Participations are a long-established means by which both:

Lenders can sell interests in loans to other parties by assignments or participations. Each of these arrangements has different characteristics. PLC Finance examines six key points about loan participations and draws comparisons between participations and assignments.

A participant, unlike an assignee, does not become a party to the loan agreement. Having no privity of contract with the borrower, a participant cannot sue the borrower for breaches of the loan agreement. It is easier for an assignee to enforce its rights under a loan agreement than a participant, as a participant can only take enforcement action through the bank that sold the participation (see Practice Note, Assignments and Participations of Loans: Privity and No Privity).

Except in certain circumstances, borrowers often have a right to consent to assignments by lenders, though a non-responsive borrower may be deemed to have given its consent (see Practice Note, Assignments and Participations of Loans: Consent). By contrast, borrowers do not typically have the right to consent to participations and may not even know that one of its lenders has sold loan participations (see Practice Note, Assignments and Participations of Loans: No Consent Required).

When lenders sell participations in their loans, sometimes the interest rate on the participation is less than the rate payable by the borrower on the participated loans. The selling lender can keep the difference as a fee (see Standard Document, Participation Agreement: Drafting Note, Participation Rate).

Assignments must usually satisfy minimum amount requirements and typically a fee must be paid to the administrative agent before an assignment becomes effective (see Practice Note, Assignments and Participations of Loans: Minimum Amounts and Fees). By contrast, lenders can sell participations in any amounts and fees are generally not payable for loan participations (see Practice Note, Assignments and Participations of Loans: No Minimums and No Assignment Fees).

Unlike assignees, which have the same voting rights as other lenders, participants often have limited voting rights covering only certain key loan agreement provisions (see Practice Note, Assignment and Participations of Loans: Voting Rights of Participants). However, some participation agreements adopt a different approach. For more on participant voting rights, see Standard Document, Participation Agreement: Drafting Note, Amendments, Waivers, Etc.

Most participations are non-recourse to the bank selling the participation, which makes it all the more important for a would-be participant to conduct due diligence on the borrower and the loan (see Standard Document, Participation Agreement: Drafting Note, Non-recourse Participation). In practice, however, a participant may carry out less extensive due diligence than the originating lender. One of the attractions for participants is that originating lenders generally carry out extensive due diligence before closing loans, allowing participants to benefit from lower administrative costs (see Practice Note, Assignments and Participations of Loans: Advantages to Participant).

A significant concern amongst practitioners and loan market commentators was whether loan participations might be regulated as swaps under the Dodd-Frank Act. Regulation under Dodd-Frank could have triggered registration requirements for banks selling participations, as well as margin collateral and detailed reporting requirements. However, the final rules defining the terms "swap" and "security-based swap" made it clear that loan participations are not swaps or security-based swaps and therefore are not subject to regulation under Dodd-Frank (see Legal Update, Regulators Define Key Dodd-Frank Terms "Swap" and "Security-based Swap" Triggering Title VII Compliance).