Introduction
Syndicated loans are designed to be traded. Under English law, the trading of loans is conducted readily and this is irrespective of whether the loan is secured or unsecured. There are two principal contractual methods of trading loans under English law: by assignment or by novation. The differing effects of these two methods on the security provided for secured loans is wholly academic because, in practice, the security remains in place. This is because a trust structure is used to hold the security.
The trust structure
Under English law, security is not granted to each individual lender. Instead, a trust structure is employed. A security agent is appointed as a trustee to hold the security on trust on behalf of the lenders (or a much wider category of entities, often referred to as the finance parties) from time to time. The very nature of an English law trust arrangement means that the defined class of beneficiaries of the trust (i.e. the lenders or the finance parties) can fluctuate freely, as new lenders join and existing lenders trade in and out of the syndicate. The position of the trustee remains the same, and the security remains unaffected. The secured assets are out of reach of the security agent’s creditors, and the lenders have a proprietary claim to them.
Cross border security
Syndicated loan transactions may have links with jurisdictions other than England – one such link is that assets located in other jurisdictions may fall within the security package. This creates an issue for the effectiveness of the English law trust structure. A number of civil law jurisdictions do not recognise the concept of a trust and especially do not recognise a trust purporting to cover assets located in their jurisdiction. In addition, many jurisdictions do not accept that it is possible to grant security to A (the security agent) in order to secure money owed to B (the lenders).
However a solution has been developed in the form of parallel debt. A parallel debt provision involves the borrower acknowledging an additional debt owed by it to the security agent. This additional, independent debt exists simultaneously or “in parallel” with the debt owed by the borrower to the lenders, and is in an amount equal to the amount owed by the borrower to the lenders. Security is then granted by the borrower in favour of the parallel creditor (the security agent) to secure the parallel debt. The security holder remains the same, notwithstanding the changes to the pool of lenders following syndication.
Despite the borrower agreeing to an additional, parallel stream of debt owed to the security agent, the borrower is not agreeing to double its financial obligations. The parallel debt provision usually provides that any payment by the borrower to the security agent in respect of the parallel debt discharges the borrower’s debt to the lenders, and vice versa.
Although this concept of parallel debt has been in use for some years, it is not without risk. In a parallel debt structure, if the security agent becomes insolvent, the security which is held by the security agent as a parallel creditor may be available to the creditors of the security agent. There may also be challenges under certain jurisdictions regarding the validity of parallel debt: as there is little judicial authority approving the structure, legal uncertainty regarding its recognition looms.
Recognition of parallel debt and other developments
In recent years there have been important steps in those jurisdictions which rely on parallel debt in recognising the structure, minimising the legal uncertainty surrounding it. A Polish Supreme Court case in 2009 and a French Supreme Court case in September 2011 made steps in recognising foreign law parallel debt structures which have been established in those jurisdictions as security for debt governed by a foreign governing law. In other words, for example, if English law permits the creation of parallel debt and it can be proven to a French court that such debt is valid as a matter of English law, then the French judgment says that (subject to certain exceptions) you can grant French law security directly in favour of the parallel creditor to secure that debt.
Furthermore, there have been promising developments in certain other civil law jurisdictions towards legally recognising the concept of a security agent. These developments demonstrate the ability of legal systems to adapt to accommodate the important market for secured syndicated, cross border lending.
However, the implementation of parallel debt structures remains the subject of debate on a case-by-case basis, with their application depending on the jurisdiction in question and the identity of the assets to be secured. Our local lawyers can provide up-to-date guidance as to how best to structure a security package upon which lenders can comfortably rely.
