Bank credit holders cover two types of credit risks: (i) the borrower`s inability to pay the underlying bank loan (which also applies to an assignment); and (ii) the occurrence of an insolvency event of the impented funder or the inability of the funder to meet its obligations under the participation agreement. A very important distinction between LSTA documentation and LMA documentation, which affects the second form of such credit risk, is the way in which the form of the LSTA and LMA participation agreements is structured. LMA-style holdings create a debtor-creditor relationship between the lender and the acquirer of the interest.26 In the event of default, the participant is treated as an unsecured creditor of the lender, with no economic share in the underlying loan. On the other hand, the LSTA`s holdings are supposed to allow for a real sale of the economic shares of the loan. In other words, under the LSTA`s holdings, the economic and economic interests of the loan are transferred from the loan to the member and not to a portion of the estate of the insolvent business. Under U.S. law, a typical LSTA participation agreement leads to the participant being considered the economic and economic beneficiary of the underlying loan. The mass of the donor`s bankruptcy is considered only as the owner of the simple legal property of the underlying loan. Therefore, the underlying economic interest in the loan that participated in the loan is not considered part of the donor`s estate.27 Both the LSTA documentation and the LMA documentation generally provide that the parties settle the terms of the equity or sub-participation trading if the liquidation of a loan by transfer is not possible. In the negotiation of the participation as opposed to the assignment, the borrower retains bonds that are only due to the seller/donor to the participation and not to the buyer/participant. The seller/Grantor is then required to transfer or return to the buyer/subscriber a corresponding amount of payments or distributions he or she has received from the borrower.
Thus, market participants use equity as an alternative method to acquire the loan when a direct sale is not possible or to preserve anonymity in the credit. LSTA secondary trade documentation and LMA secondary trade documentation have different conditions for trade depending on whether an agreement is made to be a “by” or a “distressed” trade. In principle, the seller is required to offer the buyer insurance and guarantees that are stronger than the par-terms if he sells on unproductive terms. As a general rule, the execution of credit negotiation on documentation by, while non-performing loans (or credits expected to become non-performing) trade in non-performing documents. A concept of the utmost importance for both the LSTA secondary credit markets and the LMA secondary credit markets is the idea that “trade is a trade.” This maxim is the basis of the hundreds of billions of dollars traded each year in the secondary credit market. If the essential terms of a trade are agreed orally or in writing, a binding contract is concluded. The essential terms generally include: (i) the name of the borrower; (ii) the identity, nature and amount of debt to be acquired or sold; (iii) the purchase rate; (iv) if colonization is equal or depressing; and (v) if they are subject to LSTA or LMA documents.