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LMA highlights potentially negative consequences for the syndicated loan market resulting from the Proposal for a Directive of the European Parliament and of the Council on credit servicers, credit purchasers and the recovery of collateral

08 June 2018

The Loan Market Association (LMA) has responded to the Proposal for a Directive of the European Parliament and of the Council on credit servicers, credit purchasers and the recovery of collateral (the "Proposal") in the context of the secondary syndicated loan market, as well as the wholesale loan markets more widely.

The LMA has stressed to the Commission that, whilst it recognises the positive legislative intention of the Proposal to encourage development of secondary markets for non-performing loans ("NPLs") and welcomes the proposed requirement at Article 15(2) for Member States to lift any existing restrictions in national law, such as licensing requirements, which may currently prevent loan transfers being made to non-bank institutions, it is concerned that it contains a number of measures that would, if adopted in their current form, cause significant uncertainty and disruption to primary and secondary syndicated loan markets.

For example:

  • the mandatory disclosure duty at Article 13(1) would introduce significant changes to well-established, existing market practices based around the "buyer beware" principle;
  • the proposed reporting requirements in relation to non-bank transferees at Articles 13(2) and 19(1) and the requirement for non-EU non-bank transferees to appoint an EU representative at Article 17 would discourage lenders other than EU banks and their subsidiaries from entering into secondary syndicated loan transactions, thus making it more difficult for EU banks to transfer syndicated NPLs from their balance sheets and decreasing liquidity in secondary syndicated loan markets;
  • the proposed requirement for non-bank transferees to inform competent authorities before enforcing a loan at Article 18 would make enforcement slower and hamper lender recovery efforts for syndicated lending transactions generally, where there may typically be a mixture of bank and non-bank lenders; and
  • there may be real practical difficulties with ascertaining whether a participation in a syndicated loan held by a lender other than an EU bank was originated by an EU bank and accordingly whether it would fall within the scope of Title III of the Proposal.

In view of the above and the potential disruption that the Proposal would cause to the market, the LMA has suggested drafting amendments to carve out syndicated and other wholesale loans from scope and to apply the requirements in what is hoped is a more targeted, effective and proportionate manner.

The LMA response further sets out some comments on other aspects of the Proposal, including in relation to the Accelerated Extrajudicial Collateral Enforcement ("AECE") mechanism, which are set out in the Appendix to their letter.

Commenting on the Proposal, Nicholas Voisey, LMA Managing Director, said:

"We are concerned that the Proposal, as currently drafted, brings into scope both non-performing and performing loans, which is clearly not the original intention of the legislation. If brought into law, the requirements would also go against current secondary market practices and will likely lead to the unintended negative consequences of reducing liquidity and efficiency."

"We believe that the current impact of the Proposal on the syndicated loan market would be significant and could, in our view, disrupt a fully functioning and thriving cross-border European loan market by creating new problems for that market, increasing the complexity of transactions, lengthening settlement times and adding unnecessary costs."

"We have already met with the European Commission on this matter and will look to build on those initial constructive discussions over the next few weeks".