Secured Bridge LoanGuaranteed bridging loan
The customer alert emphasises certain specific regulatory and operational questions related to the provision of secured bridging credits to EM. Specifically, this alert concentrates on questions related to the matching of VC-granted bridging credits with current and prospective priority liabilities and the appropriate design of collateral arrangements. The majority of aspiring firms have unsecured priority secured credit facilities, usually provided by venturer banks (senior debt).
Provided no exemption is agreed, the documentation supporting the Senior Notes usually significantly limits the amount of other debts entered into. Each senior creditor should be considered diligently by the Company's attorney in relation to the conclusion of bridge loan agreements to establish whether any waiver or consent is called for. Specifically, most senior debit instruments do not allow other securities to be secured.
The senior bad credit lender typically waives this request on the understanding that the VC Bridge lender enters into a satisfying senior ranking arrangement that places the bridge loan deep below the senior bad one. Often senior creditors do not allow cashs under the bridge loan until the senior loan is fully paid.
Due to these limitations, the bridge loan can only be redeemed if the bridge loan is converted into participating interests of the debtor and the bridge loanors exercised this transformation facility. Importantly, subordinated arrangements often provide for "senior debt" to cover any senior debt funding so that the above limitations apply until the initial senior debt or a senior debt funding is fully settled.
Several senior debt creditors have allowed finite periodical interest rate repayments, but the standard was a total ban on all repayments. In addition, some senior debt creditors have requested that the equities into which the bridge loan is convertible should not be repayable in the form of liquidation. Since many first round capital injections allow for repayment in the form of liquid funds, the VC's attorney should examine the company's internal documentation thoroughly to determine whether limitations on liquid funds are practicable.
Senior debt creditors usually exist for several reason on these limitations on making liquidations. Firstly, the term of VC bridge loan is usually significantly less than the term of the senior loan and the senior loan providers do not want the firm to make large disbursements to the venture capitalists who finance the bridge loan before the senior loan is repaid.
Secondly, and above all, older borrowers have a tendency to regard bridge credits as a capital asset to the investee and not as another genuine leverage component. Therefore, the Senior Default Creditors anticipate an equity-like, full substitution between their senior loan and the bridge loan provided by VC. Secondly, the problem of obedience concerns the execution measures taken by VC creditors.
Within more traditionally subordinated arrangements between senior debt creditors and Junior creditors, Senior Creditors discuss certain limitations on the Senior Debt's capacity to limit the actions of Senior Creditors in the case of failure. If, for example, a failure does occur, senior debt creditors often receive only a certain number of business hours (90-180 as a rule) before they can take corrective actions.
However, senior debt providers have generally not allowed VC providers to be flexible in taking action against the debtor, regardless of how long a failure has occurred. Such is the case as senior debt providers have a tendency to consider VC bridge credits as capital investment and capital has no such right.
Consequently, the VC lenders' capacity to take all necessary measures to enforce the loan, even if there is a failure under the bridging loan, usually comes to an indefinite halt. In order to avoid unpleasant situations on these front lines, VC Bridge creditors need to be conscious that their credit is likely to fall well below the senior debt level.
Guarantee covenants for most secured bridge credits are usually defined in a guarantee arrangement between the venture capital firms that provide the bridge credit as the secured party and the entity as the obligor. Bridging loan collaterals concluded by VC contain several individual questions. Most bridge longterm debt, for example, is financed by several venture capital firms.
The question arises as to how measures under safety agreements, as well as the exercise of legal redress, can be coordinated between CVCs. If the credit scenario were quite common, one creditor would act as an agency for other creditors. However, venture capitalists usually do not have the expertise (including back-office skills) to accomplish such a work.
Otherwise it is not clear whether legal redress can only be provided by consensus of all VC bridge creditors or by a single VC bridge creditor, even if it finances only a minimum amount of the bridge loan. However, coordination by various venture capital firms poses the second most frequent issue - the establishment of an appropriate tuning level, in particular to report a missed occurrence and take corrective action.
In contrast to traditional VCs, one or more of the bridge loan providers often have a control capital exposure within the firm. Negotiating the threshold for exercising the right to vote is thus made more difficult, as a VC in control can enforce (or not enforce) legal redress against the will of minorities DCs. Although the submission of UCC financial reports is not an inconvenience for the protection of perfectly good safety interests, two points should be considered here.
Firstly, the UCC financial reports must take into consideration the large number of secured counterparties and must properly identify those counterparties in the financial reports. Second, since there is often not a VC that acts as an agency and the venture capitalists themselves are often not legally advised, there is no clear legal advice to the lender that submits the first UCC financial reports and, if necessary, submits UCC financial reports.
Bridge financiers provided by VC should address these questions and consult with their investee and its advisors. Finally, there is the question of what securities should be provided to safeguard the bridging loan provided by VC. Venture capitalists often anticipate that the guarantee will provide coverage for all asset values. Firstly, the senior debt securities exposure often does not encompass all asset classes and precludes IP.
Under the assumption that the senior debt financiers accept that the bridge loan can be secured in the first place (which they do regularly), the senior debt financiers will not accept that the collateral arrangement for the VC bridge lender includes IP or other proprietary rights not contained in the collateral arrangement for the senior debt lender.
Secondly, even if there is no senior debt pending, there may be extra cost of searching for and perfecting an IP collateral that the firm and its VC investor should consider and debate with their attorney.