köpa sin egen skuld. Eftersom de inte kan vara innehavare av fordringar mot gentemot sig själva, kommer sådan skuld att släckas ut med effekten att låntagaren har ”återbetalt” sin skuld till ett pris som är lägre än kostnaden för att faktiskt återbetala den. Det är ett standardexempel på en debt buy-back-transaktion.
Detta arbete kommer att visa att debt buy-back-transaktioner kan vara ett lönsamt verktyg för att minska skuldsättningen i ett bolag och det kan också antas leda till en ökad likviditet hos långivare, dvs. banker, finansiella institutioner, större företag och andra investerare i lån. Detta är intressant eftersom debt buy-back-transaktioner ger upphov till vissa juridiska spörsmål och överväganden som ökar dess kontroversiella drag. Rättsfallet Strategic Value Master Fund Ltd v Ideal Standard International Acquisition S.A.R.L. visar hur låntagare (eller ägare till låntagare) uppnå betydande och tämligen anmärkningsvärda resultat genom att dra nytta av de juridiska konsekvenserna av debt buy-back. Borde bolag som är närstående till låntagaren tillåtas att rösta för sina andelar i lånet? Skulle det vara i strid med grundläggande principer för syndikerad långivning att tillåta låntagaren att köpa tillbaka sin egen skuld, då det låter en långivare bli återbetald medan andra inte blir det?
Såsom diskuteras och beskrivs i detta arbete är tillgången till överkomligt prissatt kredit kopplat till aktiviteten på andrahandsmarknaden och möjligheten att sälja sina lån och hantera sin exponering mot låntagare. Skulle begränsningar av debt buy-back vara förmånliga eller skadliga för tillgången till överkomligt prissatt kredit? Juridiskt sett, vad kan långivare göra för att skydda sig mot riskerna med debt buy-back och vad kan låntagare göra för att dra nytta av dess fördelar?
Med hjälp av LMA har marknadsaktörerna utvecklat standardiserade mallar och tillvägagångssätt för att hantera debt buy-back. Marknaden har anpassat sig till dess uppdykande och behovet av reglering kan avblåsas. (Less) - Abstract
- During times of financial instability, loans which are traded in the secondary loan market may be priced at a low level (“sub-par”). As a result, borrowers who have liquid funds available to them may benefit from the market conditions by purchasing their own debt. Since they cannot be holders of claims against themselves, such debt will extinguish with the effect of the borrower having “repaid” its debt at a price which is lower than the cost of actually repaying it. That is a standard example of a debt buy-back transaction.
This thesis will show that debt buy-back transactions can be a profitable tool when reducing the debt of a company and it can also be assumed to provide additional liquidity to the providers of loans, i.e. banks,... (More) - During times of financial instability, loans which are traded in the secondary loan market may be priced at a low level (“sub-par”). As a result, borrowers who have liquid funds available to them may benefit from the market conditions by purchasing their own debt. Since they cannot be holders of claims against themselves, such debt will extinguish with the effect of the borrower having “repaid” its debt at a price which is lower than the cost of actually repaying it. That is a standard example of a debt buy-back transaction.
This thesis will show that debt buy-back transactions can be a profitable tool when reducing the debt of a company and it can also be assumed to provide additional liquidity to the providers of loans, i.e. banks, financial institutions, major corporates and other investors in loans. This is interesting since the debt buy-back transaction gives rise to certain legal issues and considerations which add to its controversy. As evidenced by the Strategic Value Master Fund Ltd v Ideal Standard International Acquisition S.A.R.L. case, borrowers (or owners of borrowers) could achieve significant and somewhat remarkable results by benefiting from the legal effects of debt buy-back. Should the borrower-affiliated entity be allowed to vote for its participations in the loan? Would allowing the borrower itself to purchase the loans be contrary to fundamental principles of syndicated lending since it allows for one lender to be repaid, whereas others are not?
As described and discussed in this thesis, the availability for companies of affordable credit is linked to the activity in the secondary market and the possibility of lenders to sell their loans and manage their exposure to borrowers. Would restrictions on debt buy-back be beneficial or hazardous to the availability of affordable credit? Legally, what can lenders do to protect themselves from the risks resulting from debt buy-back and what can borrowers do to take advantage of the benefits?
With the help of the LMA, market participants have developed standard forms and procedures for dealing with debt buy-back. The market has adjusted to its emergence and the initial controversy and legal vacuity has been alleviated to such an extent that the need for regulation can be aborted. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/4146589
- author
- Wållgren, Albert LU
- supervisor
-
- Lars Gorton LU
- organization
- course
- JURM01 20132
- year
- 2013
- type
- H3 - Professional qualifications (4 Years - )
- subject
- keywords
- banking law, financial law, secondary loan market, loan transfers
- language
- English
- id
- 4146589
- date added to LUP
- 2013-11-13 08:22:06
- date last changed
- 2013-11-13 08:22:06
@misc{4146589,
abstract = {{During times of financial instability, loans which are traded in the secondary loan market may be priced at a low level (“sub-par”). As a result, borrowers who have liquid funds available to them may benefit from the market conditions by purchasing their own debt. Since they cannot be holders of claims against themselves, such debt will extinguish with the effect of the borrower having “repaid” its debt at a price which is lower than the cost of actually repaying it. That is a standard example of a debt buy-back transaction.
This thesis will show that debt buy-back transactions can be a profitable tool when reducing the debt of a company and it can also be assumed to provide additional liquidity to the providers of loans, i.e. banks, financial institutions, major corporates and other investors in loans. This is interesting since the debt buy-back transaction gives rise to certain legal issues and considerations which add to its controversy. As evidenced by the Strategic Value Master Fund Ltd v Ideal Standard International Acquisition S.A.R.L. case, borrowers (or owners of borrowers) could achieve significant and somewhat remarkable results by benefiting from the legal effects of debt buy-back. Should the borrower-affiliated entity be allowed to vote for its participations in the loan? Would allowing the borrower itself to purchase the loans be contrary to fundamental principles of syndicated lending since it allows for one lender to be repaid, whereas others are not?
As described and discussed in this thesis, the availability for companies of affordable credit is linked to the activity in the secondary market and the possibility of lenders to sell their loans and manage their exposure to borrowers. Would restrictions on debt buy-back be beneficial or hazardous to the availability of affordable credit? Legally, what can lenders do to protect themselves from the risks resulting from debt buy-back and what can borrowers do to take advantage of the benefits?
With the help of the LMA, market participants have developed standard forms and procedures for dealing with debt buy-back. The market has adjusted to its emergence and the initial controversy and legal vacuity has been alleviated to such an extent that the need for regulation can be aborted.}},
author = {{Wållgren, Albert}},
language = {{eng}},
note = {{Student Paper}},
title = {{Debt Buy-back - a study of recent trends in syndicated lending}},
year = {{2013}},
}