The use of a security agent in syndicated financing is a longstanding and internationally recognised practice aimed at the effective taking and enforcement of security. Their overall mission is to register, administer and enforce all types of security for the benefit of all lenders participating in the operation. Their involvement facilitates and accelerates the taking of security as it means the borrower is only dealing with one person. It enhances efficiency since the security is taken for the benefit of all creditors.
The security agent will also ensure that all annual formalities relating to security have been carried out by the borrower, and if so stipulated in the security agreement, will fulfill those requirements itself. If a lender decides to transfer its interest to another entity, the security agent will perform the administrative work in order for the new lender to benefit from the existing security. If an agent coordinates enforcement, it does so in a manner that avoids conflicting actions of the secured lenders, and facilitates the distribution of the benefits of enforcement proceedings.
The role of the security agent is even more important in an international context with complex financing structures. Freedom of contract allows parties to determine the scope of responsibilities, so the role can take many forms. The most appropriate legal status can be chosen based on the features of the operation – most notably, the county where the secured assets or borrower are based.
In common law countries, the security agent will typically be a trustee. But in other jurisdictions where trusts are not recognised, the parallel debt mechanism will be preferred. In any case, the structure adopted must be recognised and enforceable in all jurisdictions linked to the financing operation, as enforcing security is the key issue for lenders.
The enforcement of trusts and parallel debt, however, is still limited in some civil law countries like France. For enforcement, in most civil law jurisdictions the security agent will need a special power (proxy or power of attorney, for example) to make statements of claims for and on behalf of the members of the syndicate in case of the borrower's insolvency.
French law provides several legal structures for the security agent which are effective for a financing involving a French borrower or security based on collateral located in France.
Security agent under French law
First of all, a security agent could be the agent of lenders, subject to French mandate law. This form of agency is relatively effective since it allows for a good understanding and management of the security during the various stages of the security's life – from registration to enforcement.
Traditionally, each member of the syndicate mandates the security agent to sign the security documents for and on its behalf. The security agent then administers and enforces security in the name and on behalf of all the members of the syndicate in accordance with mandate law.
The security agent must have a written and special authorisation to take actions for and on behalf of each member of the syndicate. The mandate has the advantage of being effective for all types of security interests, whether personal or real, and to be recognised by all jurisdictions. This is the reason why agency is the security agent structure recommended by the European Loan Market Association and is widely used in France.
However, the agency model lacks efficiency in that the security documents, together with the appropriate registration and publicity requirements, are made for and on behalf of each of the secured lenders for the amount of their individual debt. To provide the security agent with extensive powers regarding registration and management of security, a new article 2328-1 was implemented in the French Civil Code in 2007.
This new article strengthens the powers of the agent by allowing it to register, manage and enforce security in its own name but on behalf of the lenders of the secured obligation, as well as on behalf of future lenders. Despite this, the security agent concept suffers under French law from the absence of clear and precise legislation on its nature and functions.
Therefore, despite the legal structures existing under French law, the financing parties might prefer using trust or parallel debt considering such mechanisms have been recognised recently by French jurisdictions under certain circumstances.
The Belvédère case
Financing professionals would rather use common law mechanisms that they are familiar with, such as trust or parallel debt, even when dealing with French companies.
A security trustee holds security in its own name for the benefit of all the secured lenders and enforces it on its own right when the debtor does not meet its obligations under the finance documents. But since France did not ratify the Hague Convention on recognition and enforcement of trust, beneficial ownership rights under foreign trust arrangements are not usually enforceable in France.
An alternative to the trust is the parallel debt technique which is purely contractual and derived from English law. The security agent for this purpose is a parallel creditor who acts under a mirror debt and not under a mandate. The borrower and lenders are directly obligated to the security agent for an amount equivalent to the debt granted by the secured lenders. According to this mechanism the security agent, holder of a parallel debt, can take, manage and enforce security interests in its own name but in the interests of secured lenders.
In recent years the question arose whether these two concepts, unknown in French law but widely used in international financing, could produce effects in France, notably during insolvency proceedings.
A landmark ruling by the French Supreme court (Belvédère case, September 13 2011) recently increased legal certainty for international syndicates which finance French companies, by recognising certain effects of a foreign trust and the validity of parallel debt mechanisms during insolvency proceedings.
By way of background, in 2006 the French spirits producer Belvédère issued €375 million floating rate notes. The financing agreement was governed by New York law and a US bank was appointed trustee of the bondholders, while the Polish and French subsidiaries of Belvédère guaranteed the repayment of the bonds. On the same day, the parties executed a collateral sharing agreement, also governed by New York law, under which two banks were appointed as principal and ancillary security agent under a parallel debt mechanism.
After the opening of Belvédère's insolvency proceedings in France, each security agent and trustee filed a claim for the total amount of the debt. With regard to the trustee, the key issue was whether it had the right to file a claim under French insolvency law without a special written authorisation from the bondholders. Regarding the security agents, the issue was whether their claims could be admissible in the insolvency proceedings considering the parallel debt mechanism could violate French international public policy and the principle of equal treatment of all creditors.
According to European law, French judges considered that the law governing the debt shall be used to determine whether a claimant has the capacity as a creditor to file a claim in its own name. Since the trust was set up under a law that recognises such institutions (New York law recognises the trustee as a creditor), the French Supreme Court authorised the trustee, as holder of the debt, to file a claim for the total amount of the debt.
If the effects of foreign trusts are recognised in insolvency proceedings, this decision does not imply the general recognition of trusts under French law. The French Supreme Court also recognised the parallel debt mechanism by ruling that it is consistent with French international public policy and authorising the security agents to file a claim for the full amount of the debt in the absence of a risk of double payment under the terms of the agreement.
However, as the validity of the parallel debt structure will depend on the quality of contractual provisions, it is not the most secure mechanism for the security agent.
A French alternative
A possible alternative is for the security agent to take the form of a fiduciary agent. Fiducie is an innovative and effective solution provided by French law to manage security in international syndicated financing operations.
Introduced into French law in 2007, fiducie is a similar concept to trusts. It allows the borrower to temporarily transfer any type of security, property or interest, for guarantee purposes, to be held by the fiduciary agent, which manages and enforces the security according to its fiduciary agreement with the syndicate members.
The transfer of assets, property or interests to the fiduciary agent constitutes the security mechanism itself. But is also a way to effectively manage the security since the regulation concerning the fiducie is clear and accurate.
The advantage of the fiducie lies mainly in the great freedom and flexibility left to the parties when drafting the fiduciary agreement. However it involves an onerous registration process, administrative formalities and legal publicity requirements.
In practice, if agency remains the most effective mechanism used by practitioners, they at least now the option to use common law concepts in France with more legal certainty.
By Christophe Jacomin, partner at Lefèvre Pelletier & Partners in Paris