Loan document standardisation: a growth catalyst for Nigerian syndicated loan market?

Before delving into the need for the apparent benefits of having a standardised loan document tailored to suit our domestic legal and commercial nuances, it is clear that an important commercial objective for parties to a loan transaction is to reach an agreement on the documentation quickly and in a way that gives all involved confidence of their ongoing relationship and does not result in disproportionate fees. Therefore in order to sustain and catalyse growth in the Nigerian syndicated loan market, standardisation is a useful tool. A useful parallel is the United Kingdom, where the Loan Market Association, comprising of financial institutions and solicitors, has produced recommended templates for unsecured, corporate risk terms loans and revolvers (i.e. multicurrency term, revolving or combined term and revolving facilities) and these templates are now widely accepted as a common negotiating platform albeit with variations reflecting the dynamics of each transaction and as a basis for loan documentation in the London financial market and beyond.

This article identifies and discusses: (a) the distinct elements of a syndicated loan; (b) the clausal provisions that should be considered in a Nigerian law governed standardised loan document; and (c) the value proposition for a standardised Nigerian law governed loan document that is reflective of the commercial realities peculiar to our market.

What is a Syndicated Loan

A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial or investment banks known as arrangers. The syndicated loan market has become one of the dominant ways for borrowers to tap banks and other institutional capital providers for loans because (a) syndicated loans are less expensive and more efficient to administer than traditional bilateral facilities, (b) risks are more effectively allocated and shared amongst the lenders; and (c) rights are shared pro-rata amongst lenders i.e. rights are proportionate to amounts each lender has lent.   Whilst it is incontrovertible that syndications in Nigeria has become a common feature in big ticket financial transactions due to the comparative advantages enumerated above and as can be seen in the consummated deals in the telecommunications, oil and gas and infrastructure segments of the Nigerian economy, its rise provides compelling need for a certain level of standardisation in the Nigerian financial market particularly in respect of the loan documentation.

Typical Considerations for a Standardized Nigerian Law Governed Loan Document

It is this author’s view that in order to create a standardized Nigerian law governed loan document suitable in our jurisdiction, certain clausal provisions for paramount consideration include but are not limited to the following:

Interest Rate:  

i.NIBOR/NIFEX v. LIBOR: The use of  and indeed resort to the Nigerian inter-bank offered rate (NIBOR) for naira denominated loans or the Nigerian inter-bank foreign exchange rate (NIFEX) for dollar denominated loans  in syndications involving local banks, has at best been intermittent. The non-resort to these benchmarks as a barometer for measuring a deposit money bank’s costs of funds could be that these rates are not completely reflective of a bank’s costs of funds. Another reason that has been adduced is the general apathy amongst financial dealing institutions which fundamentally affects the perception of the other bank’s rates. It is this author’s view that an independent and trusted benchmark rate is integral to the creation of a standardised loan document hence measures should immediately be taken to ensure that these rates are truly reflective of the average costs of funds and can be independently assessed and accessed.

ii.Day Count Convention:   In finance, a day count convention determines how interest accrues over time and it is also used to quantify periods of time when discounting a cash-flow to its present value. It is debatable whether the applicable day count convention used in measuring interest accruals in Nigerian finance deals is the 30/360 or the Actual/Actual day count convention. The 30/360 day count assumes there are 30 days in each month and each year has 360 days whilst the Actual/Actual method measures the actual number of days in a calendar month and the actual numbers of days in a calendar year. 

iii.Retention or Retrenchment of Mandatory Costs: Mandatory costs and by extension the Mandatory Costs Formulae as an additive to the computation of interest has been commonplace in most LMA styled loan documentation as it allows lenders with a facility office in the UK to charge for the opportunity cost of having to maintain corresponding non-interest bearing cash deposits with the Bank of England in respect of a bank’s sterling eligible liabilities. In Nigeria, the recent sterilization of public sector funds and private deposits through the hike in cash reserve requirement by the Central Bank brings to the fore the need for a Mandatory Costs in the pricing of loans in the Nigerian domestic loan market. Also, there would be greater transparency if there is a clearly quantitative formulae in deriving the Mandatory Costs so that the eventual borrower can evaluate the basis of any increase in its interest rate.

Tax  Provisions

i.The legality of grossing-up provisions has been a subject of constant debate and the dearth of decided cases in this regard has not helped to clarify the position on this subject matter. Nonetheless, the conventional position has been that where it is used as a means of tax planning rather than tax evasion then it could be permissible. It is this author’s view that there is need to debate and propose tax wording in the loan document that would sufficiently be construed as a tax planning tool rather than an evasion of tax.

ii.With the implementation of the Foreign Account Tax Compliance Act, a US legislation that would have expansive reach on the financial dealings of Nigerian financial institutions imminent, there is need to develop or adopt, if desirable, suitable wording to protect parties against the punitive deductions that would apply to non-compliant financial institutions that have US dealings.

Materiality Thresholds

Based on Nigerian jurisprudential law and knowledge of the peculiarities of our domestic company law, insolvency, litigation and court proceedings, it is important that we develop and agree mutually acceptable and reasonable materiality thresholds in the loan agreement for relevant issues such as cure periods, setting aside of court proceedings that could lead to an event of defaults, disposal of assets, financial indebtedness etc.

Conclusion

The most obvious benefits of having standardized documentation are that:

a.it promotes efficiency in the original negotiation of the loan document as transaction parties are  able to focus on principal issues  that impact on the financing;

b.it enhances turnaround time in the origination of the documentation;

c. it creates a benchmark based on standards acceptable within our indigenous commercial environment. 

d.it would catalyse activities in the secondary loan market particularly in terms of  both funded and risk sub-participations.

it is important that standardisation is not regarded as an alternative to innovation, rather it should be seen in the present context as driving  innovation as the creation of a standardised homogenous loan agreement would be as a result of rigorous consultation of market players particularly bodies and institutions such as banks, financial market dealers association, section of business law of the Nigerian Bar Association, Bankers association and all stakeholders without whose input a standardized loan document cannot be achieved.

Abayomi Adebanjo

Senior Associate, 

Banking, Finance & Infrastructure Unit

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