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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 institutions involved in the active provision of secured finance are:

  • local and international banks;
  • finance companies;
  • primary mortgage institutions;
  • non-bank financial institutions;
  • government development banks;
  • microfinance banks; and
  • private equity and venture capital funds.

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

Yes, market-standard facility documentation is used in Nigeria for secured lending transactions. A lot of bilateral and syndicated loans in Nigeria are modelled on the Loan Market Association forms and precedents. The Nigeria Single Currency Secured Term Facility Agreement of the Loan Market Association is one of the agreement forms that has been customised for use in the Nigerian lending market. 

Syndication

Are syndicated secured loan facilities typical in your jurisdiction?

Yes. Lending institutions in Nigeria engage in syndicated secured lending for large transactions.

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?

Typically, the borrower instructs a financial institution to arrange the facility on its behalf. The arranger markets the facility and secures the participation of other banks or commercial lenders to make commitments to the facility. In some instances, some of the proposed syndicate members become co-arrangers on the facility. The arranger appoints a law firm to act as lender’s counsel on behalf of the syndicate of lenders.

The lender’s counsel conducts due diligence on the borrower and drafts the financing and security documents. The facility agreement is based on the Loan Market Association form of facility agreement for Nigeria. An all asset debenture is typically prepared by the lenders’ counsel. The all asset debenture creates security (which may consist of mortgages, fixed and floating charges and security assignments) over the assets of the borrower. It is also quite common in Nigeria to have the key shareholders of the borrower create a charge over their shares in the borrower. The security is typically held by a corporate trustee for and on behalf of the lenders.

A facility agent is recognised under Nigerian law. A facility agent is typically appointed as a representative of the lenders subject to the terms of the transaction. The arranger or another lender or lenders, act as facility agents under the facility agreement. Facility agents coordinate the loan for the lenders. The role typically includes receiving the interest and repayments from the borrower and distributing them to the members of the syndicate, monitoring performance by the borrower of its obligations under the facility agreements and acting as liaison between the lenders and the borrower.

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?

Yes. Nigerian law allows security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate. However, based on the Loan Market Association facility agreement, any guarantees to be provided (especially by sponsors of the borrower) are typically embedded in the facility agreement. Where the guarantee is a separate document, this can be held by the security trustee on behalf of the syndicate of lenders. Once the security trustee has been validly appointed, the security trustee is recognised as the legal holder of the security on proper perfection of the security.  

The syndicate of lenders can appoint a member of the syndicate or a third party as a security trustee; however, in Nigeria, a third-party corporate trustee is preferred. Corporate trustees are regulated by the Securities and Exchange Commission. 

The rights, powers and duties of the security trustee are usually regulated by the terms of the trust deed, which typically include the rights available to a receiver under the law. 

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?

It is uncommon in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed, unless it is a project finance. In project finance transactions, the assets of the projects are held by SPVs, which serves to ring-fence the assets from the assets of the sponsors. However, in corporate finance transactions the borrower does not go through the process of setting up an SPV to hold the assets but, rather grants security over the assets held by it.

Where SPVs are used, security is typically given over the shares of the SPV in addition to direct asset security. Lenders insist on direct asset security in most instances due to registration requirements and to create a defence against subsequent encumbrancers.

Even where an SPV is not used, it is becoming more common for lenders to require security over the shares of the borrower where the shareholding of the borrower is closely held and not diverse.

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?

The Central Bank of Nigeria sets the universal base rate for calculating chargeable interest in lending transactions in Nigeria. Local banks sometimes set different benchmarks for local naira denominated loans, such as the Nigerian Interbank Offer Rate. However, for foreign currency denominated loans, the most common variable reference rate is the LIBOR. 

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

Yes. The Central Bank of Nigeria, by virtue of the Central Bank of Nigeria Act, is the regulatory authority which provides regulatory restrictions on the rate of interest chargeable on bank loans. The Central Bank of Nigeria requires banks to give full disclosure on lending rates. A circular is issued by the bank from time to time, publishing the interest rates that banks can charge the public on loans and advances for different sectors. These interest rates are to be used in the offer letters and facility documentation for the loans. 

Use and creation of guarantees

Are guarantees used in your jurisdiction?

Yes. Guarantees may be given by both legal and juristic persons.

What is the procedure for their creation?

A guarantee contract must be evidenced in writing and signed by the guarantor or its agent. Based on Nigerian law of contract, which requires that for a contract to be valid it must be backed by consideration or made by deed in the same way as for a loan, authorisation for a guarantee provided by a company is by way of a resolution of the company directors. Where the Loan Market Association Agreement is used and the guarantee is to be provided by the parent or majority shareholder of the company, such guarantee is embedded in the facility agreement, otherwise it is a separate document. A guarantee executed in Nigeria or relating to a thing to be done in Nigeria must be stamped in accordance with the Stamp Duties Act for it to be tendered in evidence.

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

Nigerians are generally free to give guarantees to foreign entity. However, there are certain entities which are restricted from giving guarantees – for example, banks require the prior written consent of the Central Bank of Nigeria before granting security over their assets or giving guarantees in respect of loans taken from foreign entities (other than bank deposits in the ordinary course of business). Federal government ministries, departments and agencies may also not give guarantees without the approval of the Federal Executive Council.

Otherwise, there are no restrictions and the enforceability of guarantees in Nigeria is largely subject to the laws of contract and commercial transactions.

Subordination and priority

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

Under Nigerian law, a fixed charge has priority over a floating charge affecting the same property, unless the terms on which the floating charge was granted prohibited the company from granting any later charge having priority over the floating charge and the person in whose favour such later charge was granted had actual notice of that prohibition at the time when the charge was granted. However, the doctrine of constructive notice of registered documents has been abolished, so knowledge is not imputed simply because the security document containing a negative pledge was registered at the Corporate Affairs Commission.

Where the equities are equal, priority is determined by registration. The security registered first by a genuine creditor without notice takes priority over an earlier interest on the same property.

In relation to a corporate borrower, Nigerian law recognises the priority of a registered charge as ranking in priority over an unregistered charge. Where registration of a charge of a corporate borrower is required by law, failure to register renders such charge void against the liquidators and any creditor of the company. If two security interests granted to two separate creditors are both required to be registered with the Corporate Affairs Commission, and are registered as prescribed, the security’s date of creation rather than its registration determines priority between the security interests.

Nevertheless, lenders can contractually structure the priority of debts and security. This is done by entering into an intercreditor and security sharing deed between themselves and the trustee (where the security is held by a trustee), the deed will provide for the terms of sharing of the security and for a lender to turnover any payments it received from the borrower to be shared in accordance with the terms of the deed.

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?

Yes, there are some documentary taxes and stamp duties payable on the granting of a loan, guarantee or security interest in Nigeria – these include:

  • Stamp duty – pursuant to the Stamp Duties Act, all instruments executed in Nigeria or relating wheresoever executed to any property situate or any matter or thing done or to be done in Nigeria, will not, except in criminal proceedings, be given in evidence or be available for any purpose whatever, unless it is duly stamped. Thus, where loan or security documents fit this bill, they will require stamping. Stamp duty is also typically paid on loan agreements and security documents on an ad valorem basis.
  • Asset registry fees – where the property to be used as security consists of a property with its own registry, security over such asset must be registered at the relevant registry and registration and other administrative fees may be payable.
  • Corporate Affairs Commission – fees for the registration of security at the commission is charged ad valorem on the value of the loan.
  • Value added tax – value added tax is chargeable on fees and other vatable supplies in respect of the loan documentation and perfection of security.

In addition, other fees may be payable on the enforcement of security. Such fees vary depending on where the security is situated.

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