A loan sale and purchase agreement (“LSPA”) relates to the transfer (assignment) of a large number of individual receivables. The individual receivables may originate from virtually any kind of economic activity of the seller that involves entering into numerous agreements with customers, such as loan, lease, supply or service agreements. As more customers default on their payments, the seller no longer has the organisational capacity to deal with the defaults, and transfers the receivables (referred to as “non-performing”) at a discount to a buyer specialised in dealing with defaulted customers.
The LSPA structure replicates the structure of a standard SPA. Some concepts, however, are applied differently.
As a standard, the LSPA implements a locked box mechanism. Unlike the sale of a business, the sale of receivables involves a limited number of financial variables, which are known and manageable from the beginning: principal, accrued interest and accrued collection expenses. Thus, there is usually no need for post-closing adjustments (closing accounts). Instead, the amount of the receivables is guaranteed as of an earlier accounting date (eg 31 December) and any movements in the accounts since that date are for the benefit and risk of the buyer.
An important topic in any LSPA negotiation is whether/what public information should be deemed disclosed. As disclosure releases the seller from liability for the disclosed facts, the seller wants to disclose more. A seller would claim that any public information, although not specifically disclosed to the buyer, should have been known to the buyer. On the contrary, a buyer would oppose the disclosure of anything that it has not specifically reviewed. This dynamic is part of any SPA negotiation. In the context of an SPA and sale of a business, however, a seller is more aware of the risks associated with its business and would disclose these risks specifically, rather than rely on public information. In the context of sale of receivables, the seller is often unaware of the associated risks, because there may be hundreds or thousands of receivables and any one of them may be tainted by enforcement or litigation problems, none of which is specifically kept on record with the seller and cannot be specifically disclosed.
While a compromise on the public information disclosure would depend on the particulars of the transaction, two things may facilitate the process. First, if a seller would expect a buyer to search any public information in addition to the specifically disclosed information (data room), the seller should make this clear from the beginning of the process (ideally, buyer’s searches should be limited to reliable online registers only). Second, the parties should not presume that anything in the public domain is also known to the public and the buyer. This is true for registers that legally introduce a presumption of awareness, such as the Bulgarian Commercial Register. If there is no such legal presumption, the public information is only publicly accessible, but not presumably known by the public, and the extent of the buyer’s awareness of such information can be freely regulated in the LSPA.
In an LSPA, the parties should expect a more limited catalogue of seller’s warranties compared to an SPA. In practice, the list of what is expressly not warranted is usually longer than the list of what is warranted. Under Bulgarian law, a seller’s warranty on the existence of the receivables in the amount specified in the LSPA applies by operation of law and cannot be contracted out. Virtually all other warranties can be freely regulated in the LSPA.
There are two approaches to capping a seller’s liability in an LSPA. In addition to the customary limitation on liability as per any SPA – de minimis, basket, total cap, time limitations, etc – any claim may be capped either at the proportionate amount of the purchase price (ie, if the claim is 3 % of the total amount of transferred receivables its liability cap is 3 % of the total purchase price) or at a price specifically allocated to the receivable underlying such a claim. The latter approach is called line item pricing and is considered more beneficial for the seller, because it allows allocation of low caps to otherwise large receivables if they bear the risk of legal defects.
Lastly, a unique concept in an LSPA is dealing with ongoing litigation involving the transferred receivables. Under Bulgarian law, a buyer of a receivable does not automatically replace the seller in ongoing litigation involving that receivable. Unless there is consent by the debtor, which presumably would not be given, the litigation continues between the seller (although no longer an owner of the receivable) and the debtor. In this scenario, the parties may either decide to exclude the litigated receivables from the scope of the transaction or regulate a mechanism in which the ongoing litigation continues formally with the seller, who would act on instruction, risk, cost and benefit of the buyer.
In an LSPA, the parties should expect a more limited catalogue of seller's warranties compared to an SPA. In practice, the list of what is expressly not warranted is usually longer than the list of what is warranted.