05 Dec Revisiting Cross Border Secured Financing
By Nicole Ferreira-Aaron & Melissa Inglefield.
While local businesses will often seek to raise financing within our shores, certain regional or multinational borrower groups as well as borrowers in the oil and gas sector may find it necessary, from time to time, to raise financing from an offshore lender. If a Trinidad company with subsidiaries in Barbados and Jamaica (collectively the ‘Security Parties’), obtains financing from a US bank, the transaction will be a cross-border loan. Before entering into such a transaction, it would be wise to examine of the laws of the jurisdictions whose borders will be crossed and the manner in which those laws work together.
In this Article, we will consider some key legal and practical considerations in concluding a secured cross border loan. Assuming a typical loan structure, the Trinidad Borrower will need to consider: (1) each Security Party’s ability to enter into the transaction and grant security for the financing; (2) the likely costs associated with a cross-border transaction and how the structure of the financing might impact those costs and (3) the terms on which such security will be granted.
Typical Secured Cross-Border Loan Structure:
- the US Bank would lend to the Trinidad Borrower on a US law governed loan agreement;
- the Trinidad Borrower would charge some or all of its property located in Trinidad and its shares in the Barbados and Jamaica incorporated subsidiaries as security for the repayment of the loan;
- each subsidiary may be required to provide a guarantee of the Trinidad Borrower’s loan obligations;
- each subsidiary may also be required to support its guarantee by a charge over its property located in its respective home jurisdiction.
1. Power, Capacity and Authority
The Trinidad Borrower will need to determine whether it can borrow from the US Bank and whether it can provide security. Each subsidiary will need to determine whether it can guarantee the obligations of the Trinidad Borrower and provide security for the guarantee.
Each Security Party will need to review its incorporation documents, by-laws and any applicable shareholder agreement (e.g. in respect of joint venture companies or subsidiaries that are not wholly owned by the Trinidad Borrower) to confirm that it has the capacity to enter into the relevant proposed obligations.
Each Security Party will need to review any applicable legislative restrictions on its ability to support the obligations of its parent e.g. financial assistance restrictions and confirm that it can meet any such restrictions. Special legislative restrictions or requirements may apply to subsidiaries that are financial institutions, insurance companies, publicly listed companies or other regulated entities and they warrant further enquiry.
Similarly, each Security Party will need to rule out any contractual restriction contained in any existing contract to which it is a party or to which it may be subject which might restrict its incurrence of indebtedness or its ability to grant any security.
A Trinidad Borrower contemplating or preparing to enter into a financing transaction to be supported by security provided by other members of the Borrower group would be well advised to compile a list of all proposed Security Parties and applying a jurisdictional analysis to anticipate hurdles to be overcome by each such entity prior to entering into any binding commitment for a proposed borrowing. This early analysis would aid in the negotiation of the term sheet with the arranger or lenders. The Trinidad Borrower would be well advised to seek to exclude any subsidiaries or affiliates that would be challenged in providing security or any jurisdiction whose rules would render the giving of security impractical or uneconomical.
Once the Trinidad Borrower has determined any limitations which might restrict either it or its subsidiaries from entering into the transaction or granting security for the financing, it will need to carefully negotiate the terms of the financing, including but not limited to the terms on which security for the financing will be granted.
2. Structuring of the Financing – Reducing Transaction Costs
In determining the structure and the security package of the transaction, it is likely that the arranger and lender will wish to ensure that they have first ranking security over all assets of the Trinidad Borrower group. Meanwhile, in addition to the Trinidad Borrower ensuring that the security can be easily granted and that the grant of such security will not have a detrimental impact on its ability to carry on its business, it will also be focussed on reducing the costs of the financing insofar as possible.
The Trinidad Borrower is typically liable for most (if not all) of the costs of the financing, including but not limited to the cost of both the lenders’ and borrower’s counsel, the fees payable to the administrative and paying agent and the cost of perfecting the financing and security documents. One of the highest costs in perfecting the security will often be the stamp duty payable in each participating jurisdiction. As a result, understanding the impact on the costs of a transaction that the following factors may have is critical: (a) the choice of governing law of the primary financing documents; (b) the location of the lenders or the agent(s); and (c) the make-up and requirements relating to the security package.
- Governing Law: Lenders will typically have a strong preference as to the law which is to govern the primary financing documents (e.g. the credit agreement or indenture) and there is usually little room for negotiation. However, a Trinidad Borrower should bear in mind that it will need to engage counsel in such jurisdiction to negotiate and settle the forms of such primary instruments on its behalf. The legal fees of counsel situated in jurisdictions such as New York and London are expected to be high and this should accordingly be budgeted for in a Trinidad Borrower’s transaction costs.
- Location of Lenders or Agent(s): The location of the lenders or paying agent can have a substantial impact on the costs of a transaction as it will impact the percentage of withholding tax (WHT) payable in respect of any payments of interest or any fees payable to the relevant parties. Strictly speaking, a Trinidad Borrower is required to deduct from any payment of interest being made the relevant sum of withholding tax payable thereon and to remit same to the Board of Inland Revenue. However, in most instances, a Trinidad Borrower will be required to ‘gross-up’ any payments due to the lenders or agent in order to ensure that the total sum of the payment due to the relevant party is received by such party. Accordingly, the cost of the WHT is borne by the Trinidad Borrower thereby increasing the costs of the transaction. Wherever possible, the Trinidad Borrower may seek to structure the transaction by engaging parties in jurisdictions which have a palatable rate of WHT.
- The Security Package: One additional but important consideration is what stamp duty will be payable by the Trinidad Borrower in each jurisdiction in which security is granted. While in some jurisdictions (like Trinidad and Tobago) the Security Parties can benefit from stamping one instrument as the primary finance or security document with the remaining instruments as collateral security at TT$25.00, other jurisdictions (such as Barbados) require each instrument to be stamped with ad valorem stamp duty. This can be an important negotiation point between the arranger or lead lender and Trinidad Borrower. For example, in circumstances where a subsidiary has a relatively small operation in a jurisdiction in which stamp duty at the ad valorem rate may be payable, the parties may negotiate to omit such jurisdiction from the transaction entirely. In some cases, there may be other options available to mitigate or defer the stamp duty payable partially or entirely.
3. Agreed Security Principles
As a result of the hurdles which can arise in cross-border financing transactions caused by varying requirements in the multiple jurisdictions involved, it is becoming common for the primary borrower and the arranger or lead lender to agree at an early stage the security principles applicable to the transaction at an early stage.
Such principles seek to establish the approach of the parties towards determining the make-up of the security package. Accordingly, the parties seek to agree the overarching requirements applicable in relation to the nature of the security to be granted and the requirements as to perfection, stamping and priority of such security. Once the security principles have been agreed, it is up to the lender and the Trinidad Borrower group’s local counsel in each relevant jurisdiction to prepare and settle the forms of the security instruments based on and in accordance with the principles. Taking account of any foreseeable hurdles in a particular jurisdiction at an early stage such that the agreed security principles address any such issues is accordingly critical for a Trinidad Borrower.
While the foregoing highlights some of the key points to consider when negotiating and entering into a cross-border secured financing transaction, just as each jurisdiction will need to be considered on its own, it is likely that, each transaction will have its own nuances. Any Trinidad Borrower or borrower group that intends to seek financing from offshore lenders should consider the additional costs likely to be incurred in relation to such a transaction, along with the additional complications of negotiating a security package comprised of assets in multiple jurisdictions.
Look out for our next issue of the Forum in which we highlight considerations to be taken into account by an offshore lender considering lending to or taking security from a Trinidad and Tobago incorporated company.