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DF SGS 10 Consolidation
- Module
- Debt finance
Comprehensive exam notes on SGS 10 debt finance based on the learning outcomes and small group session activities at BPP.
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Guarantees & Debentures – SGS 10Debenture Agreement
Clauses: Bank’s perspective
Clause Comments – Proposed amendments
‘Permitted Security’ Wording must be similar to that in Loan Agreement
Purpose: allow borrower to purchase assets that are already subject to a charge
Re borrower acquiring targets that may have assets already subject to a charge
Carve-out to a Negative Pledge
Commercially-sensible + exists in LMA => represents interests of both parties
‘Secured Liabilities’ “all monies” wording = beneficial for bank
However: limiting this wording to a specific Loan Agreement would mean the Bank and Borrower will need to
renegotiate security for future loans
This is inconvenient for the bank => wants all debt to be secured
‘Fixed and floating Fixed charge: Purpose: created fixed charge over all properties of Borrower
charge’ Bank wants to mitigate/reduce risk
No compromise to clause => bank will want to take as much collateral as possible
Floating charge: Purpose: mitigate risk + exposure -> ensure there’s a charge over EVERYTHING
Floating charge over ALL present and future property and assets belonging to borrower
Fall-back for bank
It should ensure it becomes a Qualifying Floating Charge Holder -> appoint ADMINISTRATOR (no court)
Bank will never compromise on clause
QFC clause S.14(1) IA 1986: bank may appoint administrator if they are a QFCH
Purpose: out-of- S.14(2)(a): debenture doc must state that this provision of IA 1986 applies
court procedure S.14(3): charge must relate to whole or substantially the whole of co’s property
Compromise depends on bargaining powers but bank is unlikely to delete clause
Conversion of Bank to convert floating charge if it considers that to be desirable necessary
Floating Charge ‘Desireable’ is fine => bank will only ‘desire’ to trigger clause in worst case scenario
bank doesn’t want to stop co from conducting its business & potentially stop servicing the loan facility
‘Pre-mature crystalisation’ -> usually when bank sees co is in financial distress (i.e starts selling stock at big %)
NB: does not change bank’s position in order of priority
Reps & Warranties Always check (1) loan agreement and (2) loan agreements of subsidiaries
Purpose: breach If the reps & warranties are identical in both -> no need to include/repeat them here (looks clumsy)
triggers EoD & risk If they are different -> include new reps & Ws here
mitigation Commercially -> might be safe to just include them
Negative Pledge Purpose: charger cannot place relevant asset(s) for further security:
(1) Gives bank ‘control’ over asset (Spectrum requirement to qualify as fixed charge); and
(2) Perfection= ‘notice’ -> MR01 + Debenture are public docs + MR01 has box to tick re NP
No compromise on removal of clause
Disposals Precludes charger from disposing of Charged Assets of its biz
(UNDERTAKING!) Bank wants to ensure borrower does not dispose of charged assets
Purpose: breach -> permits service of loan and ensures B will not simply dispose of Charges Assets that bank has rights over!
triggers EoD & risk Check loan agreement: does it contain this clause verbatim?
mitigation Yes -> no need to duplicate; NO -> keep clause
HOWEVER: SPECTRUM -> this clause shows the bank has CONTROL over fixed assets
Charges: Scenarios
(1) Scenario 1: Charge over future property
Company A enters into loan agreement with Bank X. 5 months after the Debenture is entered into, CoA acquires a new registered
freehold property. Premier Bank wishes to take a charge by way of legal mortgage over that property.
How does the Debenture assist Premier Bank in achieving this objective?
See definition of “Property” -> Bank will have ‘fixed charge’ over all property, including future
Further Assurance clause -> Bank has option to require CoA to upgrade & grant charge by way of legal mortgage
o Charge by way of legal mortgage is the strongest form of security over land (LPA 1925 powers of mortgagee)
How will the charge by way of legal mortgage be created?
CoA to enter into Supplemental Debenture – expressly creating charge by way of legal mortgage
What if COA is uncooperative?
If CoA doesn’t cooperate -> Bank could rely on Power of Attorney clause bcs Further Assurances clause forces COA to enter
further documentation to ensure bank gets security
PoA allows bank to perfect its security
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