The new lender has a direct relationship with the borrower and other parties to the syndicated loan agreement. The loan agreement should include the form of the transfer certificate used for innovation and contain a provision that the borrower does not object to the original lender selling its shares in the loan agreement to a new lender. Novation is generally used for revolving credit facilities for which the original lender has outstanding obligations, such as the loan bond. The distinguishing feature of an under-participation agreement is that the initial lender remains the borrower`s “means of payment” and there is no direct contractual relationship between the sub-participant and the borrower. No agreement from the borrower is required, so this process can be confidential. Risk-involved agreements are often used in international trade, but these agreements are risky because the participant does not have a contractual relationship with the borrower. On the other hand, these transactions can help banks generate revenue streams and diversify their sources of income. A partial capitalization stake creates new contractual rights between the existing lender and the sub-participant under the same terms as the contract between the existing lender and the borrower. The existing lender becomes an intermediary between the borrower and the participant. The sub-participant makes available to the borrower funds that the existing lender grants to the borrower. The sub-participant will only be reimbursed by the existing lender if the borrower prepays the existing lender. Unlike innovation, there is no transfer of existing rights and the borrower often ignores the contract between the existing lender and the participant.
In addition, the association stated that the agreements were used as banking products to better manage risk. Preventing them from being regulated as swaps also corresponded to the flexibility left by banks to make credit-related swaps. The most compelling reasons why financial institutions use participatory lending are: the recent volatility in European financial markets has put the emphasis back on the importance of liquidity and flexibility in the banking sector. At this time, some lenders may attempt to restructure their balance sheets by reducing exposure to certain sectors, countries and/or currencies in various existing transactions.