Instead of going to 5 banks to raise enough money, they ask a bank to act as an agent to orchestrate the loan with several other banks. In our example, the agent bank contacts four other banks, and each of them (including the agent) provides $1 billion each. What seems to be happening here is that the Agent Bank will pass the swap with the borrower and assume the market risk (rate risk) of the transaction. However, the agent bank needs the help of union banks (I think the same thing) to cover the solvency of the swap. Thus, the agent asks each union (I think to cover the same part) of the loan as provided in the loan. Of course, there are fees, and interest payments back to the agent`s bank, etc. All of this is governed by a loan participation agreement. It`s just a peasy. In this case, the borrower will probably have a much better deal than having to negotiate the individual loans with the 5 banks themselves. Risk-involved agreements are often used in international trade, but these agreements are risky because the participant does not have a contractual relationship with the borrower.
On the other hand, these transactions can help banks generate revenue streams and diversify their sources of income. A financial industry association sought clarification because its members did not consider that the risk-sharing agreements were shared with underlying swaps. For example, risk-participation agreements would not transfer some of the risk of interest rate movements. The risk associated with a counterparty failure is transferred. The association also argued that risk-sharing agreements have speculative intent and other characteristics of credit risk swaps. In addition, the association stated that the agreements were used as banking products to better manage risk. Preventing them from being regulated as swaps also corresponded to the flexibility left by banks to make credit-related swaps. With SDRView, for the month of June 2016, I can only see 3 unique credit exchange trades against North American companies, every 10 years of protection against companies. Could they be RPAs? I don`t think so, because they seem to have monthly payments instead of a single pre-payment commission.
Of course, this is my legal version of an RPA – please don`t use it for your own risk participation agreements.