THE ROLE OF THE LAWYER IN THE INTERNATIONAL DEBT OPERATIONS OF DEVELOPING COUNTRIES
by Professor Daniel D. Bradlow
(Article Reference: Document No.6, July 1999)

III. The Stages of a Debt Transaction and the Role of the Lawyer (continued)

B. Preparation: (continued)

(ii) Identification of Sources of Funds: One part of preparation involves identifying the funding sources that the borrower wishes to approach for funding. The potential sources of external financing that a borrower could approach include:

• commercial banks which could lend it money either through a single bank or syndicated term loan agreement.
• investment banks which could underwrite a bond issue, that could be issued either through a public or a private placement. These investment banks would therefore either privately approach institutional investors such as insurance companies, mutual funds, or pension funds to purchase the bond issues of the borrower or make a public offering that would be available to any investor, including both private individuals and institutional investors.
• multilateral development banks such as the World Bank and the regional development banks.
• official bilateral sources of funds which includes both official development assistance and such other official sources as export credit agencies.

Deciding which of these sources to tap is ultimately a business decision that depends on a number of variables. These variables include the ease with which the borrower can access each particular source, its overall borrowing strategy, the relative costs and terms of each funding source, and the ability of each source to lend to the borrower for the particular purpose for which the borrower wants the funds. However it is important to note that each of these variables have a legal dimension to them. Each funding source is governed by a specific legal regime that will influence or even determine to whom the source can extend credit, how much it can extend to a particular borrower, what the capital and other cost implications to the creditor might be for extending credit to the borrower, and the form in which the source will extend the credit to the borrower. For example, commercial banks may be required to maintain specified levels of capital against specified types of loans; export credit agencies may be precluded from funding certain activities such as the purchase of armaments; the International Bank for Reconstruction and Development, a member of the World Bank Group, can only lend to member states or to borrowers who have a government guarantee; and sources of credit are subject to lending limits to individual borrowers. The creditors institutions are also likely to have certain reporting and other prudential obligations towards their supervisory authorities that may be of interest to the borrower.

Given this reality, lawyers can help borrowers to identify the most suitable sources of funds. They can do so by advising borrowers on the laws and regulations applicable to each source of funds and on the legal implications of utilizing each source under the borrower's own governing legal regime. This should help borrowers identify the most appropriate funding source or sources and should enhance the borrower's efficacy in its negotiations with the source.

The borrower's lawyer can only effectively perform this role if he/she has some knowledge of the legal regimes governing each of the borrower's potential financing sources. This means that the lawyer may need to have access to information about the Articles of Agreement and internal operating rules and procedures of the multilateral development banks, the relevant statutes and implementing regulations and procedures of the official bilateral funding sources, and the laws and regulations that govern the borrower's commercial sources of funds. Clearly, it is very difficult for an individual lawyer to have detailed knowledge of all the different legal regimes that may be applicable to the borrower's potential funders. Nevertheless, the lawyer can have some general knowledge about the laws applicable to each of the borrower's key creditors. This knowledge should be sufficient to provide general guidance to the borrower and to enable the lawyer, when appropriate, to evaluate the advice he/she obtains from local counsel in the creditor's own jurisdiction. If the lawyer is able to provide the borrower with this information, the borrower will be able to make a more informed borrowing decision and to be better prepared to negotiate with the chosen funding source.

(iii) Preparation of the Information Memorandum
The information memorandum is essentially a specialized marketing document whose purpose is to convince the reader to fund the borrower and the project or purpose described in the memorandum. This means that, even though the potential lender is likely to do its own credit analysis of the borrower, it may be relying on this memorandum in making its credit decision. As a result, the borrower (or more precisely the issuer of the memorandum) could be held responsible for the accuracy and the adequacy of the information contained in the memorandum. This means that the lawyer has to ensure that the memorandum conforms to the standards of any duties of care that the issuer may owe to the recipients of the memorandum. The borrower's failure to satisfy these standards of care may expose it to potential liability to the lender for such torts as fraud or misrepresentation. In addition, the lawyer needs to make sure that the memorandum complies with the disclosure and other legal requirements in any jurisdiction in which the memorandum is made available to potential creditors of the borrower. Finally, the lawyer should advise the borrower on what steps it can take to limit its potential liability. These steps would include placing prominent disclaimers on the memorandum and qualifying the information contained in the memorandum to make clear to the reader that there are uncertainties and therefore risks associated with the information contained in the memorandum.

>> Next: The Stages of a Debt Transaction and the Role of the Lawyer (continued) | Previous Page | Back to Summary