Guarantees and securityGuarantees
Outline how guarantees among companies in a group typically operate in a high-yield deal in your jurisdiction. Are there limitations on guarantees?
Deals may comprise the granting of guarantees by material subsidiaries of the issuer and, in cases where the issuer is not the top holding company, also by its parent company, as well as by any material sister companies – respectively, upstream, downstream and cross-stream guarantees. These guarantors usually also act as such under the overlapping senior facilities agreement (if any).
In light of the PCC, a Portuguese guarantor may only secure third parties’ obligations if there is a justified corporate self-interest for it in granting the relevant guarantees or security or if the guarantor is in a group or control relationship with the entity whose obligations are being secured.
The PCC construes ‘control relationship’ as including relationships between companies where one company holds, directly or indirectly, the majority of the share capital or the voting rights in another company or otherwise has the right to appoint the majority of the members of its board of directors or supervisory board. A ‘group relationship’, in turn, includes relationships between Portuguese companies where one is fully owned or controlled, directly or indirectly, by the other; or between companies that are bound by a group agreement or a subordination agreement, whereby one company is subject to the instructions or management of the other.
In the absence of such a control or group interest, the validity of the collateral may be challenged on the grounds of its granting lacking a justified corporate self-interest, as the interested parties (eg, shareholders, creditors and stakeholders) may argue that it is contrary to the purpose of the company or that it may hinder the company’s financial ability in the satisfaction of their rights against the company.
Moreover, obligations under such guarantees or security shall not extend to any use of the proceeds of the bonds for the purpose of acquiring shares or quotas representing the share capital of the guarantor or the parent guarantor, or refinancing a previous debt incurred for the acquisition of shares or quotas representing the share capital of the guarantor or its parent guarantor. Deals breaching these limitations would constitute unlawful financial assistance pursuant to article 322 of the PCC. As a result, certain contracts pertaining to such high-yield bonds’ guarantees or security typically include guarantee limitation language to clarify and ensure that under no circumstance can any such guarantees or security granted by a guarantor be used to pay or secure any of the above-mentioned.
Finally, due either to land registry formalities (as is the case of the granting of mortgages over properties) or to tax reasons (in particular the payment of stamp duty), obligations under high-yield bonds’ guarantees or collateral granted by the guarantors are typically limited to an agreed maximum secured amount (often established as an aggregate maximum amount should there be multiple guarantees). As a result, the guarantors will not have a direct obligation to repay any amounts once the relevant maximum secured amount has been reached, as applicable.Collateral package
What is the typical collateral package for high-yield debt securities in your jurisdiction?
Collateral packages for high-yield debt securities in Portugal vary according to the type of assets owned by the issuer and its subsidiaries as well as the relevant sector of activity and may include security granted without affecting the day‑to‑day business of the guarantors.
These typically include:
- mortgages over properties and movable assets subject to registration (such as manufacturing plants, ships and other vehicles)
- pledges over equity, bank accounts, operational assets and equipment; or
- assignments of receivables by way of security.
Collateral packages usually comprise any or all of:
- share security (eg, a financial pledge with appropriation rights over the issued share capital and a promissory pledge over any equity issued afterwards);
- bank account security (eg, a financial or commercial pledge with appropriation rights over the balances of bank accounts held by the issuer);
- security over fixed movable assets (namely, a rotary pledge over stock, equipment or inventory);
- assignment of receivables by way of security, whether current or contingent, present or future (including intercompany receivables); and
- assignments of receivables emerging from, or pledges over, insurance policies and, in some cases (although less commonly), intellectual property rights (such as pledges over patents or trademarks).
Although common in other transactions, high‑yield debt issuances usually do not see security being taken over real estate (typically mortgages and assignments of income emerging from real estate).Limitations
Are there any limitations on security that can be granted to secure high-yield securities in your jurisdiction? Are there any limitations on types of assets that can be pledged as collateral? Are there any limitations on which entities can provide security?
The relevant limitations were mentioned in respect of the granting of upstream, downstream and cross-stream security. As to types, a broad diversity of assets shall be considered, as, conceptually, a pledge may be created over a certain movable asset or otherwise a credit or other right, provided that it cannot be mortgaged (Portuguese mortgages are granted over properties or movable assets subject to registration, such as vehicles, ships and aircraft). However, the type of pledge itself will vary according to the pledged asset and other factors (eg, the involved parties’ legal nature and activity). Hence, one may grant financial or commercial pledges, rotary pledges (ie, where the pledged asset is subject to replacement), pledges over credit rights, shareholdings, commercial establishments and credit notes, among many others.
If the assets of the Portuguese issuer or guarantor are covered by immunities set forth by law – which include, but are not limited to, assets that are part of the public domain of Portugal or allocated to public service purposes – such issuer or guarantor will be entitled to claim for itself immunity from suit, attachment or other legal proceedings in respect of its obligations under said guarantees.
Moreover, as a general rule, guarantees, pledges or mortgages must guarantee or secure another obligation to which it is ancillary and that shall be identified in the security agreements. Therefore, the guarantee or security follows the underlying obligation in such a way that the invalidity of the underlying obligation entails the invalidity of the guarantee or security and the termination of the former entails the termination of the latter.Collateral structure
Describe the typical collateral structure in your jurisdiction. For example, is it common to see crossing lien deals between high-yield debt securities and bank agreements?
There is no typical collateral structure in Portugal, as this structure depends primarily on the issuer and its guarantors as well as on their credit risk profile, capital and financial structure, etc.
Crossing lien structures (where lenders benefit from first ranking security and bondholders benefit from second ranking security) are not very common, but we have seen them being used. This concept can be implemented in practice, although it can be more complex in relation to certain types of assets, such as real estate. It is also common to regulate this type of issue (ranking and priority of debt and security) in the intercreditor agreement through waterfall provisions.
In recent years certain structures have been adopting a mixed issuance of senior secured bonds and senior unsecured bonds.Legal expenses
Who typically bears the costs of legal expenses related to security interests?
The costs of legal expenses related to the transaction, including the fees to be paid by the initial purchasers to their legal counsel, are usually borne by the issuer. The issuer is also commonly responsible for any expenses regarding the security interests created, including the payment of stamp duty and any registration costs in respect of the perfection of such security interests, as well as any legal costs emerging from the enforcement of the security by the secured parties (or security agent) upon a default scenario. Despite this, in some transactions such costs and legal expenses may be borne also by one or more guarantors, if agreed by the parties involved.Security interests
How are security interests recorded? Is there a public register?
Bank account pledges are subject to registration with the bank with whom the account is held, while share security is subject to registration with the issuer, a depository or a bank in the case of registered, deposited or dematerialised shares.
Should an equity pledge be granted over quotas (stock of private limited companies), registration before the commercial registry office will also be required (public registry), while mortgages over real estate or movable assets subject to registration, as well as real estate income assignments, are subject to registration before the land registry office (public registry).
How are security interests typically enforced in the high-yield context?
As Portuguese law does not recognise the concepts of parallel debt or trusteeship, indentures (and intercreditor agreements) usually establish that only the security agent may enforce the security documents in its capacity as agent and joint and several creditors. Meanwhile, bondholders will not have direct security interests and therefore will not be entitled to take enforcement actions over the guarantees or collateral securing the high-yield bonds, except through the trustee, who will provide instructions to the security agent on said guarantees or collateral. In seldom cases (mainly with fewer secured parties), however, certain security (eg, mortgages) may be registered in favour of each and all of the secured parties. Security interests are therefore commonly enforced by the security agent, if necessary, following an instruction by the bondholders or lenders according to the provisions of the indenture, the intercreditor agreement or the security agreement.
Enforcement mechanisms may vary depending on the security’s type. Financial pledges over financial instruments and bank accounts allow for the pledgee to appropriate the pledged asset as well as for an extrajudicial sale of the asset, to the extent the appropriation rights and the asset evaluation rules were established in the contract. Nonetheless, after enforcement the pledgee shall pay to the pledgor the difference between the value of the pledged asset and that of the secured obligations, if any. The enforcement of a mortgage, however, will always require the commencement of judicial proceedings, whereas the assignment of receivables only requires the notification of the debtor or client of the issuer to make payments directly to the security agent or secured parties thenceforth (said notification acting as an enforceability requirement of the assignment rather than a validity requirement).
Finally, guarantors often grant powers of attorney in favour of the security agent allowing it to enforce the security or sell the security assets upon the occurrence of an event of default, as well as to carry out any actions necessary for the enforcement of the security or otherwise its perfection. These representation instruments tend to be granted as irrevocable powers of attorney, meaning that the grantor (ie, each guarantor) will not be able to terminate it unliterally, as the consent of the attorney (ie, the security agent) is necessary, save with just cause.