Debt Finance Flashcards
What did Natwest v Spectrum hold in relation to floating charges?
Essential characteristic of a floating charge is that assets can be released from the security only with the ‘active concurrence’ of the lender; look at substance, not form, of the charge
What was the reasoning in Natwest v Spectrum in relation to fixed charges?
In order to create a fixed charge over a book debt, LENDER had to demonstrate sufficient control over both the debt and the proceeds (proceeds paid into ‘blocked’ account, borrower to collect on lender’s instructions’
What did Dearle v Hall hold?
Priority of assignments by way of security is generally determined by the date on which notice is given to the contract counterparty
BUT other case law suggests that registering the security at Companies House could be sufficient to defeat this rule
What is the problem arising from Clayton’s case?
‘First in, first out’ rule (subject to agreement to the contrary)
–> draft ‘allocation’ clause allowing bank to allocate repayments as they decide; also include ‘all monies’ clause for security
Hopkinson v Rolt
Where a borrower has granted security over its assets to two different lenders (lender X first and lender Y second), first priority of lender X in respect of new advances made under its loan will be lost to lender Y once lender X has notice of lender Y’s security
–> draft ‘ruling off’ clause (bank ‘rules off’ the borrower’s existing account, leaving borrower’s debt showing as the full amount owed at the point that the bank received notice of the second charge, so as to preserve first ranking for the full amount; further payments by borrower paid to new account) [see chapter 7]; can also use ‘tacking’ for registered land (s.49 LRA 2002)
Repay/release problem
As soon as money is repaid for a debt, the security for that debt is released
–> Draft ‘continuing security’ clause (i.e. security during life of e.g. RCF continues throughout the life of the loan)
Example off balance sheet assets - security and perfection
- Key commercial contracts - fixed charge, notice to counterparty
- Insurance contracts: bank noted on insurance policy - ‘secured with respect to its separate rights and interests’
- Goodwill - fixed charge
- Trade marks/patents - assignment/fixed charge
- Future property/IP: fixed charge/equitable mortgage; NB bank will want ‘further assurances’ and security power of attorney
Transfer of loan
Transferor, transferee and Agent execute Transfer Certificate (borrower has consented in advance to this)
Plain vanilla bond issue - documents
Agreement Amongst Managers: determines joint and several liability between managers to subscribe
Subscription Agreement: governs terms on which Managers underwrite bonds
Fiscal Agency/Paying Agency Agreement: NB NOT Principal Paying Agency Agreement, since no trustee structure used - sets out administrative/paying agency roles of fiscal agent
Bond Terms and Conditions (self-explanatory)
Deed of Covenant: necessary since NO trustee structure used - issuer covenants by deed in favour of bondholders
Borrower consent to transfer - LMA Assignment/Novation
Borrower consents in advance to transfer within syndicate or to affiliate of syndicate
Consent still required for transfer outside syndicate
Secured bond - replacement/additional documents
Principal Paying Agency Document IS required since trustee structure being used - paying agent is agent of the issuer, so cannot be trustee
Trust Deed (governing terms on which trustee holding bonds) - holds benefit of issuer’s covenant to pay on trust for bondholders
Misrepresentation under subscription agreement - who can sue?
Only the managers may sue for misrepresentation under the subscription agreement
Lenders under LMA Agreement - liability to lend?
Lenders’ liability is ONLY several, NOT joint and several (as with managers’ liability in bond issue)
Advantages for issuer of fiscal agent structure/trustee
Fiscal agent - cheaper because:
- Less documentation (no PPA Agreement)
- Fiscal agency agreement less negotiated than trust deed
- Fiscal agent does not require separate legal advice
- Fiscal agency fee is cheaper
Trustee - more expensive but:
- May allow waiver of non-prejudicial matters without convening a meeting of bondholders (only if matter is prejudicial to their interests is a bondholder meeting convened)
- Prevents multiplicity of actions in case issuer in difficulties - can prevent single bondholder calling event of default
- More considered approach (professional and experienced)
Advantages for bondholders of fiscal agent structure/trustee
Fiscal agency:
- Individual bondholders can call EoD
- Bondholders in strong bargaining position may negotiate better deal for themselves
Trustee:
- Bond is more marketable for bondholders
- Part payments shared pro-rata amongst bondholders by trustee (single bondholder cannot have better deal at expense of other holders)
- Investigative and monitoring powers
- Owes bondholders duty of care
- Can chair bondholders’ meetings
