The Loan Market Association (LMA) has recently published its template Security Agreement for use with its real estate finance investment facility agreement. The Security Agreement has been eagerly awaited by markets as the LMA has not historically published security.
Whilst the LMA drafts its standard documents with the syndicated lending market in mind, the impact of those documents on the bilateral market is still significant. Many firms (and some lenders) have their own bilateralised versions of LMA loan agreements or may document a facility on a syndicated basis even where it is intended to be, and likely to remain, a bilateral transaction. There will no doubt be numerous reviews of the Security Agreement from a syndicated viewpoint, so we’ve taken a look at it from a bilateral transaction perspective.
Security Agreement v Debenture
Although it’s called a Security Agreement, many will know this type of agreement as a debenture. It includes a variety of different security over different asset types, tied up with a general floating charge over everything else. The floating charge is intended to be a qualifying floating charge for the purposes of insolvency legislation (i.e. it envisages the ability to appoint an administrator as it will charge the whole or substantially the whole of the company’s assets).
The document contains few surprises. It is written in fairly plain English and identifies the usual asset types for taking security. In the syndicated market, it is viewed as a short form document, covering the key issues, however, in the bilateral market where such documents are often compared against bank templates, it would not necessarily be viewed as short form. For many bilateral transactions where “all monies” security is more common, a number of changes may have to be made, in particular to address the following points:
- The secured liabilities under the Security Agreement are limited to those under the specified finance documents as opposed to securing genuine “all monies” liabilities.
- The Security Agreement assumes that the security provider is an obligor under a connected facility agreement and so it does not contain representations and warranties but expects those to be dealt with in the facility agreement (because the security provider will be a party to that facility agreement, even if not a borrower).
- A number of standard clauses are included in the Security Agreement by reference to the equivalent provisions in the facility agreement and this could cause confusion if the Security Agreement is intended to secure sums under multiple different types of facility in the future.
- It includes notices of security to third parties that may not all be necessary on many bilateral deals (where, for example, hedging may be entered into with the sole lender and all bank accounts held with the lender too).
For these reasons, it will usually require a degree of adaptation to be used as the “all monies” security, often required by lenders in the regional markets, even where bilateral facilities are documented on a syndicated basis. Lenders seeking all monies security will not usually want to rely on necessary reps and warranties being contained in future facilities but will want to be comfortable that everything necessary is covered off in the original security (with possible confirmations being obtained for future transactions, where prudent).
So will we start to see this Security Agreement being used on bilateral transactions? The likelihood is that the influence of the LMA templates generally will filter down and we will start to see it impact upon security in bilateral transactions to some extent. For bilateral transactions where security has been agreed as being transaction specific is will most likely become commonplace, at least in the real estate finance market. Likewise on transactions where the lender is comfortable that all future facilities will be based on a standard form that includes all necessary reps and warranties.
Where “all monies” security is required that could cover a number of different facility types however, the heavy reliance the Security Agreement places on an underlying facility agreement and the volume of changes that would be needed to counter this means that, whilst certain provisions may be adapted, it may not have quite as significant an impact.
The Security Agreement (together with user guide) is available to LMA members on the LMA website.