Structuring a lending transaction
General Who are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)? Traditional banks (both international and local banks) are active providers of secured finance in England and Wales. However, in particular sectors such as the leveraged, real estate and fund financing sectors, institutional investors such as credit funds and insurance companies are also very prominent.
Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions? Most English law syndicated finance transactions use documentation which is largely based on the recommended forms of documentation produced by the Loan Market Association (LMA). The LMA produces various template forms of facility documentation across the investment grade and leveraged financing markets, as well as other specialist product areas, including real estate. Bilateral secured facilities are more likely to be documented on bank standard form documentation.
Syndication Are syndicated secured loan facilities typical in your jurisdiction? Yes.
How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members? In typical syndicated facilities (and in line with the recommended forms of LMA documentation as referred to above), a facility agent (usually acting out of the agency division of one of the syndicate lenders) is appointed to administer and service the syndicated loan facility in accordance with the terms of that particular facility document – for example, by coordinating utilisations and payments, as well as generally coordinating communication between the borrowers and the syndicate lenders (eg, administering consent requests and transfers between lenders).
Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate? Yes. In contrast to other jurisdictions in continental Europe, in England and Wales the concept of the trust is recognised. Security is typically granted in favour of a security trustee, who holds the security on trust for the specified secured parties from time to time.
Special purpose vehicle financing Is it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security? Yes. In England and Wales SPVs are commonly used to hold the assets being financed, with security then being taken over the shares of that SPV. It is also common for security to be taken over the assets of the SPV in addition to share security.
Interest Is interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction? LIBOR is the primary benchmark used in the syndicated loan market in the United Kingdom, with EURIBOR and other non-LIBOR benchmarks used as relevant for other particular currencies under the loan facility.
In the event of non-availability of the benchmark, there may be an option to use reference bank rates as a fallback. However, banks are increasingly reluctant to act as reference bank. The most common position in syndicated loan facility documentation currently is for reference bank rate fallback provisions to be included, but with the identity of those institutions to provide such rates being left to be agreed between the borrower and the facility agent at the relevant time. Bank base rates are typically used only in smaller, bilateral transactions.
Are there any regulatory restrictions on the rate of interest that can be charged on bank loans? In a non-consumer context, restrictions are very light. Grossly exorbitant payments can be set aside if entered into by a company within a certain period of time before insolvency (under the ‘extortionate credit transactions’ provisions of the Insolvency Act 1986). Payments which are triggered on a breach of contract (eg, default interest rates) must not be penal. In broad terms, payments which are out of proportion to any legitimate interest of the non-defaulting party in enforcing the primary obligation will not be enforceable.
Use and creation of guarantees Are guarantees used in your jurisdiction? Yes. In England and Wales guarantees are the most commonly used form of credit support in both secured and unsecured syndicated loan financings.
What is the procedure for their creation? In order for a guarantee to be enforceable under English law, it must be documented in writing (signed by the guarantor) and must either be executed as a deed or otherwise be provided to the beneficiary of such guarantee for consideration. There are no other formalities.
Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)? The key areas affecting or restricting the granting or enforceability of guarantees in England and Wales are corporate benefit rules and financial assistance rules and the risks of clawback arising on insolvency. These areas are briefly outlined below.
Corporate benefit Directors of English companies are under a statutory duty to act in a way which they consider is most likely to promote the success of that company. Upstream or cross-stream guarantees (ie, guarantees which secure the indebtedness of a holding or sister company) typically raise doubts over the existence of corporate benefit. Provided that the guarantor is in good financial health, doubts as to corporate benefit can usually be dealt with by a resolution of the shareholders of that company approving the proposed transaction. The essence of this 'solution' is that the duties of the directors are essentially owed to the members (provided that the company is not at risk of insolvency), so the members can sanction what would otherwise be a breach of duty. Corporate benefit duties are governed by the jurisdiction of incorporation/establishment of the guarantor company (rather than by the governing law of the contract).
Financial assistance Unlike in other jurisdictions where financial assistance is prohibited, the financial assistance regime in England for private companies is arguably very liberal – the prohibition now remains only in respect of English public companies providing financial assistance for the acquisition of their own shares or the shares in a holding company, or where a private company is providing financial assistance in relation to the acquisition of a target public company.
Clawback Guarantees and security may be at risk of being set aside under English insolvency laws if the guarantee or security was granted by a company within a certain period of time before insolvency (eg, on the grounds that the transaction represents a transaction at an undervalue). A transaction could be challenged on this ground if the relevant company received no consideration or consideration of significantly less value – in money or money's worth – than the consideration given by such company. For a transaction to be vulnerable, the company must have been insolvent at the time that it entered into the transaction (or have become so as a result of entering into it) and the transaction must have been entered into in the two years immediately before the onset of the insolvency.
A court will not make an order in respect of a transaction at an undervalue if it is satisfied that the company entered into the transaction in good faith and for the purpose of carrying on its business and that, at the time that it did so, there were reasonable grounds for believing that the transaction would benefit the company.
Guarantees and security may also be challenged on the grounds that the transaction represents a preference in favour of a company's creditors or a void floating charge.
Subordination and priority Describe the most common methods of structuring the priority of debts and security. The ordering of payments of debts between creditors can be achieved contractually in an intercreditor (or subordination) agreement. Under a typical contractual subordination, the creditors agree with the debtor that the debtor will make no payments (or only limited payments) in respect of the junior debt unless and until the senior debt has been paid in full. Coupled with this, the junior creditor agrees to turn over to the senior creditor all junior recoveries up to the amount of the senior debt and, pending turnover, to hold those receipts on trust for the senior creditor.
In leveraged finance transactions, contractual subordination is used alongside structural subordination. This means that the senior lenders will lend at a lower level in the group structure (closer to the asset-rich operating companies) than the deeply subordinated creditors (eg, high-yield bondholders and equity investors), which will lend to a more remote holding company and therefore will have recourse only to the shares in the holding company's subsidiaries (ie, what is left after the creditors of the subsidiaries have been paid). Certain classes of subordinated creditor (eg, high-yield bondholders) may also get a guarantee from a more structurally senior entity. While that guarantee would typically itself be contractually subordinated, at least this gives the subordinated creditor equal ranking with the unsecured creditors of the company which has given the guarantee.
Priority of claims in respect of security is also typically regulated by the intercreditor agreement, which will set out an order of application of proceeds of security. The intercreditor agreement will also regulate which creditors are entitled to take enforcement action and any applicable enforcement rules, such as ‘standstill periods’ which apply to any junior enforcement action.
Documentary taxes and stamp duty Are any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement? No stamp duty or documentary taxes are generally payable in England in respect of the execution or delivery of loan and guarantee documentation.
No stamp duty or documentary tax is payable on the creation of a security interest. However, there is currently a nominal fee payable on the registration of security granted by English companies at the Companies Registry. There are also specific nominal fees payable on registration at the Land Registry in relation to security taken over land.
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