SECURED CROSS-BORDER FINANCING TRANSACTIONS

Trust and parallel debt

Cross-border financing transactions have links with different jurisdictions, and may include both civil law and Anglo-Saxon jurisdictions. Some jurisdictions do and some don’t accept that it is possible to grant security to a security agent (e.g. a special purpose vehicle or a trust) in order to secure money owed to several lenders (syndicated loan / facility).

As far as secured syndicated facilities are concerned, it is not uncommon that one or more lenders change. It is important that despite fluctuations in the group of lenders the security remains valid, without the need to re-establish (or re-register) such security.

In Anglo-Saxon jurisdictions the trust is used as a security agent: a security agent is appointed trustee. This means that security is not granted to each individual lender and not even to the group of lenders. The lenders are the beneficiaries. Fluctuations in the group of beneficiaries does not affect the (validity of the) security.

In several civil law jurisdictions it is not allowed that a security agent (which is not a lender) holds security on behalf of the lenders.

A technique frequently used is that of a parallel debt structure. The borrower acknowledges a debt to the security agent, which is in an amount equal to the amount owed by the borrower to the lenders (i.e. the borrower’s combined financial obligations under the syndicated loan). In other words: a separate (parallel) debt is created between the security agent and the borrower. Security is then granted by the borrower in favor of the security agent (which is a creditor) to secure the parallel debt. Fluctuations in the group of lenders does not affect the (validity of the) security.

Generally, it will be agreed that an amount paid by the borrower to the security agent in respect of the parallel debt undertaking will discharge the borrower from the corresponding obligations to the lenders.

In Curaçao a security right can be validly created in favor of a person (e.g. a foundation) who is not a lender (i.e. is not the creditor of the claim that the security right purports to secure). In 2012 a new paragraph (# 3) was added to section 231 of Book 3 of the Curaçao Civil Code, which provides that an obligation for which a right of pledge or mortgage has been granted could be owed to a party not being the pledgee or mortgagee (i.e. not being the creditor).

Finally, it should be noted that the Curaçao Trust can be used to achieve a similar result. With the introduction in 2012 of the Curaçao Trust the need for a parallel debt construction in the event that Curaçao law security interests are granted as part of a syndicated loan has been abolished. This makes the Curaçao trust very interesting for financing and security purposes.

Karel Frielink
Attorney (Lawyer) / Partner

(23 February 2014)

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