Not all financial or capital markets deals are straightforward. As markets mature and investors demand more from their deals, and as deals start to involve cross-border securities, all parties are finding their roles somewhat in flux.
Traditionally when looking at deals such as syndicated loans, restructuring corporate debt, securitisation, or even a bond issuance placed in a mature market, it is not unusual for both lenders and their borrowers, guarantors and issuers to bring a fiduciary party such as a trustee or a quasi-fiduciary party (an administrative, security or collateral agent) to the structure. Using the concept of "collective action", this agent liaises with both sides of the table, organising and controlling the securities pledged or assigned for the benefit of the lenders or noteholders to secure full compliance for a loan or bond.
So far, so simple. But what happens when we started to add more parties, more jurisdictions, or more agents into the deal?
Complex debt deals and deals further down the credit curve usually require pledges by the borrower or issuer of all kinds of assets or securities; these are delivered as collateral such as shares, land, plant, machinery, bank accounts, receivables, trademarks and other assets permitted by each jurisdiction. Multinational companies often have business in multiple jurisdictions which can translate into the need to pledge collateral across multiple geographies, adding a level of complexity to the deal structure both in terms of local market dynamics (common law vs civil law; maturity of market) and which parties are able to accept and manage roles.
You may find some roles are not recognised by the markets or courts. For example, the role of trustee is not recognised in Brazil and the majority of civil law jurisdictions, and only a security agent role is required - though a global agent can combine mature market experience with local requirements to ensure the deal is compliant across all necessary jurisdictions.
Multi-jurisdictional deals and the importance of deal language
Yet the documentation that drives the deal forward can cause debates and confusion in cross-border deals. Let's say there is a debt deal combined with capital funding in New York, with collateral offered in Brazil. Here the collateral agent acts upon trustee or administrative agent instructions under New York law covering credit agreements or indenture, and for each type of security a document is created and signed by the collateral agent and the borrower/guarantor only. This structured deal has provisions and language regarding the transaction itself, including: lenders' and borrowers' obligations and deliverables; affirmative and negative covenants; fees, interest and principal schedule of payment, and so on. As the agent signs the transaction documents, it is common and standard to include language that accommodates all of the agent's protections, rights, duties and responsibilities before lenders and borrowers.
Needless to say, discussing the documents involved a complex deal with several types of lenders, banks, funds, branches and parent companies, all located in different jurisdictions, is stressful for counsels and transaction managers. At least agents find that the documents and clauses are market standard if they follow the LSTA, LMA and APLMA standards - but that's not guaranteed.
Global and cross-border agents require a standard language and set of terms to be widely accepted; this is the case in mature markets, providing a smooth closing and arguably improving and increasing liquidity in the secondary markets thanks to tried and tested legal concepts and clauses. The agent can then benefit from having the necessary protection without jeopardising its role as an independent party, acting only upon clear instructions even if they bring conflicts between lender and borrower.
Yellow flags in a non-mature market
Thanks to the common language and greater understanding in mature markets, it's not wrong to affirm that deals in mature markets tend to be less time-consuming - that common language streamlines communications. That's not the case in non-mature markets like Brazil, though. Here, if a deal is closing with local lenders and borrowers, our experience shows deal language can lead to lengthy discussions as exact meanings and responsibilities are debated. Even concepts widely accepted by foreign parties such as indemnification or the right to engage third-party advisors are not entirely accepted by local parties, often leading to a lot of debate exploring why such deal language exists and is required.
Taking Brazil as a prime example of a busy but non-mature capital market, we find there are a few scenarios that can raise flags locally when working on international and cross-border transactions. We'll look here at two very Brazilian issues, and one that is more common to the global markets.
Common to: global markets
Your agent will want to have as part of the deal language the option to resign from its role at its own discretion. This gives leeway in cases where there are compliance issues, a default on agency fees, an unforeseen added operational risk, a material adverse change, or even a high reputational risk. The agent shouldn't need to explain or state the reason for resignation, only to serve notice all deal parties informing them of the effective resignation date.
The agent should give the parties enough time in that resignation period to engage another agent, after which the resigned agent will be fully discharged of responsibility.
We find, however, that parties are unwilling to accept any wording that states the agent will be fully discharged of any responsibilities. If documentation does not have clear language that absolves the agent of responsibilities at the end of its notice period, it can become almost impossible for the agent to leave the deal. It means the agent is bound to the detail until the indeterminate time a successor is found.
Common to: Brazil markets
Agent role agreements usually require any costs and expenses incurred in connection with the performance of the agent's duties be fully reimbursed by the borrower; these can include notary costs, an attorney hired by the agent, or any other out-of-pocket expenses.
However, in Brazil the borrower frequently doesn't agree to reimburse the agent if they don't agree with the cost incurred. Sometimes the agent and borrower can, however, agree language that prevents the agent discharging its duties if it does not get funds in advance for each expense.
Common to: Brazil markets
These agreements also usually give the agent the right to consult legal counsel, independent accounts or any other expert of its own choice in order to protect the rights of the agent in the deal, but any fees incurred by the agent should be paid for by the company.
Commonly borrowers don't accept that language as they are worried about having to pay consultants' fees incurred by the agent, and yet the agent needs to have the flexibility to hiring anyone at their own discretion. To get around this, agents and borrowers can sometimes agree on a pre-approved list of consultants to be hired if needed, or on a market price cap that can give flexibility to the agent while remaining mindful of the borrowers' nerves.
Cross-border capital markets need cross-border expertise
Capital market transactions in non-mature markets can be complex due to a range of factors, not least is the language and concepts those in mature markets take for granted. Working with an expert partner that has experience across different market maturities and different deal roles can help you to navigate the challenges.
TMF Group is one of the largest independent providers of SPV management, agency and trust services for capital markets transactions around the world, providing integrated service delivery across multiple jurisdictions. Get in touch with our team where you are to see how we may support your needs.
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.