Secured Lending Rates
Guaranteed interest on loansFurthermore, lending may be secured by the Credit Guarantee Association of Japan (a government body incorporated under the terms of the Credit Guarantee Association Act and intended to supplement or improve the lending of small and medium-sized enterprises) and by the borrower's commercial property (e.g. movable assets and receivables). In comparison to property-secured credits, however, such credits are still small.
Recently, the FSA identified issues with the Japan Region Finance Institution franchise models in the face of country-wide demographic contraction and credit markets contraction. The FSA's policy in its Strategic Guidelines and Priorities 2016-2017 was that one of the guidelines of the FSA was that banks, especially local banks, must shift their lending practice from lending that is too heavily reliant on the value of the borrower's securities and warranties to lending that is reliant on an appropriate evaluation of the borrower's prospective commercial opportunities.
Are secured loans a regular business in your jurisdictions? There are no special rules in Japan which only cover secured credit operations. Nevertheless, whether or not they offer secured credit, uncollateralised credit or both, cash lending operations are subject to several acts of Japan, such as the Banking Act, the Money Lending Business Act and the Interest Rate Restriction Act.
Is there a particular set of regulatorial questions that a potential lender should consider when agreeing or concluding a secured credit arrangement? Generally speaking, there are no particular regulative questions that a potential lender should consider before concluding a secured credit contract. Some provisions, however, limit a creditor to create a lien on his property according to the property he holds.
If, for example, a utility transports and distributes power and wants to use its capital as security, it must first report this to the responsible authorities in accordance with the German Power Industry Act. Moreover, it is not allowed for municipal authorities to make their management property available as security under the law on municipal autonomy.
Is there a particular set of regulatorial questions that a potential creditor should consider when agreeing or concluding a secured credit arrangement? It is also governed by a number of provisions of the Banking Act and the Lending of Funds Act. According to the MLA, a lending bank is forbidden to commit serious wrongdoing.
FSA points out in its extensive guidance on the prudential oversight of credit institution that if an entity improperly requests a creditor to furnish security or guarantees for a value significantly in excess of the amount of the credit, such a measure may be considered as serious wrongdoing under the Regulation. Which are the current suppliers of secured financing in your jurisdictions (e.g. global banking, domestic banking or non-banking)?
In Japan, secured finance is usually provided by national and multinational banking organizations and other legal lending entities. Does your legal system use customary commercial credit facilities for secured credit operations? In Japan, there is no customary collateralised credit line record.
Where the secured credit is a revolving credit facility that is exclusively a domestic operation, it is customary to use a Japan Syndication and Loan Trading Association issued type of revolving credit facility (not a secured credit facility) by amending it as necessary. Does your legal system typically have secured credit syndication arrangements?
Yes, secured credit syndications are standard in Japan, especially for projects. Usually one of the creditors under the credit contract (usually the arranged bank) is designated as the administrative agent for all creditors under the contract. For collateralised lending, a guarantor agency is also nominated, who is normally in charge of: the communications between the guarantor and the lender in relation to the securities; the distribution of the amount received in relation to the lien without the participation of the courts.
It is appropriate to lay down the rules concerning an administrative and protective agents under the credit agreement and any other arrangement relating to the interest in the securities in a manner consistent with those actions. In your jurisdictions, does the Act allow securities and warranties to be fiduciarily retained by a securities custodian for the account of the bank consortium?
According to the Fiduciary Act, the lien can be kept in a fiduciary capacity by a fiduciary in favour of the bank consortium. The Act does not, however, allow a fiduciary to be a guarantor in favour of the bank consortium. So far, there have not been many cases where securities funds have been used by bank consortia.
In the case of secured financial operations for SEVs (Special Purpose Vehicle, SPV), is it customary to use the funds to be funded for safekeeping? As a rule, would collateral be provided for the SPV units or would creditors demand immediate collateral? Nonetheless, the SPV is often used as a borrower to have the SPV retain the securitised or liquidated financial instruments in the case of structural or otherwise funded projects.
Where this is the case, a creditor usually requests that the SPV provides its interest as surety and provides immediate securities such as a mortgages or liens over the SPV's property. The interest is generally paid on the basis of customary floating interest rates. Under the Interest Limitation Act, the interest ceiling for a credit line depends on the amount of capital of the credit line, be it from a bank or another.
Although the ceiling itself is quite high (e.g. 15% per year if the nominal amount is 1 million or more), all payments made to the creditor in respect of the borrower's debt are considered "interest". Certain categories of facilities are subject to certain legal exceptions where the law's interest ceiling does not provide for such exceptions.
Do warranties apply in your jurisdictions? As a rule, warranties are used for credits to businesses. Specifically, managers of small or midsized businesses often become common and several sponsors for a credit to the business of this manager. As a rule, parents also make available guarantee facilities for lending to their affiliates. There are also cases where the operational business, which is a daughter undertaking of such a holding enterprise, provides a guarantee for such a credit in the case of credits to a so-called 'holding company'.
In addition, Japan provides pre-existing warranties. Guaranties arise when a surety and a creditor conclude a guaranty agreement. According to the Civil Code, a warranty agreement is null and void if it is not concluded in written form (Article 446(2)). According to the first paragraph of Section 465-2 of the Civil Code, the "revolving credit surety agreement" expires if the limit is not specified in the agreement (see our reply to the next question).
Does legislation influence or constrain the provision or enforcement of warranties in your jurisdictions (e.g., up-stream warranties)? Guaranty liabilities are formed at the time when the main liability arises and at the time when the main liability ends. In case the load of a warranty commitment is higher than the load of the main commitment, the load of the warranty commitment is lowered to the limitation of the main commitment (§ 448 BGB).
Warranty contracts are only effective if they are concluded in written form (Article 446(2) of the Civil Code). Paragraph 1 of Section 465-2 of the Civil Code stipulates that a "revolving credit surety agreement" has specific limitations and describes it as a surety agreement in which one or more non-identified commitments within a certain limit are the main one.
They must contain a commitment (i.e. a commitment arising from the transfer of debt or the acceptance of the discounted value of a negotiated instrument) under a committed commitment and the sponsor must be an identifiable entity. An agreement on a revolving credit surety only becomes valid once the ceiling has been fixed (Section 465-2 (2) BGB).
In the case of a credit agreement under a revolving credit facility, in the case that the date of the establishment of the main commitment under the credit agreement under the credit agreement under the revolving facility occurs or the reasons for the establishment of the capital of the main commitment under the credit agreement under the credit agreement under the credit agreement under the revolving facility arise, a surety shall thereafter take over the credit agreement under the credit agreement under the credit agreement under the revolving facility only for the specified amount of capital and its interest and default interest.
Reasons for the main decision shall include: where an application for enforcement or for the enforcement of a charge is made against the primary debtor or surety concerned; where the primary debtor or surety concerned has passed away. The amendment to the Civil Code, which is due to come into effect by June 2020, also changes the rules on warranties and tightens the rules on individual warranties.
According to the revised version of the Civil Code, a treaty on a revolving warranty made by an individual (i.e. a warranty treaty in which one or more non-identified liabilities to a certain extent are the main liability and in which a surety is not a legal person) which does not set a limit is null and void according to Article 465-2 of the Civil code.
In the case of surety agreements in which a credit commitment taken on for a company is the main commitment, or in the case of agreements on revolving sureties containing a credit taken on as part of the main commitment, the agreement only becomes valid when it announces its intent to fulfil the surety by means of a notarial document (§ 465-6 BGB).
If, however, the person is a pertinent debtor partner (e.g. a manager, executive or majority shareholder) who is a corporate body, he is not obliged to express his intent to fulfil the warranty in a notarial act (Articles 465-9). Outline the most commonly used ways to structure the priorities of debt and collateral.
While there is a way of concluding a deal between a creditor and a borrower to determine the priorities for repaying the debt, the performance of such deals is rare unless the credit is granted to a SPE. Often a credit is secured by pledging real estate or buildings.
These mortgages have a certain order of precedence, with the sales revenue from the execution being initially disbursed to older mortgagors with secured receivables. Possibility of assigning or changing the seniority of the mortgages. Is there any tax, stamping tax or other charge due when a credit, surety or interest is granted or enforced?
Between ¥200 and 600,000 stamps are stamped on loans based on the amount of the agreement if the amount is ¥10,000 or more. The ¥200 stamping tax is levied on credit guarantees. Agreements which establish or transfer a mortgage or agreements on the establishment or transfer of a lien are not subject to stamping tax.
In cases where, however, the agreement on the establishment of a mortgages contains a clause in which a creditor declares his willingness to transfer to the creditor a security related receivable (i.e., real estate or buildings encumbered with a mortgage) - for example, indemnification for the spoliation of real estate encumbered with a mortgages - a ¥200 postage tax is levied.
Even though no stamping taxes are levied on the execution of mortgages or the enforceability of liens, it is necessary to remit the RT for the installation enrolment (if enrolment is required) and a depositing and enrolment charge to the courts. It is more usual for it to be governed by domestic laws that regulate the conditions of the plant record, or is the laws of another jurisdication often chosen by the contracting party (e.g. British or New York law)?
Even though Japan's banking community prefers to have Japan courts as the applicable jurisdiction for cross-border financing, England's courts are in fact preferred for overseas financing while New York courts tend to choose New York courts if the deal is to be conducted in the United States. Is there any restriction on lending by or the provision of collateral or guarantee to non-resident creditors?
Apart from the fact that lending to banks and non-banks is governed by the Bankwesengesetz and the Geldkreditgesetz, there are no limitations on cross-border lending and the provision of collateral or guarantees. Is there any control on currency that restricts payment to a non-resident creditor under a securities instrument, bond or credit contract?
Whilst cross-border loans (more specifically, the lending operation between a company domiciled in Japan and a non-domiciled company) and guarantees between domiciled and non-domiciled companies are each described as "capital transactions" under the Foreign Exchange and Foreign Trade Act, cross-border lending operations (including the provision of collateral or guarantees in this context) are not restricted unless they concern a counterparty or a counterparty supporting terrorists.
It is possible to establish a collateral right over all of a company's financial instruments? Assuming so, would a lump-sum collateral arrangement be sufficient or is a lump-sum collateral arrangement necessary for each kind of financial instrument? In Japan, with the exception of a legal interest (e.g. a legal lien), a interest can only be established for each company's property; no interest can be established for all a company's property.
On the other hand, in practical terms it is possible to provide interests in almost all a company's financial instruments by providing several interests in each financial instrument. In particular, when a SPV is used as a debtor, creditors usually demand that they establish a number of interests in almost all of their property by concluding a number of securities arrangements with the SPV or a third parties.
How do you formalise the provision of securities for the most popular types of investment? Generally, the interest in the securities shall expire upon full settlement of the secured liability. Interests shall also be discharged if the applicable securities arrangement lapses or ends or if the respective counterparties decide to do so.
If an interest is cancelled or discharged, further measures must be taken to eliminate the enhanced nature of that interest, including: returning secured chattels to the pawner in the case of a lien received on chattels; deregistering mortgages recorded with the competent authorities.
Is it possible to provide securities for property? And if so, what are the most commonly used securities for property and what is the process? Yes, securities can be provided for properties. In Japan, a property mortage as surety for a credit is usual for secured credit operations.
In order to issue a hypothec, the hypothecary and the hypothecary must conclude a hypothecary deed. To enable the borrower to provide evidence of the origin and continued existence ofthe loan, the loan must be recorded with the competent authorities. Additionally to the off-the-shelf loans that can be established and recorded for a specified amount of a secured commitment, a so-called "revolving mortgage" may be established and recorded in Japan for current and prospective secured commitments up to a certain permissible limit specified in the relevant Understanding.
Is it possible to guarantee safety for machines and plants? And if so, what are the most usual types of collateral for this type of ownership and what is the process? Yes, in Japan safety can be provided for machines and plants. Frequently, a collateral mortgages or a lien is used in such cases.
To establish a security mortgages on machines and installations, the lender and the creditor must conclude a contract. So that the security right over real property creditor can provide evidence of the origin and existence of the security right over real property, the machines and facilities underlying the security right over real property must be assigned to the security right over real property creditor or the security right over real property must be recorded with the competent authorities.
In order, on the other it is necessary for the pledger and pawn creditor to conclude a contract of lien and to assign ownership of property in order to establish a lien on machines and plants. So that the pawn creditor can demonstrate the origin and existance of the pawn, he must keep the property's tangible ownership.
For a works mortgages to be created, the lender and the creditor must conclude a contract. So that the security right holder can provide evidence of the origin and the existence of a credit card, the proprietor of the plant (as creditor of the mortgage) must first record his property in the establishment of the plant in a plant establishment record.
Thereafter, the plant incorporation mortgages must be entered in the register of plant incorporation within six month of the date of registration of the title to the plant incorporation. Is it possible to provide collateral for claims? And if so, what are the most commonly used types of collateral for this type of asset and what is the process?
Yes, in Japan collateral can be provided for claims. Pledging or transfer by way of collateral is usual in this case. To establish a lien over claims, the pledger and the pawn creditor must conclude a contract of lien; to establish a lien over claims by way of cession, the transferor and the transferee must conclude a collateral arrangement by way of cession.
Evidence of the origin and presence of the pawn or surety may be furnished by the pawn creditor or transferee by means of one of the following procedures: notification to a pledgeor's or transferor's debtor of the origin and presence of the pawn or surety by means of transfer; recording of the pawn or surety by means of transfer with the competent authorities.
Is it possible to provide collateral for financing documents? And if so, what are the most commonly used types of collateral for this type of ownership and what is the process? A lien is the most commonly used type of collateral in determining the collateral value of securities, although collateral by way of transfer is also used.
Also, the necessary procedures differ, inter alia, according to the nature of the collateral, the nature of the financing instrument, whether the issuing entity is a private or a public entity. Thus, for example, when ordering a bond via bearer debentures or shares, not only the reciprocal arrangement but also the registering of the bond is necessary.
For physical collateral, instead of registering, it is necessary to deliver the goods. After entry in the share registry, a share certificate can be improved against third persons. Is it possible to provide collateral in the form of liquid assets? And if so, what are the most commonly used types of collateral for this type of ownership and what is the process?
Yes, but it is unusual because the previous approval of the custodian is usually necessary under the custodian arrangement between the depositee and that custodian institution. When providing collateral for liquid assets, a collateral is the most frequent type of collateral. Is it possible to provide certainty about IP?
And if so, what are the most commonly used types of collateral for this type of ownership and what is the process? Pledge as well as transfer by way of collateral are customary. Registering is necessary in additional to the reciprocal arrangement to provide legal certainty about patents and trademarks and to make sure that copyright and publication right certainty against third party is improved.
When determining license protection, the process varies according to the nature of the license and the right under license. Which are the joint trigger mechanisms for credit, guarantee and collateralisation? A number of foreclosure drivers exist, all of which have in common the fact that the debtor does not make the necessary payment on time; that the debtor violates the conditions of credit or collateral documentation, in particular those contained in such documentation concerning the expulsion of consortia of organized criminals; attachment of assets; the disappeared of the debtor or surety; and the opening of receivership or other liquidation for the debtor or surety.
Which are the most commonly used means of enforcing? Execution proceedings vary according to the type of instrument, the secured assets and the conditions of the collateral covenant. Creditors, however, often opt for a sales arrangement because the selling prices in a sales arrangement can be raised, which is not the case in a foreclosure transaction, although this requires the approval of the lender and other collateral takers.
Normally, in the case of a pledging and securing by cession, creditors can either pursue a court enforcement or obtain such a pledging or securing by cession through a covenant. Where the secured creditor is a custodian of the collateralised borrower's securities account, a set-off is usually used instead of exercise of the interest.
As a rule, in the event of the opening of liquidation or other liquidation procedure against the Mortgagor, the Mortgagor's property becomes the object of such liquidation procedure, but the secured receivables may also be asserted outside of such liquidation procedure (except in the case of reorganization procedure). When a secured lender owns a collateral right, it takes precedence over its secured asset and is eligible for a preference payment equal to the value of that secured asset.
A secured lender has the right to assert his right to protection even after the opening of bankruptcy procedures. In the transformation process of companies, however, the assertibility of the secured creditor's rights under the Transformation Act may be limited. Seniority among several secured lenders holding interests in the same secured asset shall be established on the basis of the seniority of the interests they have.
Insofar as the revenue from secured monies is not sufficient to settle the secured creditors' total debt, they shall be considered uncovered debtors in respect of the open debt. As a rule, uncollateralised creditor receivables from the bankrupt's assets are disbursed to the exclusion of the secured creditor's secured property and after deduction of certain expenditures such as bankruptcy fees, bankruptcy trustee fees and compensation for staff of the bankrupt enterprise.