Security Trustee: How Lenders Share One Set of Security

Picture the alternative. Four lenders each take their own mortgage over the same property and their own charge over the company. Each registration needs a priority arrangement with the other three. Each lender can enforce on its own timetable, and the first to move may take more than its share. When one sells its loan, its security has to be transferred or discharged and taken again, with a fresh registration and sometimes a fresh question about priority.

A security trustee removes all of that. The borrower grants each security interest once, to the trustee, which holds it on trust for every finance party named in the documents. The lenders then rank equally behind one registration, act through one enforcing party, and share recoveries by formula rather than by speed. Because the trust is recognised in New Zealand, Australian and English law, the structure is common in syndicated and club lending in all three; where a law does not recognise the trust, deals use other devices, such as a parallel debt owed to the security agent.

The rules sit in a security trust deed, or in an intercreditor agreement where there are several classes of creditor. They commonly settle five things:

The trustee is registered as the secured party: the mortgagee on the land title, the secured party on the PPSR in New Zealand and Australia, the chargee at Companies House and, in England and Wales, at HM Land Registry. It is often the facility agent itself or an affiliate of it, or an independent professional trustee. The deed usually says it need act only on instructions and need not act until it is indemnified, and it limits the trustee's liability. How far that limit may go is a matter of law: in New Zealand, the Trusts Act lets a security trust exclude liability for the trustee's gross negligence but not for its dishonesty or wilful misconduct; in England, the trustee's statutory duty of care applies unless the deed excludes it. Its fee is paid by the borrower, like an agency fee.

A private hospital operator, constructed for this page like every figure in it, borrows a US$160m term loan from four lenders: Lender 1 holds US$50m, Lender 2 US$45m, Lender 3 US$40m and Lender 4 US$25m. Lenders 1 and 2 also provide the interest rate swaps that fix its rate. Mortgages over three hospitals, a general security agreement and guarantees from the subsidiaries are all granted to a security trustee. In this example's deed, lenders holding at least two-thirds of the loan instruct the trustee; the swap providers vote only after their swaps have been closed out. The terms are the example's.

In year two, Lender 4 sells its US$25m to a credit fund. The fund signs a transfer certificate and accedes to the security trust deed. Nothing is discharged or registered again; the trustee simply holds for a new beneficiary.

In year four, the operator defaults. Lenders 1 and 2 together hold US$95m, 59.4% of the loan, which is not enough to instruct enforcement on their own. With Lender 3 they hold US$135m, 84.4%, and they direct the trustee to appoint receivers. The swaps are closed out, owing US$5m to Lender 1 and US$3m to Lender 2. The hospitals are sold as going concerns. In US$m:

Every secured creditor recovers the same proportion, the fund that bought in at year two included, and none could have done better by enforcing first. The claims are principal and swap close-out amounts only; in a real file, interest and costs join them. The order is this deed's. Many deeds rank the trustee's costs first and then share equally as here; others give a revolving facility or a class of hedging priority, and those terms decide who is paid in full.

The two roles are often filled by the same institution, which is why they are confused. The facility agent runs the loan: it receives notices and payments from the borrower and passes them on, sets interest rates, collects compliance certificates and counts votes. It is the lenders' agent, with a largely mechanical role. The security trustee holds property, the security, for others, and in law it is a trustee rather than an agent. In a quiet year it does almost nothing. In a default it is the only party that can enforce the shared security.

It also differs from the intercreditor agreement, which is a contract about ranking: who is paid first, who may enforce, and when junior creditors must stand still. Where there is one class of lender, the security trust deed may be the whole of the arrangement; where there are senior and junior lenders, the intercreditor agreement usually tells the trustee whose instructions count.

DEFINED IN ONE PARAGRAPH → · MAJORITY LENDERS → · SYNDICATED LOAN →

For a lender joining a club or buying a share of a loan, the security trust deed is where the security's value to that lender is decided, because the lender does not hold the security itself. Its reader checks who the beneficiaries are, whether the instructing majority leaves it able to block or force enforcement, what the trustee may release without a vote, and where its claim sits in the waterfall. A hedge provider checks whether its close-out amount is secured equally with the loans and when it gets a vote.

For the borrower, the trustee is the single party that signs releases. When it sells an asset under a permitted disposal, the deed often authorises the trustee to release that asset without a lender vote, which turns a partial release into a mechanical step. Where the deed does not, the request goes to the lenders, and the instructing majority decides.

WHAT YOUR BANK HOLDS AS SECURITY → · CLUB FACILITY →