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)? International and domestic banks continue to be the primary arrangers and underwriters of secured financing in the United States. In the syndicated bank loan markets – in particular for sub-investment grade borrowers – the arranging banks often syndicate all or a portion of the loans that they arrange and underwrite to a variety of market participants, including collateralised loan obligations, debt funds and insurance companies. However, non-bank direct lenders (including business development companies, mezzanine debt funds and pension plans) have played an increasing role in the US secured financing market as direct providers of secured financing to sub-investment grade borrowers. The increased activity by non-bank lenders in recent years has resulted from a number of factors, including the prudential bank regulators placing increased restrictions on regulated banks through the implementation of the revised leveraged lending guidance.
Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions? Unlike, for instance, in the United Kingdom, there is no well-established standard documentation for corporate secured loan facilities in the United States. While certain provisions are typically included in loan agreements, loan agreements are typically negotiated on a deal-by-deal basis.
Syndication Are syndicated secured loan facilities typical in your jurisdiction? Yes, syndicated loan facilities are common in the United States. Almost all large corporates use the syndicated bank loan markets for their bank financings.
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? Typically, one of the financial institutions that is party to the loan agreement (usually the lead bank arranging the facility) is appointed to act as the administrative agent for the syndicate of lenders under the loan agreement. The administrative agent is responsible for the day-to-day administration of the loan facility. Payments, notices, reports and other communications between the borrower and the lender syndicate are made through the administrative agent.
In a secured loan facility, the lenders also appoint a collateral agent to:
- hold the collateral on behalf of the lenders;
- perform ministerial functions necessary to help to maintain a valid security interest in the collateral; and
- exercise remedies with respect to the collateral in the event of default.
Typically, the same bank acts in both the administrative agent and collateral agent roles. The agent bank is broadly exculpated and indemnified against claims by the lenders and the borrower.
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? In the United States, the security is effectively held in trust by the collateral agent for the benefit of the secured parties. The collateral documentation refers to the collateral agent and the collateral agent performs ministerial functions relating to the collateral. Guarantees are typically in favour of the collateral agent on behalf of the secured parties.
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? Whether an SPV is used is dependent on the type of transaction. In typical secured corporate lending transactions, SPVs are generally not used. However, for more specialised lending transactions, an SPV may be used.
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? Loan agreements in the United States often provide borrowers with the option to calculate interest by reference to either a base rate based on the bank’s prime rate or LIBOR. Selecting the LIBOR rate typically results in a lower total interest rate than the base rate, but requires advance notice to the lenders for borrowing under the loan agreement (usually at least two business days). In addition, a LIBOR ‘floor’ is typically included in the loan agreement setting a minimum LIBOR rate, which is typically between 0% and 1%. Base rate loans, in contrast, are typically available on shorter notice, sometimes on a same-day basis, and can be pre-paid at any time without incurring break funding fees.
Are there any regulatory restrictions on the rate of interest that can be charged on bank loans? Yes, the maximum rate of interest that can be charged on bank loans is limited by state law in many jurisdictions. The scope and amount of these limits differ significantly by state. Under Section 85 of the National Bank Act (12 USC § 85), federally chartered national banks are permitted to charge up to the maximum amount of interest permitted under the laws of the state in which the bank is located. As a result of regulatory guidance and case law interpreting Section 85, national banks with locations in multiple states have some flexibility in determining which state’s interest rate laws apply to their lending activities.
Use and creation of guarantees Are guarantees used in your jurisdiction? Yes, guarantees provided by subsidiaries of the borrower and its parent entities are a common feature of corporate secured loan transactions. In some transactions, sister company guarantees are also provided.
What is the procedure for their creation? Guarantees are created by contract, through either provisions included in the loan agreement or, more commonly, a separate guaranty executed by the guarantor. Generally, no filing is required in order to create an enforceable guaranty. However, if the guarantor is granting a security interest in its assets (which is typically the case in a secured loan transaction with guarantees), other actions will be required to perfect a security interest in the guarantor’s assets.
Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)? In the case of a corporation or other business entity, the entity’s ability to provide a guaranty is governed by the business organisation law of the state in which the entity is organised. It is important to review the applicable state law of the relevant guarantor, as jurisdictions differ on the permissibility of certain types of guarantee and whether board or shareholder approval is required or provides safe harbour protection under state law. For instance, in Delaware, a popular jurisdiction for incorporating corporations, the Delaware General Corporation Law expressly permits a Delaware corporation to provide guarantees to its subsidiaries (‘downstream’ guarantees), its parent company (‘upstream’ guarantees) or companies under common ownership with the corporation (‘cross-stream’ guarantees), provided that the guaranty is “necessary or convenient” to the conduct of the corporation’s business. Delaware courts generally will not challenge a determination by a corporation’s board of directors that the corporation’s issuance of such a guaranty is necessary or convenient to the corporation’s business.
The enforceability of guarantees may also be limited by federal and state fraudulent conveyance laws. Under Rule 548 of the US Bankruptcy Code (11 USC § 548), a bankruptcy court is permitted to set aside as a fraudulent transfer the grant of a guaranty or security interest by the debtor if the grant was made within two years before the commencement of the bankruptcy proceeding and the court determines that the grant was a product of actual or constructive fraud. In addition, guarantees and security interests may also be voided outside of bankruptcy under similar state fraudulent conveyance statutes.
Because a guarantor receives no proceeds of the loan that it is guaranteeing, guarantees may be challenged in bankruptcy court as constructive fraudulent conveyances on the basis that the guarantor did not receive reasonably equivalent value in exchange for its guaranty. In the case of downstream guarantees, courts have generally held that there is no fraudulent transfer because the guarantor is deemed to benefit from its subsidiary’s receipt of the loan proceeds. However, upstream and cross-stream guarantees are more vulnerable to legal challenge because it is harder to demonstrate that the guarantor received reasonably equivalent value and there is conflicting case law on this point.
Subordination and priority Describe the most common methods of structuring the priority of debts and security. The most common type of subordination is lien subordination, in which a creditor’s claim is senior to another creditor’s claims based on the priority of their liens against the collateral. A creditor or group of creditors can also contractually agree to subordinate their right to payment of the loan obligations (‘payment subordination’). One way of achieving payment subordination is to include provisions in the loan document identifying the debt as subordinated debt, as applicable, and setting forth the terms of the subordination. However, in cases where both classes of creditor hold security interests in the borrower’s assets and intend for there to be lien subordination in addition to payment subordination (eg, in the case of first lien and second lien credit facilities), the creditors usually negotiate and enter into a separate intercreditor agreement setting forth the terms of the subordination in detail.
Debt claims may also be structurally subordinated to one another. This type of subordination occurs when one creditor has a claim against a parent company and the other creditor has a claim against a subsidiary of the parent company. The creditor of the subsidiary has recourse to the assets and cash flows of the subsidiary and, in the event of insolvency, must be paid in full before the parent company receives any payment on account of its equity interest. Because the creditor of the parent company must look to the value of the parent company’s equity interest in the operating subsidiary for repayment, and has no direct recourse to the subsidiary’s assets, the debt at the parent company level is structurally subordinated to all debt at the subsidiary level (including any unsecured debt).
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? US federal law and New York state law generally do not impose any taxes or other fees in connection with the making of a loan or the granting of a security interest or guaranty. However, the filings required to perfect the lender’s security interest (eg, UCC-1 financing statement filings, filings with the US Copyright Office or the US Patent and Trademark Office to perfect security interests in US intellectual property and state mortgage filings) generally require the payment of a fee.
In some states (eg, Florida) a borrower’s entry into a loan document may give rise to a documentary tax under state law, in addition to any applicable filing fees.
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