Introduction
In the realm of European fund finance, typical subscription lines rarely feature an intercreditor agreement (ICA). Ideally, keeping the fund at the pinnacle of the structure “clean” with limited financial indebtedness and a firm negative pledge prevents competing creditors and security. However, as transactions grow in value and complexity, certain aspects of the Loan Market Association (LMA) ICA are often woven into facility agreements where no separate ICA exists. Most of these changes are straightforward and worth including in a well-drafted fund finance deal.
Getting the Parties Right
Before incorporating provisions from an ICA into a facility agreement, it’s prudent to contemplate the parties involved. These agreements typically involve finance parties, obligors, and entities managing the fund.
In contrast, ICAs have a broader scope, encompassing any entities lending within the structure and those external entities providing subordinated funding. Proper subordination involves both borrower and subordinated creditor agreeing to certain payment restrictions. When a parent lends to a subsidiary, the parent must be party to the facility for subordination to work effectively. If not, a separate subordination agreement is advisable. Correct analysis at the outset, often aided by a structure chart, helps avoid issues later.
Security Trusts and Investors
The LMA’s loan documents include a “Facility Agent” in the facility agreement, while the “Security Agent” under trust is created in the ICA. Where a security agent or trustee is involved, the LMA provisions must be in the facility agreement. Although rarely negotiated, these must always be confirmed for fund finance in Europe.
Checks on investor loan subordination to a facility are critical. Investors often provide loans to a fund, thus acting as unsecured creditors competing with lenders. Although facility agreements bar payments to investors in specific circumstances, the investors are not party to these agreements. Fortunately, laws often cover these scenarios, but this should be noted in due diligence reports.
Tranching
With the rise of complex fund finance transactions, we’re witnessing new financial products. Multi-tranche term loan facilities or loan notes series are emerging, with varying maturities, pricing, and ranking. Tranching debt, common in other markets, is now more prevalent in fund finance, drawing from established ICA practices in the collateralised loan obligation (CLO) space.
Example of Tranching
| Type | Maturity | Pricing | Ranking |
|---|---|---|---|
| First Tranche | Short-term | Lower | Highest priority |
| Second Tranche | Medium-term | Moderate | Medium priority |
| Third Tranche | Long-term | Higher | Lowest priority |
Hedging
Fund finance agreements typically restrict treasury transactions, aligning with constitutional fund documents. Borrowers rarely accept stricter facility terms compared to investor agreements. Permitted hedging is seen as financial indebtedness if it’s unfavorable financially.
Hedging liabilities may share transaction security, especially if required for interest or currency risks. In such instances, facility agreements need changes to acknowledge hedge counterparties as secured parties. The ICA must clearly define hedging terms, payments, and enforcement instructions. Although negotiation is possible, the LMA ICA template is a common framework.
Share security is common in fund finance, especially in NAV spaces where borrowers are fund subsidiaries. Shareholder loans must be managed during share security enforcement. Without security over shareholder loans, potential buyers may avoid companies with large ongoing receivables.
Securing both shares and loans allows seamless enforcement. The LMA ICA empowers security agents to release liabilities for “distressed disposals.” Such provisions should be documented with parental involvement to enable security enforcement and share sale.
Additionally, “fair value” protections may apply during share disposals, ensuring subordinated creditors receive surplus proceeds. Methods like court-sanctioned processes or auctions ensure fair pricing. Although not contentious, these may be essential in dealing with both share security and creditor competition.
Conclusion
Fund finance transactions, given their complexity, necessitate careful consideration of ICAs, especially when incorporating aspects into facility agreements. By addressing the roles of parties, security mechanisms, and evolving financial structures, one assures clarity and efficacy in dealings, adhering to the traditions of British diligence and precision.
For a comprehensive understanding, refer to resources on LMA and European fund regulations.
