Austria: Structural Innovation in Secured Syndicated Lending
→ Martin Ebner
This article explains novel structures that allow persons who are not members of a lending syndicate to hold security for the lenders who provide the financing.
The conundrum evolves
Pooling of security
Banks active in the CEE/SEE region often do not have the benefit of well-established security agent or security trust legislation. Accordingly, many syndicates and ad hoc lender groups in restructuring situations have found it difficult to devise structures that balance the requirement of each lender’s loan receivables benefitting from security, with the lenders’ desire to have freely tradable loan receivables that can be assigned or otherwise be transferred (without having to re-register or otherwise re-create numerous security interests on exiting a lending relation). For want of legal recognition of eg, Anglo-Saxon security trusts, structures commonly used nowadays evolve around contract law concepts and include “parallel debt” or, in case of finance documents governed by Austrian law, joint (and several) creditor structures (Gesamtgläubigerschaft). Those structures allow a single person, the security agent, to hold security (even if of accessory (akzessorisch) nature) for the aggregate amount of lenders’ receivables by establishing a claim of the security agent and/or by bundling lenders’ claims in the security agent.
But what if there is a problem with the security agent?
However, not long after bankers and their legal counsel had managed to address those legal and structural issues and became comfortable with one person holding the collateral for the entire syndicate, new questions arose – also in the wake of increased awareness of bank insolvency scenarios – against the background of lenders not wishing to incur credit risk on another bank acting as security agent.
Or what if no lender is willing to do the job?
Also, in certain (in particular restructuring) situations, lender groups have encountered that no single lending bank would be readily prepared to assume the role of security agent and related liabilities and obligations of holding and administering the transaction security for the syndicate.
Externalise secured creditor positions?
There is only so much a lawyer can do
For the first issue (security agent credit risk) lenders and their inventive legal teams and outside counsel are in many instances able to devise solutions. Structural features re-solving for this may include the creation of a trust (Treuhand) by the security agent over the collateral and/or the proceeds thereof for the benefit of the syndicate lenders. This would be the commonly used route in Austria. However, in case of uncertainty whether such trust (Treuhand) can be established under the laws applicable to the financing, a security agent could be asked to provide security over its rights to the collateral (eg, a pledge over pledge (Afterpfandrecht)), to the lenders in the syndicate as security for their claims against the security agent.
Somebody has to do it
On the other hand, the second issue of no lender being prepared to assume the security agency role cannot be addressed by legal means only. Accordingly, we have recently witnessed a demand for professional service providers that have the necessary skillset to hold and administer security for a wider group of lenders, be it a syndicate or an ad hoc group of creditors in a restructuring scenario. Ideally, such service providers would not engage in any other (banking) activity that could expose them, and thus the lenders they front, to operational/solvency risks.
Whereas some other jurisdictions (eg, England and Wales) appear to have a well-established (and partly supervised) services industry when it comes to security trustees or security agents, advisors acting in the CEE/SEE regions do not yet appear to offer that role as part of their services.
Being a joint (and several) creditor without being a lender
That aside, in jurisdictions (such as Austria) where the right to hold security cannot be separated from the secured claim, the “outsourcing” of security holding to a third party service provider also gives rise to a number of interesting legal questions, including whether one can be a joint (and several) creditor for purposes of the security structure without having a loan claim in its own right.
We think that the answer to this is yes: In many instances, the security agent will have a claim against the debtor for payment of a fee and there is no doubt that creditors of payment claims can “bundle” the same and agree with their debtor that one of those payment creditors is the joint (and several) creditor of all claims – even if those payment claims may have different causae (crediting, fee remuneration, etc). Moreover, compelling arguments can made that even in the absence of a fee claim, the creditors can agree with their debtor that one person (not having a payment claim in the first place) is joint (and several) creditor of all their claims. However, it remains to be seen if that latter structure will be accepted in practice and by the Austrian courts.