Unlocking Capital: The Strategic Art of Selling Loans

When the author of this article began his fledging career as a finance lawyer, life was much simpler. An investor who was looking to acquire an asset, or refinance an existing asset, would approach their usual lender, safe in the knowledge that they knew who they were borrowing from, and who they would be dealing with throughout the life of the loan. Indeed, a crucial requirement for any would-be borrower was the identity of, and their relationship with, their lender, and knowing that their loan would not be sold to a third party. 

Fast forward to 2025 and the lending landscape looks very different. Buying and selling loans, new or old, performing or non-performing, is now par for the course and most borrowers know and accept that their lender at the outset, may not necessarily still be their lender when their loan matures. No longer are borrowers able to insist that their loan cannot be transferred to another party, and any well-informed borrower needs to be alert to the fact that their loan may ultimately be sold. 

Why might a loan be sold?

Lenders choose to sell loans for a variety of strategic, financial, and operational reasons. Selling loans can help a lender manage and diversify risk. By offloading loans, particularly those with higher risk profiles, a lender can reduce its exposure to potential defaults and balance its portfolio. Following the GFC, an entire industry emerged around the sale of non-performing loans (NPLs), as lenders sought to clean up their balance sheets by selling loans at significant discounts to par (i.e. the face value or nominal amount of the loan). NPL trades are less common these days, given that lending practices and the appetite for higher leverage lending has changed significantly since the GFC, but there is still activity in this area, particularly across certain sectors.

Lenders may sell loans to improve liquidity. This can be particularly important for lenders looking to free up capital to fund new lending opportunities, or to address unexpected cash flow needs. Market conditions can also provide opportunities for lenders to originate and sell loans at a premium, with limited capital being risked, and can give lenders a platform through which they can originate higher value loans and sell down part of a loan, enabling them to access a part of the market that their base capital could not ordinarily access.

Regulatory frameworks, such as Basel III, impose capital requirements on banks, and selling loans can help a bank maintain or improve its capital ratios by reducing the amount of risk-weighted assets on its balance sheet. Further, a lender may decide to sell loans that no longer align with its strategic focus or business model. For example, a lender might exit a particular geographic market or industry sector and sell related loans to concentrate on core areas. 

How might a loan be sold?

Loans are typically transferred as part of a primary syndication or secondary trade.

Where a loan has been structured as a syndicated facility, one or more lenders will often lend the whole of the facility to the borrower at the outset and then immediately upon closing transfer all or part of it to one or more other lenders or investors. This practice is known as primary syndication. Following primary syndication, the lenders are open to sell their loans, or any part of their loans, to other lenders on the secondary market. 

The borrower will pay a rate of interest, as determined by the original facility agreement, and this will not alter as and when the loan or any part of it is onward traded. However, it is open to the ‘existing lender’ and the ‘new lender’ to agree whatever commercial terms they wish between themselves. It might, for example, be the case that the selling lender seeks to retain part of the interest payable by the borrower and pass only part of the rights to the interest across to the buying lender. 

Secondary debt trading is the activity of one investor purchasing debt on the secondary loan market from another investor, who may have become a lender upon origination or primary syndication of the relevant debt, or have previously acquired it from another investor. These transfers are documented using market standard documentation.

Lenders of bilateral loans (i.e. those that are made by a single lender and where may be no intention at the outset of syndicating the loan) will transfer their loans less frequently, but may need to do so from time to time for the same reasons as syndicated lenders.

Key Considerations

The process of transferring a loan will differ depending on how the loan, and the related security, has been structured at the outset. 

Has the loan been structured as a bilateral loan? Has the loan been structured as a syndicated loan? If the latter, will the loan be transferred as part of a primary syndication transaction, or a secondary trading transaction? However, there are some key considerations to be aware of on all loan transfers. This includes:

• Method of Transfer: What is the method of transfer, depending on what the objectives of the transfer are? Assignment? Novation? Sub-participation? We will discuss these methods further below.
• Consent and Notification: Is the borrower’s consent required? Even if consent is not required, does the borrower need to be notified?
• Loan Agreement Terms: Are there any provisions in the loan agreement, or the security documents, that might affect the transfer, such as restrictions on assignment, conditions precedent, or requirements for notice and consent.
• Due Diligence: The buyer will need to carry out appropriate due diligence, depending upon the nature of the loan and the security.
• Regulatory Compliance: The parties will need to ensure compliance with all relevant regulatory requirements, which may include data protection laws, consumer protection regulations, and banking laws. This is particularly important if the loan involves consumer borrowers or if the transfer crosses jurisdictional boundaries.
• Tax Implications: Any tax implications of the transfer will need to be considered for both the seller and the buyer. The transfer may result in additional costs to the borrower, especially in relation to withholding tax; there may be other issues where there is an overseas borrower or obligor, or the transferee is an overseas lender - local law advice will often be needed.
• Servicing Arrangements: How, and who, will service the loan after the transfer?

Methods of transferring loans

A loan agreement, or facility agreement, is a contract like any other. Therefore, the usual methods of transferring contractual rights and obligations apply, namely:

• Assignment; or
• Novation.

These methods do not have the same legal effect and the most appropriate method will depend on the situation. However, the distinction between assignment and novation is crucial in the context of selling a loan, as each involves different legal implications and processes, and the technique of ‘sub-participation’ is also worth consideration.

Assignment

Assignment involves the transfer of rights or benefits under a contract from one party (the assignor) to another (the assignee). In the context of a loan, this means the original lender (assignor) transfers its rights to the benefits of the loan agreement (e.g. the right to receive payments from the borrower). Importantly, any obligations under the loan agreement (e.g.  the obligation to advance further loans to the borrower) do not pass to the assignee and remain with the original lender. 

Typically, the borrower's consent is not required for an assignment unless the loan agreement specifically requires it. However, the borrower must be notified of the assignment. The legal effect of an assignment is that the original contract remains in place, and the assignee steps into the shoes of the assignor concerning the rights transferred. The borrower continues to owe obligations to the original lender, who then passes on the benefits to the assignee.

Novation

Under English law, novation is the only way for a lender to transfer both its contractual rights and its contractual obligations to a new lender, and as such, novation is the most commonly used method of transferring a loan under English law.

Novating a loan means that the existing lender’s rights and obligations are completely cancelled and discharged and the new lender assumes new, but identical, rights and obligations in their place. It is a means of creating a distinct contractual relationship between the new lender and the original transaction parties.

Transferring obligations is particularly relevant if the existing lender is looking to transfer a loan (or part of a loan) with undrawn commitments. An obvious example of such a loan is a development loan which requires the lender to advance funds on an ongoing basis. Novation is the only way (under English law) for the existing lender to ensure that it is no longer responsible for advancing those amounts. 

Unlike with an assignment of a loan, the transfer of obligations, via a novation, such as the obligation to make further loans, will only be possible with the consent of the borrower.

Sub-participation

Sub-participation differs from novation and assignment because it does not involve any legal transfer of rights or obligations in the loan. Rather, it creates a new set of rights and obligations between the lender of record that is party to the finance documents and a new entity behind the lender of record as a separate, new arrangement that is totally distinct from the original transaction.

The original loan stays in place and the relationship between the borrower and the lender of record is unaffected. A sub-participation can be viewed as a loan made by the sub-participant to the lender of record that is used to fund the loan advanced to the borrower.

Sub-participations are a common method of transferring loans on the secondary loan market, although it is worth noting that the term ‘sub-participation’ does not have a fixed meaning as a matter of English law; how the arrangement works and how it might be construed by the court in the event of a dispute, depends entirely on what is agreed under the relevant documentation. 

What if a borrower won’t consent to a novation?

As mentioned above, for the rights and obligations under a loan agreement to pass from one lender to another, the borrower’s consent is required. To ensure that loans can be freely transferred without a borrower delaying or stopping the process entirely, it has become entirely market standard for loan agreements to be drafted in such as way so as to include the upfront consent of the borrower to the lender transferring its obligations (as well as rights). This will in effect mean that the borrower is consenting in advance to a future novation. The Court of Appeal in Habibsons Bank Ltd v Standard Chartered Bank (Hong Kong) Ltd confirmed that a party can consent in advance to a future novation as long as the terms of the novation are reasonably clear and specific.

Although the upfront consent of a borrower to a loan transfer will generally not be negotiated, the identity of the intended future transferee is more likely to be the subject of negotiation by a well-informed borrower, with discussions often taking place around the types of institution a lender can transfer its loan to without the consent of the borrower. 

What about the security?

So far, we discussed the concept of selling loans, and how legally this might take place. However, crucially, any loan purchaser is not just concerned with acquiring the rights of the original lender to the loan, but also acquiring an interest in the security provided for that loan.  

Where commitments under a secured syndicated loan are transferred by syndicate lenders, there would rarely be any need to transfer security (unless required under local law). This is because transaction security is typically granted at the outset to a security agent or trustee who holds the security on trust for and on behalf of the ‘lenders’ from time to time. ‘Lenders’ would include both the original lender and any new lender who subsequently acquires an interest in a loan. In the event that the security agent or trustee enforces its security, it would be doing so as agent or trustee for the various lenders, and the proceeds of enforcement would be held as such. 

Where a secured bilateral loan is transferred or assigned from one lender to another, the security will need to be transferred in the same way that the rights to the loan are passed (i.e. by assignment or novation). It might be the case that the original lender wants to transfer all its rights to a new lender, either by assignment or novation, but it has been agreed between the parties that the security will remain held by the original lender. In this situation, the original lender and the new lender may retrospectively enter into a security trust arrangement, in which the original lender agrees to hold the security as agent or trustee for the new lender.   

Guarantees will also need to be reviewed to see whether they need to be re-taken. Again, this is unlikely to be a problem when loans are transferred on a syndicated transaction, as the guarantees will typically be provided for the benefit for all lenders, which existing or new. On a bilateral transaction, however, the wording in the guarantee should be examined carefully to see whether it covers the situation in which the underlying obligations are transferred. 

Summary

There are a whole range of other considerations to take into account when loans are bought and sold, and this article barely scratches the surface. Indeed, many transactions can include a combination of the methods that are touched upon above, and no one transaction is the same. As the financial landscape continues to evolve, the ability to effectively buy and sell loans will remain a critical tool in a lender’s armory and an understanding of the key legal principles behind the techniques involved is crucial.