Posted by London trainee Pedro Leake-Bandeira and associate Maria Capocci
The original Bankers Association of Finance and Trade Master Participation Agreement (“BAFT MPA”) was launched in 2008 to enable market participants (with its focus on banking groups) to more easily enter into risk transfer agreements, by providing a standard form document that all participants would grow to know and understand.
At the most recent Sullivan trade finance webinar, Geoff Wynne covered the development of documentation for transferring risk through different forms of participation agreements and considered whether the BAFT MPA is always the best way.
The BAFT MPA
Initially structured as a debtor-creditor agreement between a grantor and a participant, the BAFT MPA was subsequently modified into a sale and purchase structure in order to allow for the true sale of the underlying financial assets. It implements the concept of a master entity that contracts into the master participation agreement, while allowing for permitted affiliates to be the seller or the participant in the agreement by way of an offer and acceptance mechanism. In short, either party to the agreement, or its affiliates, can offer or accept a participation in a transaction.
Participations can be either funded (where the seller the participant must pay the seller upfront in order for the seller meet its own funded obligations); or unfunded (where the seller does not require payment upfront, instead the participant takes on risk, and pays upon occurrence of a trigger event (namely an underlying default)). The BAFT MPA is also able to deal with both of these fundamental structures in the same document.
Over the last few years, as the number of structures using participation agreements grows so does the number of amendments to the standard BAFT format for specific transactions. So: does BAFT MPA remain fit for purpose, or should we consider alternatives?
ISSUESWhile many issues were discussed, including the ever important legal and accounting issues relating to true sale, the webinar also highlights the following issues within the BAFT MPA:
1. Assumption of risk under the BAFT MPA
There are limited obligations imposed and limited representations given by the seller. The participant takes the document risk.
2. Limited seller obligations during the transaction
No fraud risk is specified under the agreement, but the seller is required to accept certain responsibilities in respect of how it checks the transaction documentation and how it deals with the transaction (see clauses 15 and 19 of the BAFT MPA).
3. Each transaction starts with an offer
There is no obligation on the Participant to accept the offer.
4. Participants have certain rights in relation to post-completion matters
The seller runs the relationship with the obligor in the transaction, leaving a question as to what risks the participant accepts.
Modifications to the BAFT MPA
Suggesting that the BAFT MPA does work, Geoff also notes that for participations, (i) their purpose; and (ii) the nature of the participant, is changing. The very requirement for modifications is a sign of the success of participation structures. Because it is a good base, it is a reliable tool and the BAFT MPA just needs to be tailored to specific transactions.
The question is: what tailoring to do?
Parties may consider amending the offer and acceptance mechanisms to be more detailed or specific. They can also draft bespoke clauses, to better reflect their transaction. For example, a seller could require the participant to be bound by the offer when it is made to the participant; or that the seller should have the right to understand the underlying assets before accepting. The standard BAFT MPA might not provide for this. But then, what should be re-written and should it be re-written into a template master, or should we maintain bespoke standalone documents created for their specific purpose?
Standardising the amendments approach or is BAFT the way forward?
While Geoff considers that it is not possible to standardise this ‘amendment’ approach, there are clearly areas which may achieve a better starting point, especially where you want to distinguish the different rights and obligations of the parties from the BAFT MPA position. The BAFT MPA structure is still a sound base, but many banks have taken this structure and made amendments to it or are running their own participation documents alongside it. Are the amendments being made common across different market participants? If so this could help make the case for standardising.
- It could be argued that the BAFT MPA, still works in today’s market: it is flexible, can satisfy legal and accounting requirements, and can be adapted through variations and modifications (particularly in relation to the inventiveness of those who may want to use participation for other reasons and purposes). Any new template or standardisation would need to consider all of this.
- Overall, participation is a good way of achieving the transfer of risk in the sale of an underlying transaction, and the BAFT MPA should be the way ahead.
The webinar can be viewed in full here.