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What is participation syndication?

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A US transacted participation is a financing arrangement that involves the true sale of an undivided interest in a loan and commitment by the lender of record (grantor) to participants.  The participants become holders of beneficial interest in the loan while the grantor remains the loan administrator.  Under New York law, the grantor remains the lender of record and maintains the relationship with the borrower and the participants become the beneficial and economic owners of the loan and, thus, entitled to the payments received by the grantor with respect to the loan.  If the grantor becomes insolvent, the bankruptcy estate will be considered the owner of bare legal title to the underlying loan, while the participants remain the beneficial and economic owners of the loan.

LSTA-Style Participation = True Sale of Loan to Participants

A US participation is different to a participation under English law.  An LMA-type sub-participation is a nonrecourse back-to-back financing arrangement between the lender of record (grantor) and the participants, where the participants have only a contractual right against the grantor.  Risk and reward of the loan is transferred to the participants while the grantor remains the lender of record.  The participants provide the funding of a loan and receive the right to a proportional amount of loan payments (interest and principal) only when received by the grantor.  Under English law, a participation creates an unsecured debtor-creditor relationship between the participants and the grantor.  If the grantor goes bankrupt, the participants will be treated like any other unsecured creditors of the grantor, without having any beneficial interest in the underlying loan.

LMA-Style Participation = Unsecured Participant Funding of Grantor Loan

Neither an LSTA nor LMA participation calls for disclosure of the existence of a participation or the identity of the participants to the borrower or the public.

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