International Financial Law
International Financial Law
With the increase in globalization, multinational firms have increased considerably in many countries across the world. London is a global financial hub, and the banking industry in the city is involved in lending to businesses in many different places. Observing both the United Kingdom financial law and the international financial law is critical in guaranteeing that the transactions meet the regulatory standards for all financial institutions. Observing financial laws guarantees that financial stability for the stakeholders is maintained through taking measured risks and also prevents illegal activities such as money laundering.
Financial Ratio Covenants
The financial ratio covenants are ratios used to govern the conditions of offering loans based on the company’s financial health. The ratios govern the borrower’s financial health and determine the limits that a borrower must observe to continue accessing money from the banks. These rations often restrict the money borrowed based on the net worth of the company. Other limitations of the rations may include comparing the current assets with the current liabilities, and they can also check the company’s cash flow to liabilities (Zakrzewski, 2020). By observing the ratio, the borrower is limited on the risk they can take, and the banks are sure that the borrower is financially healthy.
Banco Flamenco et Sangria, as the agent bank, should refuse this offer even though it can increase the returns that they will get from the company’s operations in Singapore and Hong Kong. Allowing the change in the ratio will mean that the risk involved in lending to Azteca Copper increases considerably, and the risk of not getting paid back increases. As the agent bank, the responsibility of making the risk analysis lies with you, and thus, the bank will be exposing itself to the majority of risk if it agrees to the proposal. There is also a clear conflict of interest if the bank convinces the other banks to take the plan while intending to benefit from business in other jurisdictions, which would be illegal.
Withholding Payments to Other Syndicate Banks
As the agent bank, Banco Flamenco et Sangria has the duty of paying interest to all the banks involved in a syndicate. The agent bank has the responsibility to both the borrower and the lenders. The bank is supposed to act as a link to both groups and is also supposed to provide accurate information to both parties (Salami, 2018). When dealing with the leaders, Banco Flamenco et Sangria should provide them with accurate information about the borrower and the payment progress to exercise their powers outlined within the contract for the syndicated loan.
I advise the bank not to stop any interest payments to the other banks. The payment terms are set out in the contract that all the lenders and the borrower signed before the money were advanced. Only terms specified within the contract can permit the payments to be stopped but not the borrower’s will. If the bank stops the payments, they will expose themselves to litigation and may even be held liable for coercing the other banks to change the agreement terms when dealing with the payments. The bank must disclose all the information to the leaders before asking them to change the ratio covenant.
Breach of Its Obligations under Derivatives Contracts
One of the most important duties of an agent bank is to pass accurate information to various parties. The other lenders depend on the agent back to keep tabs on the borrower and inform them about any changes. The information given to them allows them to take actions that are allowed by their signed contract. It is necessary for Banco Flamenco et Sangria as the lead agent to inform the other banks of the finding of a breach by the Azteca Copper of its obligations under a derivatives contract.
Even though the breach occurred in Singapore and involved another back, it is important to indicate the firms’ financial health. Azteca Copper signed a contract while borrowing money that required them to maintain financial health at a D/E ratio of 1.5:1. The bank should notify the other banks of their discovery immediately to allow all the participants to take the right actions based on the contract signed. It can also allow all the lenders to investigate the borrower to determine if they observe the ratio covenants limitations.
The information memorandum is a detailed collection of information that the borrower provides to the agent bank concerning its operations and the outlook of its financial performance. The agent bank is then responsible for passing this information to the other banks involved in the lending process to assess the information before deciding on whether they want to be involved in the project. According to Goeth (2018), the agent bank also has to check the authenticity of the borrower’s information and advise the rest if there are any concerns.
Banco Flamenco et Sangria should call for a meeting with all the other banks involved in the syndicated loan agreement, including Bank Mandarin. The bank should then bring up the false information that Azteca Copper provided in the information memorandum. Each bank had the duty of confirming the accuracy of the information, but the agent bank is responsible for checking that all things are accurate. The bank should acknowledge that they did not find out about the false information early enough, and they should seek to come up with an action plan that can minimize the risk that all the banks will face. The clauses should guide the process in the contract they sighed with the borrower.
Sale and Leaseback of Assets
Azteca Copper already has a syndicated loan with banks with Banco Flamenco et Sangria as the agent bank. For an international syndicate loan, it is expected that the company has several assets that the banks can use as collateral to recover their money if the company is unable to pay it back. Banco Flamenco et Sangria, as the agent bank, cannot stop the company from expanding its mining operations. Still, they should check and guarantee that the assets used to secure the loans are not sold to the United States banks (de Quesada, & Renner, 2017). If these assets are sold, the bank will lose any means of recovering their money.
Second, the bank should check with the company to confirm that the ratio covenant of 1.5:1 is observed even as it seeks to invest $400 million in new mining operations. The financial health of the company should not be affected beyond agreed limits by the new investments. Lastly, the bank should inform both the other syndicate lenders they are in a contract with and the US banks involved in the new transaction. Sharing information is critical for such an investment to avoid liability to the banks or any unmanageable financial risk to the company.
Observing financial laws guarantees that financial stability for the stakeholders is maintained through taking measured risks and also prevents illegal activities such as money laundering. Being an agent is a syndicated loan agreement on an international level that comes with considerable benefits, risks, and responsibilities. The most critical duty of an agent bank is to be the link between the lenders and the borrower and pass all relevant information to the various stakeholders in real-time. The weight of confirming information given by the borrower lies with Banco Flamenco et Sangria as the agent bank. The bank is also expected to act in the interest of all the lenders. All decisions are expected to be made with full disclosures, as each bank should be able to take independent decisions when changes occur based on what had been agreed in the initial contract.
de Quesada, C. E., & Renner, M. (2017). Contractual business networks: the case of syndicated loans. European Review of Contract Law, 13(2), 164-194.
Goeth, P. (2018). The Liability of Arranger Banks Against Lenders in International Syndicated Loan Facilities Under English Law. BankArchiv, 66(9), 628-635.
Salami, I. (2018). Book Review: The Law of International Finance 2nd edn (Oxford University Press 2017)(eds) McKnight, Paterson, & Zakrzewski. Journal of International Banking Law and Regulation, 33(1), 32-33.
Zakrzewski, R. (2020). The Roles of Arrangers and Agents in Syndicated Lending Transactions: Duties, Risks, Liabilities, and Protections. Intergovernmental Org. In-house Couns. J., 25.