Commercial Lending and Secondary Negotiation: BAFT vs. LMA


This article is co-authored by Ian Clements, Alexander Hewitt and Evdokia Maslennikova of Dentons

Commercial loans are used to finance transactions involving import or export trade and reflecting different stages of the commodity trade cycle, from pre-export financing to basic borrowing facilities.

However, all commercial loans are used to finance imports, exports or other commercial transactions.

Commercial loans vary from uncommitted, unsecured bilateral financings to complex, secured syndicated financings (almost inevitably conducted under Loan Market Association (LMA)-style documents).

In addition to “traditional” loans to companies, commercial loans are also granted between banks, which allows borrowing financial institutions to on-lend to companies.

As in many banking sectors, market participants are often keen to achieve two objectives:

  1. Standardized documentation; and
  2. Better distribution in secondary markets (for example, to reduce risk or improve liquidity).

The realization of the former tends to favor the latter, which makes the model forms published by the Bankers Association for Finance and Trade (BAFT) and the LMA so useful.

The BAFT Master Commercial Lending Agreement (MTLA) creates framework conditions for bilateral unsecured, uncommitted commercial loans with a one-time repayment to businesses or financial institutional borrowers.

Variations from standard MTLA terms can be made in “Commercial Loan Applications,” which document specific advances.

A lender can assign or transfer interest on a loan in two ways so that they are no longer the lender of record:

  1. An assignment of rights, or
  2. A novation of rights and obligations.

To use these options, either the underlying transaction must not prohibit the assignment or transfer, or the counterparties involved must consent to it (including the disclosure of confidential information).

While there are no industry standard procedures for assignment or novation agreements used in the BAFT MTLA, the LMA documents contain standardized mechanisms and agreements for these processes.

Although the initials “LMA” are synonymous with “bargain” in many areas of the loan market, parties sometimes prefer to use shorter or bespoke documents.

With secondary trading in mind through a certificate of transfer or assignment, these parties may wish to select the key features of the LMA primary documents summarized below.

Aspects of the LMA

In LMA-based facility documents, a security officer holds all trusted security for financial parties, preventing security documents from being discharged by novation.

Each lender has a qualified right to sue independently for the collection of its own debts.

This even includes lenders who entered into the transaction through a Certificate of Transfer or Assignment Agreement.

Payments between all parties must generally be made available to the settlement agent – and any security is given to each financial party individually and directly.

Using a quirk of English contract law (based on Carlill v. Carbolic Smoke Ball Company), the LMA Form of Transfer Certificate novates the participation of a lender, binding all parties to the facility agreement even if only the agent of the installation, the existing lender and the new lender sign the certificate of transfer.

The LMA Assignment Agreement (effectively an Assignment, Assumption and Release Agreement) produces a similar economic outcome – again with only the Installing Agent, Existing Lender and New Lender signing .

The impact of novation on LMA loans

Transfer certificates are used when lenders have rights and obligations of novation (for example, under undrawn covenants) unless the facility is in default (because there is a risk that novation could undo a default).

Each Novation terminates the Loan Agreement between the Existing Lender, the Borrower and all other parties with respect to the Transferred Interest (but not with respect to any Retained Interest or Transaction Security).

This means that the rights of the new lender under the security trust supersede those of the existing lender.

Bilateral lenders who hold security for their own advances can avoid novation releasing their security by holding it under a security trust.

This can be done when the bilateral loan is documented as a syndicated loan that uses the main LMA features mentioned above.

Novation and assignment agreements

The LMA Assignment Agreement is primarily used if a borrower is in a civil law country that has issues with transfer certificates.

Legal advice should be taken on the effect of the assignment agreement in a given jurisdiction, including security issues.

Although economically very similar to a novation, the contract of assignment contains (unsurprisingly) an assignment of rights.

Where the interest is assigned, English law may make it impossible for an assignee to bring an action under its assigned rights without involving its assignor in the proceedings.

However, one of the effects of the main features of the LMA forms summarized above is that an English court is likely to treat an LMA assignment agreement as authorizing the new lender to sue to recover the assigned interest without any involvement of the transferor.


BAFT Framework Participation Agreement

Secondary trading of loans includes the use of sub-participations, which is very common for commercial loans using BAFT’s Master Participation Agreement (MPA) form.

BAFT’s 2018 English Law MPA can create funded or unfunded risk participation in business assets.

Unlike the 2008 MPA (still in use), the 2018 MPA gives the buyer a fair disposal in a participating asset.

Again, unlike a 2008 equity (debtor/creditor), the 2018 disposal model is able to remove the asset from the seller’s balance sheet and out of its insolvency estate.

In addition, the equitable assignment can sometimes be “elevated” to a full legal assignment.

This, however, depends on the terms of the participation and applicable laws, such as the law governing the asset, which generally gives the buyer simpler enforcement rights against the debtor in respect of the purchased asset.


Unlike the 2018 BAFT GPA, LMA financings and risk participation in commercial loans are debtor/creditor agreements.

Pending any elevation, there is only an economic transfer of lender’s risk in the underlying transaction, with none of the lender’s rights against a debtor being transferred and the seller remaining the lender of record.

Advantages and disadvantages of LMA

One of the advantages of the LMA model is that it can be used when there are no assignment or transfer restrictions in the commercial loan, or when a loan is in default, and it avoids participation is reclassified as a sale.

A disadvantage for the buyer is that he has no rights under the commercial loan documents (including any security or guarantee), and no right to exercise any rights or discretions under any of these documents.

A participant’s consent to such actions is only required in connection with LMA participations of a seller’s entire interest in the loan in which they participated.

A related point is that commercial loan indemnities are generally only triggered by circumstances occurring in relation to the seller, not the buyer.


A key difference between the LMA and BAFT Participation Documents is that under the LMA, elevation wording is only included in the funded version of the LMA Master Participation Agreement.

Even here, the language is vague and highly qualified – the operational arrangements for the transfer or assignment being left to the buyer and seller to agree outside of the participation agreement.

About the authors

Ian is a partner in the London office of Dentons. He focuses on international commodities, structured trade, receivables and export finance transactions. Ian’s work includes advising on various finance structures and commodity types, including debt base, pre-export and structured prepayment finance as well as bilateral trade finance facilities. Ian also has expertise in export credit financings, receivables financing transactions and trade finance distributions. Ian acts for financial institutions, alternative finance providers, borrowers, trading houses and export credit agencies.

Alexander has over 25 years of experience as a banking lawyer. He specializes (among others) in trade, commodity and receivables finance. He speaks regularly on these subjects – and on the technical side of missions and standing ovations.

Evdokia (Dunya) joined Dentons in 2011 and qualified for the Trade and Commodity Finance team in London in 2013. Dunya acts for banks, borrowers and commodity trading companies. His experience includes oil and gas, metals, commodities, supply chain finance and receivables finance transactions.

Read the latest issue of Trade Finance Talks, July 2022


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