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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)?

The active providers of secured finance are varied. It is principally provided by Canadian chartered banks, but also by non-bank financial institutions, as well as international banks.      

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

No well-established market-standard facility documentation exists in Canada for secured lending transactions. For smaller transactions (ie, typically less than C$10 million), transactions with Canadian chartered banks and non-bank financial institutions, standard form documentation of the bank or financial institution would typically be used. For medium-size and larger deals, loan documentation is tailored for each transaction and negotiated on a case-by-case basis.

Syndication

Are syndicated secured loan facilities typical in your jurisdiction?

Syndicated secured loan facilities are very typical in Canada.   

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 credit facilities are commonly structured with a lead lender as the administrative and collateral agent for the lending syndicate. The law does not restrict the administrative agent from acting on behalf of the other bank syndicate members. Often there are also one or two lead arrangers or syndication agents that may or may not be the same lender as the administrative agent. Among other functions, the administrative agent facilitates the exchange of information between the borrower and the lenders. While the agent acts on behalf of the syndicate, the loan documentation would typically require that unanimous lender consent is required for changes to things such as interest rates, amortisation and payment terms, term to maturity, security and releases thereof, while a majority or 66.6% of lender consent is required for other amendments to covenants and loan documentation. 

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?

Most common types of security may be granted to a security trustee for the benefit of a syndicate of lenders. Similarly, a guarantee of obligations owed to a syndicate of lenders may be granted in favour of a security trustee. 

It would be typical in Canada in the context of a syndicated credit facility to have an administrative agent or collateral agent (in Quebec, acting as a hypothecary representative) hold security for a lending syndicate, rather than to appoint a security trustee. This may be due in part to legislation at the provincial level that regulates, among other things, the ability of a corporation to act in the province as a trustee in respect of a service it provides to the public or otherwise to carry on all or any part of the business of a trust corporation. This legislation may be relevant if:

  • the syndicate of lenders or any substantial portion of the syndicate is located in Canada;
  • the security trustee has responsibilities in connection with the security which need to be discharged in Canada; or
  • in connection with the enforcement of the security, the security trustee takes steps to operate the business of the debtor directly (eg, rather than through a receiver).  

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?

In a typical secured financing transaction to a corporate borrower or corporate group for a business as a going concern, it would not be common to use an SPV to hold the assets being financed. SPVs appear more commonly in the area of real estate lending where a specific asset or group of assets is being financed.

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 in Canadian dollars are commonly available to a borrower with reference to a bank base rate or a market variable rate, at the borrower’s option.

Typically, interest on Canadian dollar-denominated loans is calculated with reference to the Canadian prime rate, which is usually defined in credit documentation to be the greater of either the administrative agent’s prime rate for loans made in Canada to Canadian borrowers or the 30-day Canadian dollar offered rate (CDOR) (described below) plus 1%. 

Canadian dollar loans are also commonly available to be drawn in the form of bankers’ acceptances.  Rather than loans which bear interest, bankers’ acceptances consist of drafts that are issued by the borrower and accepted by the lenders, with a face amount and a specified maturity date. The drafts are purchased by the lenders at a discount to their face amount and the borrower receives the discounted proceeds as a loan. The discount rate at which the lenders purchase the drafts is often based on the CDOR rate, a screen rate published for various terms to maturity of bankers’ acceptances in a manner similar to the London Interbank Offered Rate. On the maturity date for the bankers’ acceptances, the borrower is required to pay the full face amount of the bankers’ acceptances to the lenders. 

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

The Criminal Code makes it an offence to enter into an agreement providing for the payment of interest at a criminal rate. It is also an offence to receive interest at a criminal rate. ‘Criminal rate’ is defined as an annual rate of interest determined in accordance with generally accepted actuarial principles which is in excess of 60% a year. For these purposes, ‘interest’ is defined broadly and includes virtually all elements of the cost of borrowing, regardless of how such elements are characterised by the parties to the loan. This issue may require particular consideration where warrants or other ‘equity kickers’ form part of the financing.

Other statutory restrictions on the rate of interest include restrictions under the Interest Act that limit the rate of interest that may be charged on arrears of principal or interest secured by a mortgage on real property to the rate of interest applicable to principal or interest not in arrears.

Additional regulatory restrictions apply in the context of consumer lending.    

Use and creation of guarantees

Are guarantees used in your jurisdiction?

Yes ‒ guarantees are common.

What is the procedure for their creation?

Guarantees are generally documented within the loan agreement or in a standalone agreement.  They commonly include an indemnity (which is not subject to the same panoply of defences as a guarantee) and, among other things:

  • waivers of defences associated with increases or other changes to the guaranteed obligations;
  • amendments of the loan documentation;
  • defects in enforceability of the guaranteed obligations; and
  • changes in the structure of the borrower.    

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

Financial assistance given by any corporation is regulated by the corporate statute that governs the corporation, and corporate statutes exist both at the federal level and in each Canadian province and territory. The financial assistance provisions formerly included in many of the corporate statutes, including the Canada Business Corporations Act and the Business Corporations Act (Ontario), have been repealed. However, there remain a number of provincial corporate statutes which require that a solvency test be satisfied in order for a corporation to give financial assistance to related parties (subject to exceptions generally including financial assistance provided by a wholly owned subsidiary to its parent or by a parent to its subsidiary). Certain corporate statutes also retain a prohibition on financial assistance by a corporation for the purposes of acquiring its own shares, subject to the same exceptions for financial assistance provided by a wholly owned subsidiary or by a parent to its subsidiary and, in some cases, subject to a solvency test.

Further, every director and officer of a Canadian corporation in exercising their powers and discharging his or her duties must act honestly and in good faith with a view to the best interests of the corporation. Therefore, in authorising any financial assistance, the board of the Canadian corporation must conclude that providing the financial assistance is in the best interests of the corporation. 

Subordination and priority

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

Each Canadian province and territory (other than Quebec) has a personal property security act, which applies to consensual security interests in most types of personal property. Each province and territory’s personal property security act provides for methods of perfecting a security interest that vary according to the type of collateral, provided that security in all types of collateral subject to the personal property security act may be perfected by registering a financing statement in the personal property security registry of the province or territory. The priority of security interests subject to the personal property security act and perfected by registration is generally determined according to the order of registration. Therefore, it is typical for a lender to file a financing statement against a borrower before, and in anticipation of, taking security from the borrower, in order for the lender to predetermine, to the extent possible, the priority of the security when it is granted. Financing statements may be filed in multiple provinces or territories, depending on the nature and location of the collateral and the location of the debtor (as determined under the personal property security act).

Quebec also has a provincial register of personal and movable real rights which similarly provides for publication of security, and priority of consensual hypothecs over movable property will generally be determined according to order of registration in the register.

The lender may require that other creditors ‒ especially secured creditors ‒ of the borrower enter into intercreditor arrangements with the lender to contractually subordinate their security to the lender or otherwise address priorities as between the creditors.   

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?

There are no documentary taxes or stamp duties payable to a regulatory authority for executing or registering loan, guarantee or security documents or on their enforcement. There are filing fees payable to the applicable registry or filing office on filing financing statements and other types of security documents.  

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