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Opinions and views from expert CFOZone members.

Mar 06

Mexican stand-off over bad JP Morgan loan is hardly a first

Posted by Ron F in RakoffloansJP Morgan Chasedue diligenceDealscomplianceBanksBanking

Ron F

As bad as this case involving JP Morgan and its Mexican client, Empresas Cablevision, sounded to me when I first read about it last month, I couldn't help but wonder just how unusual it was.

After all, it seemed clear from the coverage that there were some do's and don'ts in "assigning" loans, and that therefore the issue must have come up before.

To be sure, offering Cablevision's loan to a competitor through an assignment disguised as a participation, as JP Morgan allegedly did after it couldn't arrange a syndication, wasn't exactly in the interest of the borrower. But Judge Rakoff's finding that this deal amounted to an illegal assignment made me wonder under what circumstances a loan assignment could be legal.

Since Felix Salmon's column didn't spell that out, I turned to Jeff Wallace, a principal in the consulting firm, Greenwich Treasury Advisors, and an advisor to CFOZone, for enlightenment.

As usual, Wallace came through in spades, though he's usually quicker to do so and apologized for failing to be more timely this time. (No problem, Jeff.)

As he explains in an email to me today, banks do not owe fiduciary duties to their borrowers. As a result, Wallace continues, "buying up debt of competitors to force them to deal on unfavorable terms has been a fact of life since debt instruments were invented."

As a result, the consultant says borrowers need to keep in mind that restrictions on assignments and participations need to be written explicitly in the debt agreements. "If they are not explicit," he warns, "then anything goes."

Wallace adds that it's naïve to expect otherwise, noting that JP Morgan was probably acting to reduce a substantial loss on the paper. And you can't exactly blame the bank for wanting to do that.

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