The last few years has seen an increasing level of participation by surety providers in syndicated bank facilities. From the bank perspective this has been a response to reducing exposures and concentrating on funding lines which provide better returns and margins than bank guarantees/letters of credit.
From the surety perspective participation in syndicated bank facilities provides:
- An opportunity to participate in bigger credits
- Access to borrower/contractor security
- Usually more detailed and comprehensive financial reporting and covenants, and
- A defensive strategy against potential loss of clients
The purpose of this paper is to provide some insights and commentary on the role of a surety in a syndicated bank facility. The starting position is to consider the orthodox bilateral surety – contractor structure and documentation.
Traditional Surety Approach
A typical structure involves
- A term sheet between the Contractor and the Surety setting out matters such as the range of bonds to be issued, term of surety line, facility limit, fees, some core financial covenants and details of indemnifiers
- A deed of indemnity and guarantee between the Surety and Indemnifying Group
- Occasionally a requirement for security such as a 2nd ranking general security agreement
Syndicated Bank Facility
The typical syndicated bank facility involves:
- A syndicated facility agreement, usually based on the Asia Pacific Loan Markets (APLMA) template with, among other things, comprehensive and bespoke financial covenants
- Possibly a common terms deed (CTD)
- A security trust deed under which the borrower agrees to give security (for example, general security agreements and property mortgages) in favour of a security trustee who holds that security
- The securities themselves
Benefits of Surety participation in Bank lead Facilities
Taken against the background of the brief summaries of the respective surety and bank facilities, there are a number of attractions for surety in participation in a syndicated facility, including:
- A comprehensive range of financial covenants, including debt service, interest cover and LVR
- Restrictions on disposals, acquisitions and incurring further financial indebtedness
- Mechanisms for introducing new guarantors into the guarantor group as well as releasing non material guarantors
- A robust reporting regime with covenants being tested and verified on a quarterly basis
- Access, on a pari passu basis, to all security given by the borrower/security providers
While the benefits of surety participation in bank facilities appear attractive there are some aspects of such facilities which a prudent surety needs to understand and be familiar with.
Issues to be considered in bank facilities
As a surety provider whose only product available under a syndicated facility are your bonds, you need to be aware of the following:
- The facility is a committed facility. That is, it will be available to the borrower for a term of often up to 5 years. This is in contrast to a typical surety- contractor facility which will be for a 12 month term and under which the surety has a unilateral right to decline to issue a bond
- The decision making process, for example calling an event of default, is a product of a collective decision which typically requires a 'Majority Lender' outcome. Majority Lenders usually = two thirds of the commitments of all of the financiers participating in the facility. The commitment of a surety will usually be modest compared to that of the banks who will have a range of funding lines, including even hedging facilities
- There will be bank specific provisions in the syndicated facility agreement such as illegality and compliance with FATCA, which will not apply to sureties and which may allow banks to withdraw from a facility or require the borrower to compensate the bank
- The mandatory prepayment provisions (for example on a disposal the borrower must pay down rateably all banks) do not operate for the benefit of sureties as providers of contingent risk products
- Often the key aspects of the facility will be the subject of an extensive term sheet. It is not uncommon for sureties to have modest input into the term sheet with the result that key terms are already agreed prior to the facility agreement stage
The key to participation by surety providers in syndicated facilities is to fully understand the positives and downsides of such participation.
At Kemp Strang we have the benefit of both representing banks in syndicated facilities and drafting and negotiating documentation as well having a wealth of experience in advising surety providers.
For further advice on this and any other issues for surety providers feel free to contact chapmanb [at] kempstrang [dot] com [dot] au (Bill Chapman), Partner, murray-nobbsd [at] kempstrang [dot] com [dot] au (David Murray-Nobbs), Partner or wilsonm [at] kempstrang [dot] com [dot] au (Matthew Wilson), Executive Counsel.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.