From 15 March 2014, Hun­gar­ian law will recog­nise the con­cept of trust, and the prob­lems with secur­ing syn­di­cated loans under Hun­gar­ian law seem to be solved.

The cur­rent sit­u­a­tion under Hun­gar­ian law

If a syn­di­cate of banks pro­vides funds to the debtor, usu­ally the secu­rity trustee, being a mem­ber of the syn­di­cate, holds in trust the secu­rity interest(s) estab­lished over the assets of the debtor on behalf of the other syn­di­cate mem­bers. So far, the imple­men­ta­tion of this struc­ture has been dif­fi­cult under Hun­gar­ian law.

What is the prob­lem with secur­ing syn­di­cated loans under Hun­gar­ian law?

Secu­rity inter­ests in Hun­gary are gen­er­ally sub­ject to a reg­is­tra­tion require­ment (with lim­ited excep­tions). How­ever, as Hun­gar­ian law does not recog­nise the con­cept of trust, the trustee can­not hold the secu­rity inter­est on behalf of other syn­di­cate mem­bers, mean­ing that only reg­is­tered lenders become secured. This, together with the acces­sory nature of secu­rity inter­ests, led to the devel­op­ment of var­i­ous solu­tions from the lawyers.

One obvi­ous solu­tion would be reg­is­ter­ing all syn­di­cate mem­bers. But this is bur­den­some since every case when the syn­di­cate mem­bers change must be noti­fied to the rel­e­vant reg­istry by delet­ing every mem­ber leav­ing and reg­is­ter­ing every new mem­ber join­ing the syn­di­cate. This cre­ates a very inflex­i­ble struc­ture: clearly not what the par­ties want.

Reg­is­ter­ing only the trustee is the other option. But this gives rise to other con­cerns, as such secu­rity inter­est (due to the acces­sory nature of the secu­rity inter­ests) would cover only the indi­vid­ual claim of the trustee (since only the trustee is reg­is­tered); the claims of other syn­di­cate mem­bers remain unse­cured. Using a par­al­lel debt struc­ture, which is widely known in inter­na­tional financ­ing, might be mere gam­bling as the recog­ni­tion of this struc­ture is not tested in Hun­gary. Such abstract debt might raise pub­lic pol­icy con­cerns in Hungary.

Solu­tions so far

One solu­tion was get­ting around the gen­eral acces­sory nature of secu­rity inter­ests. The inde­pen­dent mort­gage, which is very sim­i­lar to the acces­sory mort­gage in prac­tice, is non-accessory (sim­i­larly to the Ger­man Grund­schuld) and thus not tied to the under­ly­ing claim. This became a widely used tool, as the secured amount does not fol­low the amount of the indi­vid­ual claim of the trustee. So the whole debt may be secured, just by set­ting out the secured amount equalling thereto, and only the trustee of the syn­di­cate is reg­is­tered as secu­rity holder.

Still, some minor prob­lems remain in the struc­ture. The main prob­lem is that, as only the trustee is reg­is­tered, only the trustee is deemed secured under Hun­gar­ian law. The other syn­di­cate mem­bers will have no in rem right over the encum­bered assets.

Beside this “ortho­dox” solu­tion, there is also a rather unortho­dox way of pool­ing secu­rity, although this solu­tion is not wide-spread in Hun­gary. In this struc­ture, the trustee issues a bank guar­an­tee in favour of the syn­di­cate mem­bers, which secures the indi­vid­ual claims of each syn­di­cate mem­ber. In turn, the secu­rity inter­est pro­vided by the debtor secures the indem­ni­fi­ca­tion claim of the trustee under the bank guar­an­tee. How­ever, this solu­tion is rather lim­ited by the cash flow of and the sol­vency pre­scrip­tion to the trustee.

The new Hun­gar­ian Civil Code pro­vides for the most obvi­ous solution

The Hun­gar­ian leg­is­la­tion has changed its posi­tion towards the con­cept of trust. The new Hun­gar­ian Civil Code, enter­ing into force on 15 March 2014, will recog­nise the con­cept of trust gen­er­ally and also pro­vide spe­cific rules to the secu­rity trustee struc­ture. But it might take years until Hun­gar­ian courts estab­lish inter­pre­ta­tive prac­tice thereon.

The main rules on secu­rity trustee in the new Hun­gar­ian Civil Code

The lenders may appoint in writ­ing any per­son or entity, either among them­selves or an unre­lated third party, as secu­rity trustee. Such appoint­ment must be reg­is­tered with the reg­istry where the secu­rity inter­est is reg­is­tered in. So only the trustee will be reg­is­tered as the holder of the secu­rity inter­est. Nev­er­the­less – and con­trary to the cur­rent rules – the secu­rity inter­est will cover the entire claim of the syn­di­cate, and the mem­bers of the syn­di­cate will have in rem right over the debtor’s assets. How­ever, only the secu­rity trustee may exer­cise the rights stem­ming from the secu­rity inter­est. The enforce­ment pro­ceeds, once col­lected by the secu­rity trustee, are not deemed as part of the assets of the secu­rity trustee. Thus, the cred­i­tors of the secu­rity trustee may not seek sat­is­fac­tion from the enforce­ment pro­ceeds even in an insol­vency proceeding.

Secur­ing syn­di­cated loans will be eas­ier in Hungary

By recog­nis­ing the con­cept of trust, the new Hun­gar­ian Civil Code will end the devel­op­ment of even more and more cre­ative solu­tions when it comes to secur­ing syn­di­cated loans. Although it will gen­er­ate less work for bank­ing lawyers, they widely wel­come the new set of rules on the secu­rity trustee structure.

The Hungarian legislation has changed its position towards the concept of trust. The new Hungarian Civil Code, entering into force on 15 March 2014, will recognise the concept of trust generally and also provide specific rules to the security trustee structure.