The following Banking & Finance practice note provides comprehensive and up to date legal information covering:
Sub-participation is a means by which a lender can transfer its risk in a loan to another lender.
For an overview of the reasons why a lender might generally want to transfer a loan, see Practice Note: Key issues in loan transfers.
Sub-participation differs from novations and assignments because it does not involve any transfer of rights or obligations. Rather, it creates a new set of rights and obligations between the existing lender and a new lender. The original loan stays in place and the relationship between the borrower and the original lender is unaffected. In other words, a sub-participation arrangement is totally distinct from the original transaction.
Sub-participation can be either funded or un-funded. If it is un-funded, it is known as a 'risk' sub-participation.
In a funded sub-participation, the existing lender identifies the amount of the loan it wishes to sub-participate and then obtains a deposit from a new lender in an amount equal to it. The lender which makes the deposit is known as the 'sub-participant'.
Under the terms of the sub-participation agreement, the parties agree that the existing lender will only make payments to the sub-participant when it has received equivalent amounts from the borrower under the loan agreement ie:
the deposit will be repaid when the loan principal is repaid, and
interest on the deposit will be paid only
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