Yield Protection Loan Agreement

The main costs incurred by a lender in granting its loan are its financing costs – e.B. EIBOR and the costs of meeting the capital and liquidity requirements applicable to that loan. In the UNITED Arab Emirates, the margin imposed by a lender is usually designed to cover that lender for the cost of complying with existing capital requirements. Unlike other markets, the practice in the UAE is that the margin absorbs this existing capital adequacy as well as liquidity requirements. In other markets, these requirements are covered separately in the form of a mandatory cost requirement. The Basel Accords (published by Basel I and Basel II and Basel III currently under development), which are recommendations on banking laws and regulations, establish common definitions of the eligible components of a bank`s capital. Among other things, they: A lender who deducts a loan agreement expects to receive a certain rate of return, which is usually calculated on the basis of an agreed margin on its financing costs. This pricing model is based on certain assumptions regarding the broader tax and regulatory treatment of the loan and the lender. If the treatment of either of the two changes makes the loan more expensive for the lender or otherwise reduces its performance, the lender expects that under the loan agreement it will have the right to pass on these costs to the borrower, thereby protecting that expected return. Various provisions of a credit agreement refer to such performance protection, the most important provisions being the tax clause and the cost increase clause. It should be noted at the outset that if a lender wants to have the right to recover certain costs under its loan documentation, this does not mean that lenders will always exercise this right in practice.

This is the “capital adequacy ratio”. The capital ratio limits the amount of assets (loans) a bank can have based on its own capital base. These regulatory requirements are intended to standardize these risk weights and the capital classes that count in a bank`s capital base to determine its equity ratio. Basel II requires all banks to maintain a capital ratio of at least 8%. Overall, this means that for every AED100 in its portfolio, a UAE bank must have a capital base of at least AED8 (which translates into an equity ratio of 8%). Basel II allows for a derogation from this minimum capital adequacy requirement based on the historical experience of banks domiciled in different jurisdictions. The CENTRAL BANK of the United Arab Emirates has introduced a higher capital ratio, which all banks in the United Arab Emirates should have met by June 2010. Basel III requires higher capital ratios based on the fact that banks should have an adequate and liquid capital buffer that is accumulated in healthy times and that could be used in the event of financial market shocks and minimise the public costs of a possible bailout.

Mandatory capital reserves (capital as a percentage of risk-weighted assets) are therefore at the heart of ongoing banking regulatory reforms. To meet these requirements, a bank can essentially do one or three things: matching financing. Since LIBOR was originally based on the idea that to lend to a borrower, a bank would enter the London interbank market and receive the funds it needed for the loan by taking a short-term deposit from another bank7, the bank`s financing on the interbank market is intended to “match” the loan. that it granted to its borrower. Bankers, lawyers and others involved in the transition of the London Interbank Offered Rate (LIBOR) credit market to a different benchmark rate have spent much of the last two years thinking about and drafting fallback provisions – the section of a loan agreement that describes what happens when LIBOR is not available. .