united states - lending & secured finance

Lending & Secured Finance: United States

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UNITED STATES

LENDING & SECURED FINANCE

1. Do foreign lenders require a

licence/regulatory approval to lend into

your jurisdiction or take the beneﬁt of

security over assets located in your

jurisdiction?

While there is no US federal regulatory framework

applicable to foreign non-bank lenders that are engaged

in commercial lending in the US, a few US states require

non-bank lenders to obtain a license prior to engaging in

commercial lending activities (i.e., lending activities

engaged in between corporate lenders and

corporate/institutional borrowers for business or

commercial purposes) under certain circumstances. The

commercial lending licensing requirements of some of

these states are generally triggered only when a

commercial loan is secured by real property located in

one of such states. However, in California, commercial

lending license requirements may be implicated

regardless of whether a commercial loan is secured by

real property located in the state. As such, California is

the state that is most often implicated in the commercial

lending context due to the broad scope of California’s

commercial lender licensing requirement. The US states

that may impose commercial lending licensing

requirements (unless an exemption from such licensing

requirements applies), generally include, but are not

limited to: California, Florida, Nevada, North Dakota,

South Dakota and Vermont.

While New York does have a commercial lending

licensing requirement, such requirement is only

applicable to business and commercial loans in a

principal amount of US$ 50,000 or less that also meet

other speciﬁed conditions.

2. Are there any laws or regulations

limiting the amount of interest that can be

charged by lenders?

Federal law does not regulate the amount of interest

that can be charged by lenders; instead usury laws are

primarily regulated and enforced at a state level. Such

usury limits typically take into consideration the size of

the loan, the type of loan and the nature of the lender or

issuing institution; for example, many states exclude

commercial loans from state laws regulating usury limits

to the extent such loan complies with certain conditions

such as the minimum threshold principal amount or the

purpose of such loan. State laws governing usury limits

also regulate the calculation of interest for the purposes

of determining compliance with such restrictions (in

particular, whether certain fees or other charges

incurred in connection with a loan should be treated as

interest and therefore subject to the usury limits).

3. Are there any laws or regulations

relating to the disbursement of foreign

currency loan proceeds into, or the

repayment of principal, interest or fees in

foreign currency from, your jurisdiction?

Federal law does not impose any restrictions or controls

on either the disbursement of loan proceeds in foreign

currencies or the payment of interest or fees (or

repayment of principal) in a foreign currency. Rather,

such restrictions will often depend on the ability of

individual lending institutions to provide loans in a

particular foreign currency or otherwise to receive

payments in such foreign currency. Lenders should take

into account federal sanctions and anti-money

laundering laws which require ﬁnancial institutions to

implement due diligence procedures with respect to

their customers to prevent the transfer of cash to certain

prohibited countries and persons.

4. Can security be taken over the following

types of asset: i. real property (land), plant

and machinery; ii. equipment; iii.

inventory; iv. receivables; and v. shares in

companies incorporated in your

jurisdiction.

In the US, a lien may be created over real property —

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land and improvements — by execution of a mortgage or

deed of trust, under the applicable state law where the

real property is located, and recordation of such

document in the county land records where the real

property is located. In the case of a deed of trust, the

trustee is an independent third party, often the title

company involved in the transaction or an individual

associated with the title company involved in the

transaction, that is granted legal title to the property and

whose primary responsibility is to sell the property at a

public auction if there is an event of default under the

loan which permits foreclosure of the lien of the deed of

trust. In the case of a mortgage, the secured party or its

agent would be the mortgagee. The creation and

enforcement of the security interest in real property is

governed by the law of the state where the property is

located so engagement of counsel in the jurisdiction

where the real property is located is important to ensure

the necessary local law requirements are included in the

security instrument.

Security interests in ﬁxtures attached to the real

property are governed by the Uniform Commercial Code

(UCC) in the jurisdiction where the ﬁxtures are located.

To perfect and ensure the priority of a security interest

in ﬁxtures, a ﬁxture ﬁnancing statement must be ﬁled in

the land records in the county where the property is

located. In nearly all jurisdictions, a mortgage/deed of

trust may act as a ﬁxture ﬁling if applicable provisions

are included in the mortgage/deed of trust. It is common

practice to rely on the mortgage/deed of trust as a

ﬁxture ﬁling in transactions where the real estate is not

the sole or primary collateral in lieu of ﬁling a separate

ﬁxture ﬁling.

To create a valid security interest in equipment,

inventory, receivables and shares in companies (as well

as the other categories of collateral governed by the

UCC, (i) a security provider (the grantor) must execute

or authenticate a written or electronic security

agreement that provides an adequate description of the

collateral, (ii) the grantor must have rights in the

collateral or the power to transfer such rights, and (iii)

value must be given. The security agreement is typically

governed by US law and is usually the law of the state

that governs the loan agreement, although the assets

intended to be covered by such security agreement may

be located outside of such state (it is uncommon for

security over US assets to be created under a foreign law

governed document as this might trigger issues with

enforceability and perfection).

A security interest in most types of collateral governed

by the UCC (including receivables, equipment and

inventory) generally may be perfected by the ﬁling of a

notice ﬁling under the UCC, referred to as a UCC

ﬁnancing statement. For debtors that are “registered

organizations” (which term includes most domestic

corporations, limited liability companies and limited

partnerships) the UCC ﬁnancing statement would be ﬁled

in the jurisdiction in which the grantor was formed,

although there are exceptions for certain entities and

certain collateral.

In addition, with respect to receivables, if the receivable

is evidenced by an instrument or chattel paper,

perfection by possession or control of the instrument or

chattel paper is preferable to perfection by a UCC

ﬁnancing statement as possession or control may entitle

the secured party to higher priority and protect the

secured party from third parties acquiring better rights

in the collateral (although it would be common to also

perfect by the ﬁling of a UCC ﬁnancing statement in

addition to perfection by possession or control). Certain

collateral such as accounts (basically receivables that

are not evidenced by an instrument or chattel paper)

and general intangibles (basically any intangible

collateral that does not fall into another UCC category)

may only be perfected by the ﬁling of a UCC ﬁnancing

statement.

Finally, with respect to shares in a company, the UCC

provides separate perfection rules for each of the three

methods by which a grantor may hold securities (i.e.

certiﬁcated securities, uncertiﬁcated securities or

through a securities account maintained by a ﬁnancial

institution referred to as a securities intermediary).

Perfection of a security interest in a certiﬁcated security

can be accomplished by either the ﬁling of a UCC

ﬁnancing statement or by the secured party taking

physical possession of the original share certiﬁcate

either directly or through an agent of the secured party.

Perfection of a security interest in uncertiﬁcated

securities and securities maintained in a securities

account can be accomplished by either the ﬁling of a

UCC ﬁnancing statement or by the secured party

obtaining control thereof (i.e., by entering into an

agreement whereby the issuer or securities intermediary

(as applicable) agrees that it will comply with the

transfer instructions originated by the secured party

without further consent by the grantor or, less

commonly, by registration of the shares or the securities

account in the name of the secured party). Generally, in

each of the foregoing methods, perfection by possession

or control is preferable to perfection by a UCC ﬁnancing

statement as this entitles the secured party to higher

priority and may protect the secured party from third

parties acquiring better rights in the collateral.

Pending revisions to the UCC will permit perfection by

control of digital assets such as cryptocurrencies and

NFTs as well as certain electronic accounts and payment

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intangibles that exist in controllable form.

5. Can a company that is incorporated in

your jurisdiction grant security over its

future assets or for future obligations?

Yes, a company incorporated in the US can grant

security over its after-acquired assets; this is achieved

by including express language in the security agreement

that the security interest will also apply to cover any

future assets acquired by the applicable company to the

extent such assets fall within the scope of the pledged

collateral. Upon the inclusion of such language, the

security interest will automatically attach to future

assets of the company, without the requirement for any

further action by such company. However, depending on

the type of asset involved, there may be certain

additional measures required to be performed by the

security provider in order to perfect the security interest

created over such after-acquired property. Note,

however, that any assets acquired after the ﬁling of a

petition for bankruptcy would be cut-oﬀ by applicable

bankruptcy law.

Similarly, a company incorporated in the US can also

grant security to secure future obligations by including

express language in the security agreement that the

secured obligations deﬁnition therein would also extend

to cover any obligations incurred after the date the

security agreement is originally entered into. To the

extent such future advances are reasonably identiﬁed

and determinable under the terms of the security

agreement as being secured obligations, the security

interest in the pledged collateral will automatically

secure any such future obligations.

6. Can a single security agreement be used

to take security over all of a company’s

assets or are separate agreements

required in relation to each type of asset?

Security interests in the US are commonly taken over

substantially all personal property assets (i.e. all assets

other than real property) in a single security agreement.

Such personal property assets may include general

intangibles, including contract rights and intellectual

property, accounts receivable, goods, including

equipment, movable assets and inventory, securities and

securities accounts, and cash deposits.

As noted above, interests in real property, whether

owned or leased, need to be addressed in a separate

mortgage or deed of trust enforceable under the state in

which such real property is located.

7. Are there any notarisation or

legalisation requirements in your

jurisdiction? If so, what is the process for

execution?

With respect to security agreements in respect of

personal property, state law does not generally have any

notarisation or legalisation requirements.

However, as noted in Question 4 above, the creation of

the security interest in real property is governed by the

law of the state where the property is located and each

state and certain counties have speciﬁc requirements to

be complied with as to the form of the security

instrument (including items such as required margins,

required cover pages or speciﬁc property information to

be included) as well as required or recommended

provisions, so engagement of state speciﬁc counsel in

the jurisdiction where the real property is located is

important to ensure the necessary local law

requirements are included in the security instrument. In

addition to any state speciﬁc provisions to ensure

compliance with statutory requirements of the applicable

state, each document must be executed by the property

owner, as mortgagor/trustor, and notarized by a notary

public in the state where the documents are being

executed, using the appropriate form of

acknowledgment. If the mortgage/deed of trust is being

signed outside the US, we recommend consulting with

the title company managing the recordation of the

security instrument to determine if an apostille or other

formalities are required in order to successfully submit

and record the document in the land records of the

relevant jurisdiction.

8. Are there any security registration

requirements in your jurisdiction?

See Question 4 above.

9. Are there any material costs that

lenders should be aware of when

structuring deals (for example, stamp duty

on security, notarial fees, registration

costs or any other charges or duties),

either at the outset or upon enforcement?

These material costs are primarily real estate related.

There are nominal recording fees for mortgages / deeds

of trust which vary by jurisdiction and depend on the

number of pages of the documents being recorded. In

addition, certain states impose a mortgage recording tax

on the amount secured by the mortgage/deed of trust. In

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those jurisdictions, the rate varies by state and by

city/county and is based on the applicable tax rate

multiplied by the secured amount of the mortgage. As an

example, the mortgage tax imposed on mortgages

secured by commercial properties in New York City is

currently 2.80% of the secured amount. On transactions

where the real estate collateral is only a portion of the

collateral package, to limit the amount of mortgage tax

that must be paid, lenders often agree to cap the

secured amount of the mortgage at a percentage of the

fair market value of the property, often ranging from

110-125% of the value at the time of the granting of the

mortgage, rather than securing the entire loan amount.

This formulation avoids paying mortgage tax on amounts

far exceeding the value of the property, but is intended

to provide lender protection over potential appreciation

of the property value during the term of the loan, as the

amount of mortgage tax paid will cap the recovery upon

a foreclosure unless additional mortgage tax is funded

on or prior to the time of foreclosure. It is important to

consult with counsel in the jurisdiction where the

property is located or a title company to determine the

amount of any applicable mortgage recording tax.

Although not required by law, it is customary for a lender

to require the borrower to deliver a lender’s title

insurance policy insuring the enforceability and priority

of the mortgage lien as well as a survey of the property.

The title policy insures the priority of the mortgage as of

the date of recording, subject only to the identiﬁed title

exceptions. The cost varies based on the location of the

property, as in some states the title insurance rates are

regulated whereas in other states they are negotiable.

However, the costs of title insurance and surveys are

typically paid by the borrower as part of the transaction

costs.

There are ﬁling costs for ﬁnancing statements and

intellectual property security interests, but these tend to

be ﬁxed fees and are nominal in relation to typical deal

sizes.

With respect to personal property, the State of

Tennessee is the only state that imposes material taxes

in connection with the ﬁling of UCC ﬁnancing

statements.

10. Can a company guarantee or secure the

obligations of another group company; are

there limitations in this regard?

Yes, in the US, guarantees fall into three categories,

namely (i) “downstream” guarantees whereby a parent

company guarantees the debt of its subsidiary, (ii)

“upstream” guarantees whereby a subsidiary

guarantees the debt of its parent entity, and (iii) “cross-

stream” guarantees whereby a subsidiary guarantees

the debt of a sister company. Hence, a company

incorporated in the US is generally permitted to

guarantee and secure the obligations of another group

member, subject to certain considerations and

limitations. In order to be enforceable, the guarantee will

need to comply with certain general principles such as

the receipt and suﬃciency of consideration and in some

states, the guarantee must be in writing and duly

executed by the guarantor in order to comply with the

Statute of Frauds. However, the guarantor does not need

to demonstrate direct corporate beneﬁt to the guarantor

in order to determine the suﬃciency of consideration

where such intercorporate guarantee that beneﬁts the

group as a whole. The corporate beneﬁt consideration

would also be relevant in insolvency proceedings,

speciﬁcally in determining whether such guarantee can

be challenged as a fraudulent transfer under the US

Bankruptcy Code (as discussed in Question 24 below).

11. Are there any restrictions against

providing security to support borrowings

incurred for the purposes of acquiring

shares: (i) of the company; (ii) of any

company which directly/indirectly owns

shares in the company; or (iii) in a related

company?

Generally, unlike in certain other jurisdictions, the US

does not have any restrictions on “ﬁnancial assistance”

that would prohibit providing guarantees or security to

support borrowings to ﬁnance the acquisition of a target

company (or its direct or indirect parent or any related

company). However, depending on the type of entity

being acquired or that is required to provide the

guarantee or security, there may be regulatory issues to

consider when the guarantee or security provider is a

specialized or regulated entity. Nevertheless, the

fraudulent transfer issues noted in Question 24 below

would also be relevant in a scenario where guarantees

and/or security are bring provided to support borrowings

to acquire the shares of another company and

accordingly, the applicable company and the lenders will

need to be comfortable with the solvency of the

guarantors and security providers prior to entering into

such guarantees and/or security (hence the loan

documentation will include a solvency representation to

this eﬀect).

12. Can lenders in a syndicate appoint a

trustee or agent to (i) hold security on the

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syndicate’s behalf, (ii) enforce the

syndicate’s rights under the loan

documentation and (iii) apply any

enforcement proceeds to the claims of all

lenders in the syndicate?

Yes, the lenders in a syndicate can and almost always do

appoint an agent to act on behalf of the lenders as a

whole. The agent will administer the loan and in this

capacity, the agent will hold security on behalf of the

syndicate, including to manage the enforcement of

collateral securing the loan and to apply any

enforcement proceeds towards satisfaction of the

obligations.

In terms of process, the syndicate will appoint the agent

to act as administrative and/or collateral agent in the

loan documentation thereby conferring upon the agent

the right to take various actions in respect of the

guarantee and collateral package on behalf of the

syndicate. The appointment of the agent will also

preclude the lenders in the syndicate from acting

directly in their individual capacities in respect of any

enforcement of the lenders’ rights, instead, they can

only do so by instructing the agent to take certain

actions on their behalf (and such instructions will

typically require majority lender consent). Pursuant to

the agency appointment, the guarantors and security

providers would provide the guarantees and grant

security solely in favor of the agent (acting on behalf of

all the lenders) . Given the expansive role of the agent,

when assuming the agency role, agents will typically

include in the loan documentation fulsome indemnity

provisions to protect their interests in carrying out this

agency function.

13. If your jurisdiction does not recognise

the role of an agent or trustee, are there

any other ways to achieve the same eﬀect

and avoid individual lenders having to

enforce their security separately?

N/A (See above).

14. Does withholding tax arise on (i)

payments of interest to domestic or

foreign lenders, or (ii) the proceeds of

enforcing security or claiming under a

guarantee?

The United States federal government generally imposes

a 30% withholding tax on interest paid to a non-US

lender on a debt obligation of a US person (and of

certain non-US persons engaged in a trade or business in

the US). For this purpose, payments with respect to any

original issue discount, if not otherwise considered less

than de minimis, are also treated as interest income and

subject to said withholding tax.

If the lender is qualiﬁed for the beneﬁts of an applicable

double taxation treaty between the United States and

the country in which a lender receiving interest is

resident, the aforementioned withholding tax may be

reduced or eliminated the relevant provisions of such

treaty.

Alternatively, a non-US lender may qualify for an

exemption from US federal withholding on interest under

the “portfolio interest exemption”. To qualify for the

portfolio interest exemption, the lender must not be a

controlled foreign corporation related to the borrower or

a bank receiving interest on an extension of credit

entered into in the ordinary course of its trade or

business; and the lender must not own (directly,

indirectly or by attribution) equity representing 10 per

cent or more of the total combined voting power of all

voting stock of the borrower (or, if the borrower is a

partnership, 10 per cent or more of capital or proﬁts

interest of the borrower). In addition, the portfolio

interest exemption is only available for debt that is in

“registered form” for US federal income tax purposes.

Portfolio interest does not apply to certain contingent

interest, such as interest determined by reference to any

receipts, sales, cash ﬂow, income or proﬁts of, or the

ﬂuctuation in value of property owned by, or dividends,

distributions or similar payments by, the borrower or a

related person.

In order to claim an exemption or reduction available

under an applicable double taxation treaty or the

portfolio interest exemption, the beneﬁcial owner of

interest must generally submit a properly completed IRS

Form W-8BEN-E (or, if an individual, IRS Form W-8BEN).

If interest paid to a non-US lender is eﬀectively

connected with such lender’s trade or business in the

United States, such interest will not be subject to US

federal withholding as long as such lender submits a

properly completed IRS Form W-8ECI, but will generally

be subject to net income tax in the United States and,

for foreign corporations, branch proﬁts taxes. Other

exemptions may be available for foreign governments or

governmental entities assuming they provide the

applicable properly completed IRS Form W-8EXP.

Additionally, withholding taxes may arise in other

circumstances, including the payment of amounts to a

US person that does not demonstrate exemption from

US backup withholding tax by providing an applicable

properly completed IRS Form W-9, the payment of US

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source interest and certain other amounts to entities

treated as “Foreign Financial Institutions” that are not

eligible for an exemption from FATCA withholding tax,

the payment of various fees (such as letter of credit

fees), modiﬁcations to debt obligations, and various

adjustments on debt obligations that are convertible into

stock.

Payments under a guarantee are generally treated

consistently with the discussion above, with the source

of payments for US federal income tax purposes

generally determined by reference to the residence of

the relevant borrower. If the lender is receiving proceeds

of security, such transaction may generally be treated as

a payment on the loan. Under certain circumstances, the

lender may be treated as the owner of the foreclosed

property, which may result in adverse tax consequences

(especially in the case of US real property held by a

foreign lender).

15. If payments of interest to foreign

lenders are generally subject to

withholding tax, what is the standard rate

and what is the minimum rate possible

under double taxation treaties?

The standard rate for regular withholding tax on interest

payments is 30%. If the interest payment is subject to

multiple withholding tax regimes (e.g., if both standard

withholding tax and FATCA withholding tax apply), the

maximum withholding tax rate nevertheless remains at

30%. Double taxation treaties may reduce the

withholding tax rates to as low as 0%.

16. Are there any other tax issues that

foreign lenders should be aware of when

lending into your jurisdiction?

If a foreign lender originates loans to US borrowers with

continuity and regularity, US government may consider

such person as engaged in a US trade or business, which

may in turn require the lender to ﬁle a US tax return and

pay income taxes on its income attributable to such

trade or business. Generally speaking, any activities that

can be considered secondary trading are exempted from

such rules, irrespective of continuity or regularity. As

such, foreign lenders should take care to limit the extent

and scope of their origination activities. If any foreign

lender that is engaged in extensive origination activity is

also qualiﬁed for the beneﬁts of a double taxation treaty

and does not have a permanent establishment in the

United States, the foreign lender may be protected

under the rules of such treaty.

17. Are there any tax incentives available

for foreign lenders lending into your

jurisdiction?

No, the United States does not currently provide tax

incentives for foreign lenders.

18. Is there a history in your jurisdiction of

ﬁnancing structures being challenged by

tax authorities, and if so, can you give

examples.

US federal government and other US tax authorities

regularly audit and make tax assessments on borrowers

and lenders to ensure compliance with the various rules

around deductibility of interest, withholding tax, income

tax rules and to ensure taxpayers do not utilize

structures that may result in tax avoidance.

As an example, US tax authorities may perceive certain

borrowing structures where a third party lender has lent

to a foreign borrower, which has in turn on-lent a

substantial portion of the loan proceeds to a US entity as

a US “conduit” arrangement that is put in place to avoid

US withholding tax. US tax authorities have challenged

such structures in court and also enacted anti-conduit

regulations. Parties to such transactions take care to

ensure the structure does not raise any concerns under

the aforementioned US conduit regulations.

19. Do the courts in your jurisdiction

generally give eﬀect to the choice of other

laws (in particular, English law) to govern

the terms of any agreement entered into

by a company incorporated in your

jurisdiction?

The courts in the US generally give eﬀect to the choice

of law (including English law) that the parties have

contractually agreed will govern, provided that such

choice of law bears a reasonable relation to the

transaction. However, such decisions will also depend on

various overriding considerations (such as the applicable

court determining that it has jurisdiction to resolve the

matter at hand or that the application of such choice of

foreign law would be not be contrary to public policy).

20. Do the courts in your jurisdiction

generally enforce the judgments of courts

in other jurisdictions and is your country a

member of The Convention on the

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Recognition and Enforcement of Foreign

Arbitral Awards?

Yes, the US is a party to the New York Convention on the

Recognition and Enforcement of Foreign Arbitral awards,

which has been incorporated as Chapter 2 of the Federal

Arbitration Act, 9 USC. § 200 et seq. The US is not a

party to any treaties for reciprocal recognition of foreign

judgments, hence foreign judgments are enforced

pursuant to the applicable state statutes, which

generally follow the Uniform Foreign Money-Judgments

Recognition Act, the Uniform Foreign-Country Money

Judgments Recognition Act, or common law principles of

international comity. Final and binding money judgments

that are enforceable in the country where they were

rendered are generally enforced.

21. What (brieﬂy) is the insolvency process

in your jurisdiction?

The Bankruptcy Code is the primary corporate

insolvency law in the US, which provides alternative

regimes for reorganization under chapter 11 or

liquidation under chapter 7. Each state also has statutes

that provide rules for of receivership or assignment for

the beneﬁt of creditors, which can vary substantially by

state.

Chapter 11 is a court-supervised process used to

restructure a company’s debts. Generally speaking, the

process is designed so that the company continues to

operate in the ordinary course, should emerge with a

stronger balance sheet, and management and the board

remain in control of operations, subject to court

oversight and the rights of parties in interest to be

heard. The company is characterized as a “debtor-in-

possession.” The goal of a chapter 11 is for the company

to develop a plan of reorganization with major

stakeholders to restructure its debts.

Chapter 7, as opposed to chapter 11, is a court-

supervised process used to liquidate a company in an

orderly manner. A chapter 7 bankruptcy case does not

involve the ﬁling of a plan of organization. Instead, a

bankruptcy trustee marshals and sells the debtor’s non-

exempt assets and uses the proceeds of such assets to

pay holders of claims in accordance with the provisions

of the Bankruptcy Code. Typically, secured creditors will

be paid from the value of their collateral, subject to the

potential to surcharge for the costs of preserving and

realizing the collateral.

22. What impact does the insolvency

process have on the ability of a lender to

enforce its rights as a secured party over

the security?

The ﬁling of a bankruptcy case under the Bankruptcy

Code will result in an automatic stay that prevents

lenders (and all creditors) from enforcing any security

without prior relief from the bankruptcy court. Relief

from the stay is available upon application and a

showing of cause, including based on the lack of

adequate protection of a lender’s interests in its

collateral. Lack of “adequate protection” means a lack of

security to protect against the diminution in value of the

secured lender’s collateral during the bankruptcy case –

(i.e., the debtor’s use/dissipation of that collateral). As

noted above, property acquired after the date of the

ﬁling of a bankruptcy petition is not subject to a secured

party’s after-acquired property provisions of its security

agreement and the security interest will not attach to

such property.

Secured lenders may be “undersecured” or

“oversecured” in a chapter 11 bankruptcy. An

oversecured creditor (i.e., value of creditor’s collateral

exceeds the amount of its debt) is entitled to interest,

fees, and related charges as part of its allowed secured

claim in a bankruptcy case – whereas an undersecured

creditor (i.e., value of creditor’s collateral does not

exceed the amount of its debt) is not.

In a chapter 11 bankruptcy, post-petition ﬁnancing (“DIP

ﬁnancing”) may be available, including on a basis that is

“priming” or senior to all prepetition liens. As with use of

cash collateral, a debtor is required to provide adequate

protection to the relevant secured lenders as a condition

to DIP ﬁnancing that is secured by liens that are senior

to or pari passu with the liens of such lenders, or obtain

the consent of such lenders.

23. Please comment on transactions

voidable upon insolvency.

The types of voidable or challengeable transactions upon

the ﬁling of a bankruptcy case include:

Preference: Transfers on account of ana.

antecedent debt made within the 90 days

prior to the bankruptcy ﬁling when the debtor

was insolvent are avoidable if they permit the

creditor to receive more than they would in a

hypothetical liquidation under chapter 7 of the

Bankruptcy Code. The 90 day period is

extended to one year for insiders. There are a

variety of statutory defences and safe

harbours to preference claims.

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Fraudulent Transfers: Transfers of an interestb.

in property of the debtor may be avoidable if

they are (a) made with actual intent to

defraud or deprive creditors of value or (b)

made (i) when the debtor is insolvent or that

render the debtor insolvent and (ii) for which

the debtor receives less than reasonably

equivalent value.

In addition to preference and fraudulentc.

transfer claims, the chapter 11 estates would

have the right to pursue any claims of the

debtor, including claims for breach of ﬁduciary

duty claims against directors and oﬃcers,

such as for approving of fraudulent transfers

(to the extent available under applicable law).

Proceeds of avoidance actions ared.

unencumbered assets available for unsecured

creditors. As a matter of practice, an

unsecured creditors committee will seek to

prevent a post-petition DIP lender, especially

one that is a prepetition secured creditor,

from obtaining DIP liens over avoidance

actions, and bankruptcy judges will often side

with the creditors committee on this point.

24. Is set oﬀ recognised on

insolvency?

Yes, the doctrine of setoﬀ is recognized in

bankruptcy cases generally speaking,

provided that there is a general prohibition

on the setoﬀ of prepetition claims against

post-petition obligations.

US federal bankruptcy law does not aﬀect a

creditor’s setoﬀ rights and does not create

a right of setoﬀ, but preserves rights of

setoﬀ that may exist under applicable non-

bankruptcy law. Therefore, any setoﬀ rights

between parties that exist under a contract

or under state law will continue to exist in a

bankruptcy.

25. Are there any statutory or

third party interests (such as

retention of title) that may take

priority over a secured lender’s

security in the event of an

insolvency

Yes, there can be statutory interests (or

third party interests) that may take priority

over a secured lender’s security in the

event of insolvency. The primary types of

statutory interests available in the United

States arise from state law that permits

liens for possessory creditors (e.g.,

warehouse lienor) or other statutory lien

claimants (e.g., mechanics, technicians,

materialmen, and repairmen) to assert liens

on property or equipment (i.e., secured

collateral) to secure payment of their

prepetition claims. The Bankruptcy Code

authorizes these types of lienors to perfect

their liens despite the automatic stay under

362 of the Bankruptcy Code. The priority of

these statutory interests is deﬁned by state

law. In some cases, the interests can be

deemed to have been perfected as of an

earlier date (e.g., the date a mechanic

started work) that can result in the

statutory interest taking priority over a

secured lender if the perfection of the

statutory interest is deemed to have

occurred earlier than perfection of the

secured lender’s interests.

26. Are there any impending

reforms in your jurisdiction which

will make lending into your

jurisdiction easier or harder for

foreign lenders?

Historically, non-US aﬃliates that are

treated as controlled foreign corporations

for US federal income tax purposes have

not provided guarantees to support the

debt obligations of a US borrower, because

such a guarantee would result in a deemed

dividend to its direct or indirect US

shareholders. In addition, to avoid such

deemed dividend, no assets of a controlled

foreign corporation have been pledged to

support the debt obligations of a US

borrower related to the controlled foreign

corporation, and only up to two-thirds of the

voting stock of a ﬁrst-tier controlled foreign

corporation would be pledged in support of

such debt obligations. A controlled foreign

corporation generally means a foreign

corporation that is directly or indirectly or

by attribution owned, in the aggregate, by

more than 50 per cent (based on vote or

value) by United States shareholders. A

United States shareholder in this context

means a shareholder that is a United States

person and owns at least 10 per cent of the

foreign corporation.

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The US tax reform at the end of 2017 and

subsequent guidance issued by the

Treasury, however, open possibilities for

obtaining credit support from a controlled

foreign corporation. More speciﬁcally,

Treasury Regulations issued in May 2019

eﬀectively turned oﬀ the deemed dividend

rule in respect of earnings of a foreign

subsidiary that is a controlled foreign

corporation when the foreign subsidiary

guarantees or provides certain pledges in

support of debt of a related US borrower

provided certain conditions are met.

These rules are expected to make lending

to the US for all lenders (including foreign

lenders) easier by expanding the available

foreign entity guarantee and other credit

support with respect to debt obligations of

US borrowers.

27. What proportion of the

lending provided to companies

consists of traditional bank debt

versus alternative credit

providers (including credit funds)

and/or capital markets, and do

you see any trends emerging in

your jurisdiction?

The US loan market has seen a signiﬁcant

uptick in the proportion of lending provided

to companies by alternative credit

providers (including private credit and

direct lending providers, investment funds,

specialty ﬁnance ﬁrms, hedge funds, CLOs

and business development companies).

Whilst traditional bank lenders still

generally dominate the market for larger,

broadly syndicated loan transactions and

indeed often arrange syndicated

transactions where the bulk of the debt

facility is provided by CLOs, borrowers have

increasingly turned to alternative credit

providers (including on larger scale

ﬁnancings) in the loan market to avail

themselves of the better pricing and deal

terms that alternative credit providers are

sometimes able to deliver (particularly for

better rated credits) in an increasingly

competitive market. We see direct lenders

able to provide sole underwrites or club

deals for large multi-billion dollar

transactions on terms that are competitive.

28. Please comment on external

factors causing changes to the

drafting of secured lending

documentation and the

structuring of such deals such as

(i) Brexit (ii) LIBOR transition

and/or (iii) COVID 19

With LIBOR scheduled to be phased out

completely by June 30, 2023, borrowers and

lenders have begun incorporating

alternative benchmark rates intended to

replace LIBOR in loan documentation in the

US. Many US lenders and borrowers are

using Term SOFR as the alternative

reference rate in new deals, with some

variety in the market with respect to the

applicable credit spread adjustments that

are used. For existing outstanding loans,

many US lenders and borrowers had

already adopted the hardwired fallback

recommended by the Alternative Reference

Rates Committee (ARRC) convened by the

Federal Reserve Bank of New York, which

provides that if LIBOR stops or is declared

to be non-representative, then the

replacement rate will be determined by

reference to a waterfall of choices

consisting of (i) the forward-looking term

Secured Overnight Financing Rate (SOFR)

plus the spread adjustment recommended

by the ARRC; or (ii) if such term SOFR rate

is not available, daily SOFR rates calculated

in arrears using simple interest for the

relevant interest period plus the spread

adjustment recommended by the ARRC.

Separately, recent loan documentation

have also generally been updated to

account for Brexit, particularly with respect

to the contractual recognition of bail-in

powers of EEA and non-EEA ﬁnancial

institutions. The updated bail-in language

now expressly refers to the bail-in powers

of UK ﬁnancial institutions (in addition to

EEA ﬁnancial institutions) and also features

recognition of the write down and

conversion powers under the UK’s bail-in

regime in respect of the in-scope liabilities

of UK ﬁnancial institutions entering into

non-UK law agreements.

Finally, the COVID-19 pandemic has also

triggered a number of changes to loan

documentation to address the economic

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impact of COVID-19 and the resulting

disruptions to businesses. In particular, the

material adverse eﬀect representation in

credit agreements has been heavily

negotiated between lenders and borrowers

to determine whether the impact of the

COVID-19 should be excluded from the

making of this representation. Another

consideration for borrowers is whether

COVID-19 related costs and expenses could

be categorized as an extraordinary, non-

recurring EBITDA addback in order to avoid

breaching ﬁnancial covenants as a result of

declining revenues. The continued

uncertainty surrounding the COVID-19

pandemic and its ongoing impact has made

it all the more important for US lenders and

borrowers to collaboratively strategize on

the best way to navigate these uncharted

waters.

Contributors

Daniel Seale

Partner

[email protected]

Alfred Xue

Partner

[email protected]

Nicole Fanjul

Partner

[email protected]

Preeta Paragash

Counsel

[email protected]