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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)?

There is a mix of secured finance providers, although the four major Australian banks (the Australia and New Zealand Banking Group, Commonwealth Bank, National Australia Bank and Westpac) continue to dominate as lead arrangers for syndicated banking facilities and control over 50% of the institutional loan market.

Since the global financial crisis, European banks have reduced their participation in the Australian syndicated market and have been replaced by Asian banks such as Mitsubishi UFJ Financial Group, Sumimoto Mitsui Financial Group, Mizuho and HSBC, in addition to Singaporean and Taiwanese lenders.

China’s biggest five lenders also have a growing presence in Australia (ie, Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank and Industrial and Commercial Bank of China). These banks have typically appealed to Chinese companies and suppliers engaging in local projects and often team up with local banks on syndicates.

Another trend is that more non-banks are participating in syndicated loans, such as Australian superannuation funds like Challenger, IFM and VicSuper (which have their own lending teams) and international investors such as Intermediate Capital Group.

Competition in the syndicated loan market has, to date, inhibited the development of a viable Australian corporate bond market.

Australia does not have a particularly active secondary market where loans can be resold and traded as liquid assets. This is because most syndicated lenders prefer to take a 'buy and hold' approach.

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

The market-standard documentation issued by the Asia-Pacific Loan Market Association (APLMA), which is similar to the standard form documentation prepared by the UK Loan Market Association, is regularly used as a base for secured lending transactions. That said, no standard secured APLMA loan agreement exists, so the unsecured APLMA loan agreement must be converted into a secured document.

However, law firms and financial institutions often use their own form of loan documentation containing their own nuances and house views. 

The Australian Financial Markets Association (AFMA) also releases industry standard documentation, including for debt capital markets transactions and arrangement letters for international debt offers (excluding the United States).

Syndication                         

Are syndicated secured loan facilities typical in your jurisdiction?

Syndicated secured loans are a common form of loan facility in Australia. The large Australian banks each have syndicated loans desks which originate, structure and distribute syndicated loans.

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 typically structured with the following individuals:

  • Lead arrangers – the (senior) lenders chosen by the borrower (usually from among its existing relationship banks) to put the deal together and provide funding. Lead arrangers are responsible for performing credit checks and structuring the loan facility, including negotiating the pricing and terms and conditions. In larger deals, they are also responsible for underwriting and marketing the loan to other lenders.
  • Other (senior) lenders – participate in providing the debt funding on syndication.
  • In some instances, junior lenders, who are subordinated to the senior lenders.
  • Facility agent – acts on behalf of the lenders (in a non-fiduciary capacity) and is responsible for administering the loan agreement after its execution and managing the ongoing relationship between the syndicate members and borrower (the facility agent is typically one of the lead arrangers).
  • Security trustee – holds the benefit of security on behalf of the beneficiaries (typically the agent, lead arrangers, lenders (senior and, if applicable, junior) and hedge counterparties). The security trustee can typically enforce the security if directed to do so by the lenders or agent and must distribute enforcement proceeds in line with the security trust deed (the security trustee is typically a related body corporate of one of the lead arrangers).

No specific licensing or registration requirements exist for agents or security trustees.

In a typical deal (around A$500 million), there are usually two to five lenders involved in arranging and funding the deal.

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?

The role of the security trustee is to hold the security on trust for the benefit of the banking syndicate, pursuant to a security trust deed. However, a guarantee provided by the obligors under a syndicated facility agreement will not be held on trust by the security trustee. Instead, the guarantee is a direct contractual undertaking by the obligors in favour of the members of the banking syndicate.

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?

It is common for SPVs to hold the assets being financed. In this case, financiers will usually want to take direct security over the assets, in addition to security over shares in the SPV (if a company) or units in the SPV (if a trust), in order to:

  • gain first-ranking security over the SPV's assets and cash flows (with appropriate negative pledge covenants), so that competing claims are minimised;
  • maintain control over the assets, so that in an enforcement scenario, the lender can maximise the value obtained from realising the security; and
  • lower administration risk in case an administrator to the company and security becomes subject to a moratorium under the Corporations Act (Cth) (administration risk is lowered because the financier has security over all or substantially all of the company's assets).

Lending to trustees of trusts is common, especially to real estate investment trusts. In this case, lenders must ensure that the trustee has power under the trust deed to borrow and grant security and an effective right of indemnity out of the trust property.

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?

Syndicated loans are generally priced as an interest rate spread above a floating reference rate –  most commonly, the bank bill swap rate for Australian dollar-denominated loans and LIBOR in the case of non-Australian dollar-denominated loans.

The spread mainly depends on the borrower's credit risk and the size and term of the loan. The spread may be fixed for the life of the loan or linked to changes in the borrower's gearing or profitability. Recently, spreads have narrowed due to an increase in the supply of loans by banks.

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

Consumers are protected against excessive rates of interest under unfair contract terms regulations which are enforced by the Australian Securities and Investments Commission. However, this protection does not extend to corporate borrowers.

Use and creation of guarantees

Are guarantees used in your jurisdiction?

Yes. Financiers to a corporate group will often require cross guarantees from all companies in the group. Under this arrangement, each guarantor guarantees that the borrower and other guarantors will perform their obligations.

Financiers also usually insist that borrowers provide indemnities in addition to guarantees.

The significance of an indemnity is that it is a separate and independent obligation to pay monetary compensation to the lender if it suffers loss, which means that the lender can directly claim against the indemnifying party without having to prove that some other party defaulted on its obligations.

On the other hand, a guarantee is triggered when another party defaults on their obligations (so the guarantee is dependent on specified defaults occurring before it can be enforced by the lender).

What is the procedure for their creation?

Guarantees and indemnities can be either created in a standalone document or be contained as a clause in another document (eg, a loan agreement or security document).

Usual contract law principles apply to the creation of guarantees and indemnities.

Some states and territories also have formalities, such as that a guarantee must be in writing and signed by the guarantor.

The National Credit Code also sets out certain formalities for natural persons giving guarantees under certain credit contracts.

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

Restriction and enforceability issues may arise in the common scenario where a subsidiary gives a guarantee in favour of a lender to secure the obligations of its parent or related company (as a prerequisite to the parent or related company obtaining financing).

Directors' duties and corporate benefit

Directors must ensure that, among other things, the giving of a guarantee by a company is in line with their duties to act in the company's best interests. Although there may be little commercial benefit to a wholly owned subsidiary in providing a guarantee relating to its parent's obligations (despite the fact that the giving of the guarantee ensures financing is obtained to support the corporate group as a whole), directors of a wholly owned subsidiary may consider the best interests of the holding company if permitted by the constitution and if the company is solvent at all relevant times.

A guarantee may be rendered void if:

  • it does not commercially benefit the company;
  • a director's duty is breached (which can result in civil or criminal penalties and personal liability for directors);
  • the company’s constitution prevents the giving of the guarantee; or
  • the guarantee is deemed to be an uncommercial transaction or unfair preference (in liquidation).

Financial assistance Shareholder approval may need to be sought if the giving of a guarantee counts as financial assistance (eg, in the common scenario where the guarantee is given in support of a loan used to fund a purchaser's acquisition of shares in the company giving the guarantee).

Shareholder approval is not required if the guarantee will not materially prejudice the interests of the company or shareholders or the company’s ability to pay its creditors. However, it is generally considered risky to rely on these exceptions, so a financial assistance 'whitewash' is most typically undertaken by the relevant companies.

Special rules apply to public companies for shareholder approval.

Certain requirements under consumer protection legislation apply to guarantees given by consumers and small business.

Subordination and priority

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

The ranking of the debts between creditors is typically achieved through contractual subordination in the form of a 'subordination deed'. This document will generally provide that, except for certain permitted payments, the junior creditor may not receive repayment of its debt before the senior creditor has been paid out in full. The junior creditor will also undertake to turn over amounts received by it during the subordination period in breach of its obligations under the subordination deed.

The ranking of claims by two or more creditors with respect to separate security over a debtor's assets is dealt with in a priority deed. This document will cover the ability of a security holder to commence enforcement action and the agreed priority of distribution of proceeds of realisation of the secured property. Where two or more classes of secured creditor share the same security, the priority arrangements between those creditors are typically covered in the security trust deed (which in those circumstances may be called a security trust and intercreditor deed).

In deals involving senior and mezzanine debt, it is common for the ranking of debts and security to be achieved via structural subordination. Under this approach, a holding company is inserted into the corporate structure between the previous holding company and the borrower. The senior lenders provide funding to the borrower and take security over each group entity from the holding company down. The mezzanine lenders provide funding to the previous holding company and take security over previous holding company only (including its 100% shareholding in the holding company). Given that this structure involves different levels of lending and no common security, there is prima facie no requirement for an intercreditor agreement between the senior and mezzanine lenders or any other direct contractual nexus between those parties.

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 taxes are payable on the granting of a loan or guarantee.

As of July 1 2016 no stamp duty is payable in any Australian jurisdiction on security documents. However, security documents in New South Wales relating to liabilities before July 1 2016 will need to be stamped in order to be enforceable.

Depending on the jurisdiction, different registration fees will be payable on the registration of mortgages over real property. Nominal registration fees will also be payable for each security interest registered on the Personal Property Securities Register.

If a secured party wishes to enforce its security interest, court filing fees will also be payable.

Australia levies interest withholding tax (IWT) on interest payments made by an Australian borrower to an offshore lender. The IWT rate is 10% of the gross amount of interest paid. Relief from IWT may be available if:

  • the lending is an issue of debentures (eg, bonds and notes) or a syndicated loan which results from a public offer; or
  • a double tax treaty applies.

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