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)?

Maltese banks play a large role in financing home ownership and businesses. However, Malta’s position as an international shipping, aviation and financial centre, and as a burgeoning economy attracting significant foreign direct investment, has led to a number of international banks providing secured financing facilities to Maltese borrowers or taking security over Malta-based assets for borrowers within a wider multinational group. 

Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions?

Yes. Local banking institutions have standard forms and documentation. In addition, notarial deeds published in connection with the granting of a loan or security typically contain largely standardised clauses required by the financing bank.

When international banking institutions are involved, the documentation used largely depends on the domicile of the financing bank. Such transactions tend to be largely governed by English law, with London Market Association documentation being used.

When the issue of financial instruments is involved, the prospectus tends to be moderately standard in format, but security arrangements and structures can vary depending on the nature and structure of the security provided by the borrower or the guarantors. 

Syndication

Are syndicated secured loan facilities typical in your jurisdiction?

Syndicated facilities are rare for local banks unless the facility creates a significant balance sheet exposure for the bank, which is uncommon. Such syndicated secured loan facilities are more typical in cross-border lending.

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?

Syndicated facilities are normally governed by English law, while the security documentation relating to Malta-based assets is governed by Maltese law.

Facility agents can be appointed to act on behalf of other syndicate members in accordance with Article 1856 of the Civil Code. Parallel debt structure arrangements with a foreign governing law have also been used in cross-border transactions, with the Malta-facing security matters being governed by Maltese law for validity and enforcement considerations.

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. Article 2095E of the Civil Code and the Trust and Trustees Act provide a clear and comprehensive framework for the settlement and operation of security trust arrangements. 

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?

The establishment of SPVs in secured lending transactions is uncommon in Malta. However, the regulation of securitisation vehicles by the Malta Financial Services Authority has led to an increase in the establishment of SPVs in the contest of such structures.

In most cases where SPVs are used, the lender typically requires security over the shares in the SPV and, by binding the SPV as a guarantor for the loan, it also seeks direct asset security. Lenders would also typically require appropriate covenants to be provided by the SPV in the sense that the lender’s consent would be required before the SPV undertaking any further material borrowings.

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?

Local banks apply their own base rate which are used to calculate all lending rates are calculated. Such rates are established in accordance with the Interest Rate (Exemption) Regulations and routinely revised by each respective bank. The bank base rate is communicated to the market through public announcements and publication on the bank’s website.

In cross-border transactions, the reference rate would typically be Libor or Euribor, with the choice between the two driven by the domicile of the lender or the leading arranger of the facility.

Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?

Although the Civil Code lays down a general rule that interest rates cannot exceed 8% a year, the Interest Rate (Exemption) Regulations provide specific exceptions to that general rule, placing banking institutions and other specific financing vehicles and defined transactions outside the scope of the restriction, and thus allowing interest rates of more than 8% a year.

The restrictions referred to above apply only if the loan agreement entered between the borrower and the lender is governed by Maltese law.

Use and creation of guarantees

Are guarantees used in your jurisdiction?

Yes, guarantees are commonly used in Malta – primarily to bolster security in secured lending transactions. A guarantee would be classified under the heading of ‘suretyship’ under the Maltese Civil Code, which is the nomenclature used in formal legal documents. 

What is the procedure for their creation?

The creation of a guarantee does not involve a high degree of formality under Maltese law. A guarantee is usually created by way of a private written agreement executed between the guarantor and the lender, which establishes the specific obligations undertaken by the guarantor in regard to the lender. Unless the guarantee is secured, a guarantee need not be registered in order to become legally valid or enforceable.

The granting of upstream guarantees is subject to certain restrictions and formalities (see below). Also, in the case of married individuals whose estate is subject to the community of acquests, spousal consent may be required in order to create a valid and enforceable guarantee.

Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)?

Article 110 of the Companies Act lays down a general rule prohibiting the grant of upstream guarantees by Maltese companies. However, this prohibition would not apply to  private companies (as opposed to public companies), subject to the satisfaction of specific formalities by such companies. These formalities essentially involve:

  • the approval of the company’s board of directors after having assessed the financial position of the company by means of a board resolution;
  • affirmation of the board resolution by the company’s shareholders by means of a shareholders’ resolution; and
  • a filing with the Registry of Companies recording the satisfaction of these requirements.

It is important that all formalities are undertaken and the relevant form filed with the Registry of Companies before financial assistance is granted.

The provisions relating to fraudulent preference under Article 303 of the Companies Act, as referred to above, are also pertinent for a lender to consider in the context of receiving a corporate guarantee.

Subordination and priority

Describe the most common methods of structuring the priority of debts and security.

Structured finance transactions involving multiple layers of debt such as senior debt, mezzanine debt, hedging debt and bond holder debt typically adopt an inter-creditor agreement addressing the priority and subordination arrangements between the financing parties. Such inter-creditor agreements are largely governed by English law.

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?

The granting or enforcement of a loan, guarantee or security interest does not, of itself, trigger the payment of any taxes, stamp duty or other fees. However, the granting of specific security interests will require filings with various entities, which could include:

  • the Public Registry (eg, rights over real estate assets and also general hypothecs or floating charges);
  • the Registry of Companies (eg, pledges over securities);
  • the Merchant Shipping Directorate (eg, mortgages over Malta-flagged vessels);
  • the Civil Aviation Directorate at Transport Malta (eg, mortgages over aircraft fuselage or engines); and
  • the European Intellectual Property Office (eg, a European trademark or patent).

The required filings may attract certain disbursements based on publicly available tariffs issued by the authority concerned.

The tariff adopted by the Public Registry, which receives notes of enrolment relating to special hypothecs (security over real estate assets) and general hypothecs (akin to a floating charge), is an ad valorem tariff, and therefore proves to be costly in secured financing transactions.

Click here to view the full article.