Why DTB Bank (U) Limited & DTB Bank (K) Limited win against Ham Enterprises Limited is a reprive for Uganda’s financial sector.

HAM Enterprises Limited and Kiggs international (U) Ltd (Borrowers) approached both DTB Kenya and DTB Uganda (Lenders) for financing to tunes of about UGX 120 billion. The two banks had to join efforts to offer the facility with each contributing a portion of the loan required. DTB Kenya having no presence in Uganda where the Borrowers were located channeled its portion through DTB Uganda, making DTB Uganda its agent for the purposes of this transaction. 

The Borrowers later on challenged the transaction on several grounds like unconscionable interest rates, breach of contract and illegality among others. Throughout the trial that went through the full length of the Ugandan Courts hierarchy, a number of legal touch points were raised. 

However, for the purposes of this text, I will limit myself on the aspects of syndicated loans and the relationship that exists between parties to such arrangements.

Impact of Supreme Court Decisions

Before I jump into a discussion on syndicated loans, I wish to highlight why it is important that this decision came from the Supreme Court. It is important to note that the supreme court is the last appellate court in Uganda. Once it pronounces itself on a matter, it might not matter as much that you are dissatisfied with it, it becomes binding on all lower courts unless it is diverted from by the Supreme Court itself. 

Another important reason why Supreme Court decisions are very important is that they often touch on matters of public legal importance. An unclear area of the law often attains clarity when it finds its way to the Supreme Court. As a matter of fact, this case provided us with an opportunity to examine the legality of foreign lending in Uganda which will be partly what I discuss in the text below.

What are syndicated loans and why involve foreign lenders?

Simply put, syndicated loans refer to situations where lenders lend in a syndicate (group) by contributing portions of what is the loan amount to the ultimate borrower(s). Often times, syndicated loans involve large sums of money normally associated with big projects. These kinds of projects always exhaust the single obligor limits permissible for participating lenders. 

Banks are required by regulation to protect their capital base and hence secure depositors’ funds. As such, a financing need that requires over and above the limits set by the central bank has to be met by a combination of banks each contributing up to a maximum of their single obligor limit.

By their very nature, syndicated loans require a number of players for various roles. Some of the roles common with syndicated loans include the following;

Arranger: This is normally the dominating lender that negotiates the commercial terms. Because of their dominant role, they could receive some fees over and above members of the syndicate. The Arranger basically coordinates the syndication.

Agent: This role is for the party that will act for and on behalf of the syndicate. (In the HAM case, DTB Uganda played this role). Normally, all communication is passed through the Agent on behalf of the syndicate. In most arrangements, it often sense that this role is taken on by the Arranger.

Security Agent: In cases where there is need to provide collateral for the loan, the Security Agent will hold the collateral on behalf of the lenders. The Security Agent also forecloses on behalf of the lenders in case of default by the Borrower.

Foreign Lenders role

In most group structures like the DTB group, lenders feel confident contacting their affiliates to participate in the syndicate. These affiliates as it is with most banks in Uganda normally operate from a different jurisdiction. For example, DTB Kenya in Kenya. It is not strange therefore that most syndicated loans involve foreign lenders. Another reason is that Banks are rated according to their capitalization, asset quality, earnings and liquidity among other reasons. A lower rated bank can team up with a higher rated bank to participate in a syndicate which they would not have ordinarily participated in singly. Uganda’s Banking industry is still on a growth trajectory and might not have participants with a triple AAA rate internationally and very few have it locally. As such, teaming with an international Bank with a better rate serves the purpose for large lending needs normally associated with syndicated loans.

In addition to that, inviting foreign lenders is a good gesture for the region from a common market’s perspective. Using the DTB transaction as an example, the Borrowers could have simply obtained credit from DTB Kenya or any other Bank in the region where it was possibly cheaper. Similarly, cross border trading enables merchants and service providers to offer their products and services where it is best to sell in the regional market without geographical restrictions.

The ultimate effect with such cross-border transactions is that it justifies use of a common currency thus achieving a monetary union. The East African market is dominated by the US dollar and the Euro for cross border payments. The introduction of a common currency for the East African region would strengthen local currency against the dollar, euro or any other foreign currency. In turn, this would reduce foreign exchange losses and improve the region’s terms of trade and balance of trade alike.

Key Take aways

• Adopt an appropriate financial product for your loan

Depending on your financing need, you might need to require the lender to advise on the appropriate financial product. Banks have overtime designed various products for customers. These include among others, Term loans, Revolving Credit lines, Contract Financing, VAF facilities and FX hedging facilities. Choose carefully what works for you for the relevant transaction.

• Adopt appropriate legal documentation 

Most structured loans have almost standard documentation. Associations like the Loan Market Association, Global Financial Markets Association have developed documentation that can b accessed on various platforms by both Lenders and Borrowers. Be certain that before assuming a loan, you have adopted the right documents.

• Seek professional advice

Most customers shy away form seeking independent professional advise before taking on loan financing for their businesses. This puts you at a disadvantage because most lenders will come to you after exhausting all professional angles of the transaction and will almost be certain about their rights. This is partly because they can afford it but also because they have been in business long enough to learn from experience. Borrowers do not have these advantages playing in their favour, making independent professional advise even more relevant especially for large, structured and complex loans. For instance, involving a lawyer or a financial advisor and seeking their opinion prior to entering into such transactions will save you millions.

• Monitor the performance of your loan

Most structured or even unstructured loans have conditions precedent to the loan, conditions subsequent to the loan, financial covenants and other terms that are default triggers. A deviation from the same could potentially cause the Bank to call on your loan. Engage the Bank through your Relationship Manager for waivers on breached covenants and regularize the position as soon as possible. Contrary to the common belief, Banks are interested in the success of your loan as opposed to the same underperforming, so constant engagement with the Bank is key. 

Keith Kyaruzi Namara.