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Securing of syndicated financings in Poland (part one)

It is relatively easy to secure under Polish law a simple financing, where a single lender extends a loan to a single borrower. The exercise may not, however, be equally easy when it comes to securing a multi-facility syndicated structure not so rarely employed in cross-border financings.

For decades, Polish law stood on the principle that one security interest may secure only one receivable (claim). While the approach might have been suitable in the less demanding pre-World War II capitalist economy as well as in the communist-era centrally-planned one, it hardly could live up to the needs of sophisticated fin de XXe siècle market.

To address the deficiencies, a new law on registered pledge and pledge registry was adopted in 1996 (and entered into force in 1998). Though it was considered a breakthrough in existing legal concepts as it allowed the securing of several claims of a number of creditors with (only) one pledge, its revolutionary approach shortly proved too evolutionary and insufficient to address the needs of the booming Polish market.

In light of the lack of a response from the legislator to the complaints of practitioners, both as regards further changes to the revolutionary registered pledge and to the remaining instruments still taking an early-20th century approach, the market had to find an alternative solution.

That solution was a parallel debt concept developed and employed in other continental jurisdictions, where, similarly as in Poland, existing concepts could hardly help in the securing of multi-facility syndicated structures.

Under the concept, each obligor undertakes with respect to one of several lenders or finance parties, usually acting as the security agent in a given transaction, to pay to that lender (security agent) sums equal to, and in the currency of, any sums owing by that obligor to any other finance party under any transaction finance document as and when the same fall due for payment under those finance document.

To cut a long story short, the obligor incurring the parallel debt becomes – by way of that undertaking – a debtor to the lender (security agent) in parallel to its original (underlying) indebtedness toward the remaining finance parties; the parallel debt obligations are parallel to the underlying indebtedness also in a sense that any discharge of the original obligations results in the discharge of the parallel debt, and vice versa.

The so-created parallel debt – as a single receivable (claim) – may then easily be secured by all security instruments, which (still) stand on the one claim-one security interest principle.

The concept is very tempting, not only because of the easiness with which parallel debt claims may be secured, but also due to its undemanding administration – changes to the finance parties (other than the security agent) or to the finance documents (other than the parallel debt clause itself) may usually be effected without the need of any related changes to the documentation securing the parallel debt.

As always, however, there is a small ‘but’. Firstly, neither the concept itself nor the securing of the instrument by Polish security interests have been actually tested before Polish courts. Secondly, a parallel debt clause has to be governed by foreign law (usually English or German) since its structuring under Polish law is questionable.

Borys D Sawicki

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