A borrower of a loan will often grant security interests in its shares and assets in favour of its creditors. This security package gives the creditors control over such shares and assets, enabling them to take possession of and sell them if the borrower defaults on its obligation to repay its debt.
This article examines the reasons in favour of appointing an independent security agent (such as Serica Trust & Agency) to hold those security interests for and on behalf of creditors, rather than granting the security directly in favour of the creditors themselves. In many cases, these apply to simple bilateral lending arrangements as much as to complex, multi-jurisdictional syndicated financings.
A security agent acts for and takes instructions from the creditor group as a whole and will not favour the interests of any particular creditor to the detriment of others. This is particularly so when an independent security agent (such as Serica Trust & Agency) which is not itself a lender is appointed.
An experienced professional security agent can be a valuable asset to a creditor group in an enforcement scenario, helping to guide it through complex enforcement processes in jurisdictions which may be unfamiliar. A security agent will also work closely with local counsel in the relevant jurisdiction(s) to ensure that all security interests are properly registered and perfected, to ensure that there are no nasty surprises if enforcement is required.
Granting security in favour of a security agent to hold for the benefit of a creditor group means that the identity of those creditors can change from time to time without affecting the validity and/or enforceability of the security interests.
Without a security agent, security granted in favour of an individual creditor that sells its debt to a third party would need to be released at the time of sale and granted again in favour of the incoming creditor. As well as creating unnecessary legal costs, this means that any applicable “hardening period” (a period of time during which a security interest is capable of being avoided by virtue of any bankruptcy, insolvency, liquidation or similar laws) would restart on the date of the new security document, to the detriment of the incoming creditor.
Creating a single security package in favour of a security agent is considerably cheaper and more efficient than granting separate security rights to each creditor. Minimising the number of security documents and parties to them helps control initial legal costs. In addition, on-going legal spend is reduced because there is no need to “release and retake” security every time a creditor either joins or leaves the creditor group.
Granting security in favour of a security agent, instead of to numerous creditors, ensures that only the security agent (acting on the instructions of the creditors) is entitled to take enforcement action against the relevant grantor. This prevents individual creditors from taking independent acceleration steps which could be contrary to the wishes of other creditors and, potentially, financially damaging to the transaction and its parties.
On more complex financings with both senior and junior lenders, a common security agent may be appointed to hold security interests on behalf of both lender groups pursuant to an intercreditor agreement, which will set out the rights of each lender group to instruct the security agent independently of the other.
Another advantage of having all security granted in favour of a security agent is that, in the event of default and acceleration, any enforcement action will be taken by the security agent. This protects individual creditors from any perceived reputational damage of taking enforcement steps in their own name.
Serica Trust & Agency acts as security agent/trustee in respect of assets located across the Asia-Pacific region. If local laws and regulations preclude us from holding security ourselves, we can work with local security agents to provide a seamless service. Contact our team to learn more about how we can support your business.
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