United States
Lending in the US can be structured in a number of different ways to include a variety of features depending on the commercial needs of
the parties.
A loan can either be provided on a bilateral basis (a single lender providing the entire facility), a club basis (a small group of multiple lenders each providing parts of the overall facility) or syndicated basis (a larger group of multiple lenders each providing parts of the overall facility).
Loans can be secured or unsecured. Assets of a debtor can have multiple security interests attached thereto and such security interests are usually allocated among secured parties in respect of priority and other similar rights pursuant to an intercreditor agreement. A first-lien/second-lien loan can be combined into one unitranche loan. In this structure, the lenders enter into an agreement among lenders outside of the credit agreement with the borrower.
Club and syndicated facilities by their nature involve more parties (such as agents which fulfil certain roles for the finance parties), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.
Loans will be structured to achieve specific objectives, e.g. acquisition financing, dividend recapitalizations, working capital loans or letter of credit facilities.
Loan durations
The duration of a loan may include:
- a term loan, provided for an agreed period of time but with a short availability period;
- a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn if repaid;
- a swingline loan, provided on a short-term basis to solve short-term cash flow issues; or
- a bridge loan, provided for up to a year and intended to bridge the gap until another financing source is available.
Loan security
A loan can either be secured, unsecured or guaranteed. For more information, see Giving and taking guarantees and security – common types.
Loan commitment
Lenders are obligated to provide the loan if certain conditions are fulfilled.
A credit agreement may also include an uncommitted incremental facility or an accordion, which allow the borrower to increase the commitments of the existing lenders or bring new lenders into the facility. The lenders do not commit upfront to providing additional loans.
Loan repayment
Typically, a term loan is repayable on an amortizing basis (in instalments over the life of the loan) or is repayable in full at maturity. Revolving loans may be reborrowed and repaid throughout the life of the facility.
Are there any restrictions on giving and taking guarantees and security?
Below are some of the key areas affecting the giving of guarantees and security.
Capacity
It is important to check the law of the state in which the company is organized, as well as the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative.
Consideration
Many state statutes require that the guarantee be in furtherance of the company’s purpose and that the company receive a benefit in exchange for providing such guarantee. This is often more difficult in the case of upstream or cross-stream guarantees or security provided by a subsidiary to its parent or sister company. The safe approach is often to have the members of the company approve the giving of the guarantee or security by resolution. Some state statutes also provide a safe harbor if the company and borrower are part of the same corporate group.
Insolvency
Guarantees and grants of security may be at risk of being set aside under US bankruptcy laws if the guarantee or security was granted by a company that was insolvent at the time of such grant and the company received less than reasonably equivalent value for the guarantee. Guarantees and security may also be challenged on other grounds relating to insolvency.
What are common types of guarantees and security?
Common forms of guarantees
Guarantees can take a number of forms. A particular distinction worth remembering is between a guarantee of payment and a guarantee of collection.
Under a guarantee of payment, the guarantor is obligated to repay the lenders immediately upon default of the borrower. The lenders are not required to first take any action against the borrower. Guarantees of payment are customary in the US.
Under a guarantee of collection, the lenders must first exhaust all remedies against the borrower before they may make a claim under the guarantee. The lenders are only entitled to the shortfall not paid by the borrower.
Common forms of security
Under US law, personal property, fixtures, general intangibles and other certain types of collateral are governed by the Uniform Commercial Code (UCC) as adopted in the borrower’s state of organization. Other types of collateral, including mortgages and motor vehicles, are governed by applicable state or federal laws, instead of or in addition to the UCC.
Under US law it is possible to grant security over all or a portion of the assets of a US borrower or guarantor.
Are there any other notable risks or issues around giving and taking guarantees and security?
Giving or taking guarantees
Guarantees are typically considered secondary, and not primary, obligations.
Many legal defenses are available to guarantors which may invalidate the guarantor’s obligations under the guarantee, including the invalidity of the underlying credit agreement or a change to the corporate structure of the borrower. However, in most cases, the lenders require the guarantor to waive these defenses, and doing so is typically permitted under applicable US law.
US state law typically requires that a guarantee be in furtherance of the guarantor’s purpose and that the guarantor receive a benefit in exchange for providing such guarantee. This may be achieved if the company and borrower are part of the same corporate group.
Giving or taking security
A security interest is created and attaches to the company’s property when the lender extends credit to the borrower and the borrower delivers to the lender a written agreement granting the security interest and describing the property.
Once created, the security interest needs to be properly perfected before it is valid against third parties. Perfection formalities are governed by the Uniform Commercial Code (UCC) as adopted in the borrower’s state of organization and, with respect to real estate, by the real estate law of the state where real property is located. Perfection formalities can range from having the secured asset delivered to the security holder, filing a financing statement or mortgage or entering into a control agreement. Under the UCC, a lender who properly files a financing statement first typically has priority over other lenders, with certain exceptions.
Security documents granting a security interest in personal property collateral generally do not need to be notarized, but notarization may be required for real property in certain states.
There may be negative tax consequences to a US borrower if the loan is secured by all of the assets of its non-US subsidiary that is considered a 'controlled foreign corporation.'
John T. Cusack
Partner
DLA Piper LLP (US)
[email protected]
T +1 312 368 4049
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