Guarantees and securityGuarantees
Outline how guarantees among companies in a group typically operate in a high-yield deal in your jurisdiction. Are there limitations on guarantees?
In Portugal, a high-yield deal comprises the granting of guarantees by material subsidiaries of the issuer (upstream guarantees) and, in cases where the issuer is not the top holding company, also by its parent company (downstream guarantee), as well as by any material sister companies (cross-stream guarantees). The guarantors are usually the same as the guarantors under the senior facilities agreement (if any).
Pursuant to the Portuguese Companies Code, Portuguese guarantors may only secure third parties’ obligations if the company has a justified corporate self-interest in the granting of the guarantees or the security, or both, or if the company is in a group or controlling interest with the entities whose obligations are being secured.
Under the Portuguese Companies Code the definition of ‘controlling interest’ includes relationships between companies where one company holds, directly or indirectly, the majority of the share capital or the voting rights in another company or otherwise has the right to appoint the majority of the members of its board of directors or supervisory board. A ‘group interest’ includes relationships between Portuguese companies where one is 100 per cent owned or controlled, directly or indirectly, by the other; or between companies that are bound by a group agreement or a subordination agreement, whereby one company is subject to the instructions or management of the other.
In the absence of a control or group interest, the validity of a guarantee or security interest could be challenged if there is no justified corporate self-interest in its granting, as the interested parties (such as the shareholders of the company) may argue that the granting of said guarantee or security is contrary to the purpose of the company.
In addition, the obligations under the high-yield bonds’ guarantees or security granted by the guarantors shall not extend to any use of the proceeds of the bonds for the purpose of acquiring shares representing the share capital of the guarantor or shares representing the share capital of the parent guarantor, or refinancing a previous debt incurred for the acquisition of shares representing the share capital of the guarantor or shares representing the share capital of its parent guarantor. This would constitute unlawful financial assistance pursuant to article 322 of the Portuguese Companies Code.
In this respect, guarantee limitation language is included in such high-yield bonds’ guarantees or collateral to ensure that in no case can any high-yield bonds’ guarantees or collateral granted by a guarantor secure repayment of the above-mentioned funds.
Finally, we also outline that, for tax reasons (namely in the context of the payment of stamp duty), the obligations under high-yield bonds’ guarantees or collateral granted by the guarantors are typically limited to an agreed maximum secured amount (which is commonly established as an aggregate maximum amount should there be multiple guarantees). As a result, the guarantors will not have a direct obligation to repay any amounts once the relevant maximum secured amount has been reached, as applicable.Collateral package
What is the typical collateral package for high-yield debt securities in your jurisdiction?
In Portugal, the typical collateral package for high-yield debt securities includes pledges over the issued share capital, property and equipment (this refers to manufacturing plant and machinery, trucks, generating sets, drilling rigs and similar items), bank account pledges, pledges over credits and assignments of receivables by way of security, among others.
The typical collateral package granted by entities in connection with high-yield debt securities depends on the type of assets owned by the issuer and its subsidiaries as well as on the sector of activity. Usually it comprises:
- share security (namely, a financial or commercial pledge over the issued share capital and a promissory pledge over any equity that is issued afterwards);
- bank account security (namely, a financial or commercial pledge over the bank accounts);
- assignment of receivables, whether present or future (including intercompany receivables);
- security over fixed movable assets (namely, a pledge over stock, equipment or inventory); and
- assignments of receivables emerging from, or pledges over, insurance policies and, in some cases (although less commonly), intellectual property rights.
In very few issuances, security is taken over real estate (this will usually include mortgages and assignments of income emerging from the relevant real estate).Limitations
Are there any limitations on security that can be granted to secure high-yield securities in your jurisdiction? Are there any limitations on types of assets that can be pledged as collateral? Are there any limitations on which entities can provide security?
The limitations on the granting of guarantees are those already mentioned in respect of the granting of upstream, downstream and cross-stream security.
As to the types of assets that can be pledged, there is a very broad diversity of assets to be considered in this context as, conceptually, a pledge will be created over a certain movable asset or otherwise a credit or other right, which may not be mortgaged.
However, the type of pledge itself will vary according to the pledged asset and other factors. Hence, one may grant financial or commercial pledges, rotary pledges (in which the pledged asset is not always the same), pledges over credit rights, shareholdings, commercial establishments, credit notes, among others.
If the assets of the Portuguese issuer or guarantor are covered by legal immunities – which include, but are not limited to, assets that are part of the public domain of Portugal or allocated to public service purposes – the relevant issuer or guarantor will be entitled to claim for itself immunity from suit, attachment or other legal process in respect of its obligations under said guarantees.
We also note that, as a general rule, under law, any guarantee, pledge or mortgage must guarantee or secure another obligation to which it is ancillary, which must be identified in the security agreements.
Therefore, the guarantee or security follows the underlying obligation in such a way that the invalidity of the underlying obligation entails the invalidity of the guarantee or security and the termination of the underlying obligation entails the termination of the guarantee or security.Collateral structure
Describe the typical collateral structure in your jurisdiction. For example, is it common to see crossing lien deals between high-yield debt securities and bank agreements?
There is no typical collateral structure in Portugal, as this structure will primarily depend on the issuer and its guarantors as well as on their credit profile risk, capital and financial structure.
Crossing lien structures (where lenders benefit from first ranking security and bondholders benefit from second ranking security) are not very common but we have seen them being used. This concept can be implemented in practice, although it can be more complex in relation to certain types of assets, such as real estate.
It is also common to regulate this type of issue (ranking and priority of debt and security) in the intercreditor agreement through waterfall provisions.
Finally, we have also seen structures where there is a mixed issuance of senior secured bonds and senior unsecured bonds.Legal expenses
Who typically bears the costs of legal expenses related to security interests?
In Portugal, the issuer usually bears the costs of legal expenses related to the transaction, including the fees to be paid by the initial purchasers to their legal counsel. It is also common for the issuer to bear any expenses related to the security interests, including the payment of stamp duty and any registration costs.Security interests
How are security interests recorded? Is there a public register?
Bank account pledges are subject to registration with the bank with whom the account is held, while share security is subject to registration with the issuer, a depositary or a bank in the case of registered, deposited or dematerialised shares. Mortgages over real estate or registrable movable assets (eg, vehicles, ships and aircraft), assignments of real estate income, as well as pledges over quotas, are recorded in the competent land or commercial registry office, whose register is in both cases public.
How are security interests typically enforced in the high-yield context?
Portuguese law does not recognise the concept of parallel debt or trusteeship. The indenture will thus provide (along with the intercreditor agreement) that only the security agent may enforce the security documents in its capacity as agent and joint and several creditor, and that usually the holders of the bonds will not have direct security interests.
Therefore, the holders will not be entitled to take enforcement action in respect of the guarantees or collateral securing the high-yield bonds, except through the trustee, who will provide instructions to the security agent in respect of the bonds’ guarantee or collateral, or both. The security interests are thus enforced by the security agent, if necessary, and following an instruction by the bondholders or lenders in accordance with the provisions of the indenture, the intercreditor agreement and the relevant security agreement.
Depending on the type of security, the ways of enforcing can be very different. Financial and commercial pledges over financial instruments and bank accounts allow for an appropriation of the asset by the pledgor and allow for an extrajudicial sale of the asset to the extent that said appropriation right as well as the rules for the evaluation of the asset have been established in the contract. Nonetheless, the pledgor is subject to the obligation of paying the difference between the value of the relevant asset and the amount of the secured obligations to the pledgee. The enforcement of a mortgage, however, requires a judicial enforcement proceeding, whereas the assignment of receivables only requires a notification to the debtor or client of the issuer to make payments directly to the secured parties (said notification being an enforceability requirement rather than a validity one).
Finally, it is very common for the guarantors to grant power of attorney in favour of the security agent allowing it to enforce the security and to sell the assets upon the occurrence of an event of default, as well as to carry out any other necessary actions in respect of the enforcement of the security or otherwise its perfection.