Sharing of payments by lenders: Overview, definition and example
What is sharing of payments by lenders?
Sharing of payments by lenders refers to a provision in syndicated loan agreements or multi-lender arrangements that ensures all lenders share proportionally in payments received from the borrower. This includes repayments of principal, interest, or recoveries from collateral in the event of default. The purpose of this provision is to maintain fairness among lenders by distributing funds according to their respective participation in the loan, preventing any one lender from receiving preferential treatment.
This provision often applies when one lender receives a payment outside the ordinary repayment schedule or as part of a recovery process during default.
Why is sharing of payments by lenders important?
Sharing of payments by lenders is important because it ensures fairness and equity among lenders participating in a syndicated loan or similar arrangement. It prevents situations where one lender might receive an outsized payment at the expense of others, maintaining trust and collaboration among the lending group.
For borrowers, this provision helps streamline repayment processes and ensures transparency. For lenders, it reduces the risk of disputes, fosters cooperation, and ensures all parties are treated equitably, particularly in complex financial arrangements.
Understanding sharing of payments by lenders through an example
Imagine a group of banks participates in a $100 million syndicated loan, with each bank contributing $25 million. The borrower unexpectedly makes an early payment of $10 million directly to one of the banks without informing the others. Under the sharing of payments clause, the receiving bank must redistribute the funds proportionally to the other lenders so that all banks share in the payment based on their respective contributions.
In another example, if the borrower defaults and the collateral is liquidated, the sharing of payments clause ensures that the proceeds are distributed among the lenders in proportion to their participation in the loan, rather than allowing one lender to claim a larger share.
An example of a sharing of payments by lenders clause
Here’s how a sharing of payments by lenders clause might appear in an agreement:
“If any Lender receives any payment or recovery, whether voluntary or involuntary, as a result of the Borrower’s obligations under this Agreement, in excess of its pro-rata share, such Lender shall promptly remit the excess amount to the Administrative Agent for redistribution among all Lenders in accordance with their respective participation percentages. This provision ensures that all payments or recoveries are shared equitably among the Lenders.”
Conclusion
The sharing of payments by lenders clause ensures fairness and equity in syndicated loans or multi-lender arrangements, protecting the interests of all lenders involved. By requiring proportional distribution of payments and recoveries, this provision reduces the risk of disputes, fosters trust, and supports efficient loan administration. Including this clause in loan agreements is essential for maintaining collaboration and transparency among lenders.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.