Institutions share large credits either by participation, where the lead retains the loan and sells an interest, or by syndication, where multiple lenders are each direct creditors of the borrower.
Participation. The borrower’s relationship is with the lead alone. The participant holds a contractual right against the lead, which raises the question at the heart of every participation dispute: if the lead becomes insolvent, is the participant an owner of an interest or an unsecured creditor? A true sale, properly documented and accounted for, is what determines the answer.
Key participation terms. Whether the sale is with or without recourse; the lead’s servicing standard, usually ordinary care or the standard applied to its own loans; voting rights on amendments, waivers and enforcement; information undertakings; and rights on default including the ability to compel action.
Syndication. Each lender has privity with the borrower; an agent administers the facility under an agency provision that typically limits the agent’s duties sharply and disclaims fiduciary status.
Due diligence does not transfer. A participant that relies on the lead’s credit analysis without its own file is exposed both commercially and to examiner criticism.
Concentration limits are measured on the retained portion; sold portions must be genuinely sold to count.