18 The issue of set off in funded participation

Because the participation is a contractual arrangement an additional risk for the participant is if the borrower exercises a right of set off against the lender.
This could happen if the lender is a bank and the borrower has a deposit with the lender or if the lender has entered into a swap or derivative transaction with the borrower, as is often the case.
The participant will therefore want to ensure that the borrower has waived its rights of set off under both the loan with the lender and any derivative or other transaction entered into with the lender.
Remember that the funded participation is not like an assignment where the notice could be provide the borrower and therefore crystalise any set-off when the notice is delivered.
The participant may take some comfort by insisting that the lender represents that is the case. In any respect the participant may also find it prudent to undertake some due diligence to ensure the documentation (loan and derivative) between the lender and borrower does include a waiver of set off by the borrower.