English law syndicated facility agreements traditionally provide that:
- a security trustee holds any transaction security for the lenders (and any other secured parties); and
- any transfers of loan commitments are made by novation, using a transfer certificate.
Where English law governs the transaction security, this approach generally works. In particular, transfers by novation should not affect the transaction security.
What if other laws govern some or all the transaction security? The position is not always so straightforward, particularly when dealing with civil law regimes. Philippe Max (France), Tim Stubbs (Russia) and Jesús Varela (Spain) briefly discuss how their local law security is usually held in English law syndicated loan transactions. They also examine how to avoid pitfalls when transferring English law loans benefiting from that security.
Overview — LMA facility agreements and foreign law security
Parties commonly opt to use English law facility agreements to document large international syndicated loan transactions. Many of these involve foreign law security. The LMA's English law facility agreements reflect this in various ways:
- They enable lenders to transfer loan commitments by an assignment agreement (as well as by transfer certificate) "to avoid a novation of rights/obligations relevant to a civil jurisdiction". In some civil law jurisdictions existing security cannot secure novated obligations. Under an assignment agreement, the existing lender assigns its rights and the new lender assumes equivalent obligations to those of the existing lender. The intention is that this will have the same economic effect as a transfer by novation, but without prejudicing the transaction security.
- They refer to the holder of any transaction security as the "Security Agent" rather than the "Security Trustee" (although they make clear that it will hold any English law transaction security as trustee). This reflects that some foreign laws do not recognise trusts in the English law sense.
- Some also include a "parallel debt" clause, under which the security agent is owed a "parallel" and equal debt to that owed to the secured parties. This is to address the requirement under some foreign laws that the security holder must also be the creditor.
However, these documentary features are only a starting point where a transaction involves foreign law security. The LMA agreements point out that local law advice is essential to ensure that the security structure and transfer mechanics are effective in all relevant foreign jurisdictions.
French law security
French law security in syndicated transactions is usually granted to the lenders, represented by a security agent.
The French courts have recently given effect to a parallel debt structure created under a foreign law document. However, certain types of security interests (such as a "Dailly" assignment by way of security or a pledge of stock governed by the French commercial code) can only be granted to credit institutions that have extended a "credit". So parallel debt cannot be used in connection with these types of security. (Parallel debt is also not used in purely domestic French transactions. Although untested, it is generally considered that it would not work in this context.)
Unlike in some other European jurisdictions, the French Civil Code (article 2328-1) expressly allows security to be held by a person appointed by the secured creditor(s), rather than by the secured creditors themselves. However, this mechanism is not widely used in France. It raises some uncertainties and does not, for example, create a trust mechanism over the security interest held by the security agent.
In a syndicated loan transaction, the transfer of an English law loan commitment using the LMA form of assignment agreement should not adversely affect any French law security held by the security agent. Depending on the type of security interest, a registration with the relevant registry may be necessary.
A transfer by novation can also work, but the security must be expressly reserved if it is to continue to secure the novated obligations. This reservation language can be in the French law security document. If it is, there is no need to amend the form of transfer certificate.
Russian law security
There is no standard way of holding Russian law security in a syndicated loan transaction yet. The holder of Russian law security must always be the secured creditor itself. The enforceability of parallel debt structures is genuinely uncertain in Russia, so an alternative structure is often used instead. One lender in the syndicate (usually the security agent) is declared a "joint and several creditor" with the other secured creditors for the full amount of the debt. The Russian Civil Code recognises the concept of a "joint and several creditor". Therefore, this approach is probably less risky than using "parallel debt" (which may work under a foreign law but is an unknown concept in the Russian civil system). However, its use in this context is also largely untested in the Russian courts.
What if one of the above two structures (under which a single person becomes security holder and creditor for the whole secured debt) were not used for a syndicated loan? Then security for that loan would need to be granted directly to all the lenders. This would require all lenders to be parties to the security documents, and cause administrative difficulties — for example on amendments to the security or on any transfer of a lender's loan commitment.
Russian law security is generally accessory to a secured obligation and follows the secured obligation, unless the contract provides otherwise. Where Russian law security secures English law syndicated loans, novations of those loans should always be avoided, whichever security-holding structure is used. It is unlikely the security will continue to be effective against the novated obligation. Transfers may be made by assignment agreement instead. For registered security, the register must be amended to complete the transfer of the benefit of security to a new lender. But that will not be relevant if under the transaction structure (as described above) security was not granted directly to the transferring lender.
There has been ongoing discussion in the Russian legal community about the need to introduce further changes to Russia's legal system to provide more comfort for syndicated lenders, such as recognising the concept of a security trustee.
Spanish law security
Security interests under Spanish law are accessory and so must be held by the secured creditors themselves. Spanish law does not recognise the use of a parallel debt structure to address this. A security agent will nevertheless usually be appointed to hold Spanish security in a syndicated loan transaction, but it will hold the security in the name of and on behalf of the original lenders. The lenders will need to empower the security agent to do so under a power of attorney.
If a loan is transferred by way of an English law novation in this context, any existing Spanish law security is unlikely to secure the novated obligation. This is not necessarily the case where the transfer is made by way of assignment and assumption. However, unless the purchaser signs a notarial "escritura", legally the security will remain on the relevant Spanish registries as held by the security agent for the original lenders. The signing of an "escritura" is usually not practical because of the stamp duty payment obligations it triggers. Without an "escritura" the new lender may still benefit indirectly from the security through the contractual arrangements between itself, the original lender and the security agent. Spanish courts sometimes question the right of security agents to enforce security on behalf of unregistered lenders. New lenders may seek to reduce this risk by signing a notarial "poliza" in relation to the transfer, which does not attract stamp duty.
Law stated as at 5 December 2013.