Secured Loan ProgramGuaranteed loan programme
This at least hinders a fund's ability to decide when to call up funds and also carries the risks of a possible failure of a funds to meet its contract commitments, such as payment of the sale consideration on a trade, as it does not have the cash at its disposal. Some of the questions that creditors face in arranging these credits and some of the questions that funds manager should consider when arranging credit documentation are addressed in this paper.
It is very important for a investment bank to plan before negotiating an investment loan. Further as set out below, a Investment Facility Management Company (with the support of legal counsel) should, before finalising the organisational and other documentation of the Investment Facility, consider what action can be taken to assist a prospective Investment Loan Programme, taking into account any limitations or obstacles within the framework of suggested or current documentation or otherwise.
Investment credits are usually revolving credits to the funds secured by pledging the right of the funds to its shareholders to secure pledges of principal, which include the right to make call orders. Asset-raising requirements for shareholders are laid down in the fund's management vehicles, usually in a Kommanditvertrag ( "limited partner agreement") in which shareholders participate and in the subscriptions contracts concluded by each of them.
Those rules shall cover the amount of tie-up of each investor's share of the capital, the procedure for raising the funds, the authorised use of the funds, the date on which the funds are to be allocated, the data or conditions under which the funds may no longer be drawn on and the powers and redress available to the funds in the case of failure of an individual player.
Investment credits are mainly secured, revolving lines of credits with a maturity of between one and three years. In contrast to conventional secured credits for an operational business, where the security of such a loan consists of a wide variety of asset types (e.g. inventories, fixtures and fittings, IP, bank deposits and properties ), the security of investment credits to investment fund managers is often very small.
Principal security for investment credit is provided by the principal pledges of the fund's investor. Supplementary collaterals shall comprise the right of the Investment Manager to request, assert and obtain payment in connection with the principal commitment. Often the last item of security is a pledge on a bank balance to which the income from all withdrawals of principal is paid.
While it would be abnormal for a borrower under a principal call loan to have a pledge or right to the administration fee due to the asset management company, a borrower may request that the administration fee payments be subject to the redemption of the principal loan in the case of late payments.
It is important for the Investment Manager to consider diligently whether it should accept any assumption as this could adversely impact the Investment Manager's business, which includes the capacity to hire the Manager's specialists and other personnel and cover overheads. How a creditor would record and improve his pledge of securities to secure an investment loan is similar to the way a creditor would take action in relation to other kinds of secured lending.
Under the terms of the collateral pledge agreements, the Company and the general partner of the Company conclude a collateral contract under which they assign a pledge to the creditor in their individual interests under the Articles of Association and in their individual interests in the committed principal and principal payments of the Fund's shareholders.
The pledge, as stated above, also covers the right of the pool to a specific investment bank to which the principal is paid. Investment loan documents will essentially resemble a traditionally secured loan facilities. Several of the most important rules for an investment loan are the following:
Under many investment credit arrangements, the amount of credit granted (and outstanding) from period to period is determined on the basis of a certain percent of the unsecured equity committed by certain individual shareholders. Furthermore, in the case of unvalued shareholders, the prepayments could be linked to the net asset value of these shareholders.
It would also have concentrations so that the aggregated uncovered exposure of an individual borrower covered by the credit basis would not be allowed to excess more than a certain proportion of the total credit basis. Entitled investors/excluded investors. "Those occurrences shall be ( i) receivership or receivership, (ii) the investors fail to make a principal injection or default under the conditions of the Memorandum or Articles of Association, or (iii) the investors contest or declare their obligation to make a principal injection non-enforceable or reject all essential conditions of the Memorandum or Articles of Association.
Due date of the credits. Investment credits, as mentioned above, usually have a duration of between one and three years. In the creditor's view, the due date of an investment loan should be well before the end of the obligation cycle of the funds during which the asset managers may make principal call orders (usually 4 to 5 years, with certain exemptions such as follow-on investment or settlement of liabilities).
From time to time, the Company is obliged to make the following information available to the Lender: the amount of the uncovered principal commitment, the amount of the uncovered principal commitment, the credit baseline calculations and notifications of the events that make an investors "excluded".
" As a rule, the borrower requires a copy of each call for funds. The loan contract imposes certain limitations on the funds, which include, if the creditor does not agree, limitations on changes to the Umbrella Fund's assets and limitations on changes to the Umbrella Fund's assets that would be detrimental to the creditor.
Further joint limitations placed on the endowment loan agreements of the Company are (i) a ban on the distribution of income from investments to shareholders if an occurrence of delay has arisen or if there is a shortfall of funds or interest on the loan, and (ii) a ban on the right of the general partner to agree to the transfer of its privileges and the tie-up of funds by an investor if, after the effect of the general partner's right, there is an occurrence of delay or if the amount of the loan exceeds the amount of the loan, or if the creditor has not authorized the borrower.
As a rule, fiscal coupons are capped and can consist of a simple requirement of a certain amount of endowment (i.e. uncovered committed principal plus the net assets of the funds must exceed a certain multiples of the fund's overall debt). Much of the terms and condition for the conclusion of an investment loan contract will be based on those of another secured finance contract.
Among the special terms of an Investment Loan may be (i) the service to the Loanor of a blank demand directed to each Shareholder and subscribed by the General Partner and ( ii) a written communication from the General Partner to the Shareholder informing the Shareholder that the Funds have concluded a Loan Agreement with the Loanor and that the Equity Commitments will have been given as security for the Loan.
For a share purchase account, the Loan Drawdown Contract contains certain types of failure occurrences, such as (i) the occurence of occurrences under the Memorandum which would put an end to the right of the Company Secretary to draw down non-funded committed assets, (ii) the occurence of a "Key Person Event" in the organisational document, e.g.
deaths, resignations or resignations of certain members of the Management Company's staff and (iii) the retirement, resignations or dismissals of the Management Company without the nomination of a replacement who would be deemed suitable by the Creditor. Given that the onset of a delay may have adverse effects, such as the full speeding up of all arrears, the Investment Manager should consider whether certain suggested delay should instead only be an obstacle to further borrowing or advance payment to avoid triggering overdue provisioning under other arrangements.
A key person incident, for example, that does not lead to the right to call for uncovered funding being terminated could be exempted from the definitions of defaults. Appeal of the creditor. When a principal loan is in arrears, the Creditor has the typical right (i) to request the Investment Manager to (' ) provide call for principal from depositors to meet the principal loan amount in arrears, (ii) to identify depositors as'defaulting depositors' and (iii) to request the Investment Manager to directly enforce some or all of the sanctions and redress provided for in the Memorandum and Articles of Association against those depositors who fail to pay (including taking steps to recover the amount of the principal loan in arrears and interest and collections costs and/or take steps to recover the amount of the principal loan in arrears).
Creditors may also wish to have the right to pursue these legal proceedings directly and without the participation of the Investment Manager. For example, the security documentation often authorises the creditor to take these measures on behalf of the funds or the funds managers. Furthermore, it is not unusual for empty terminations to be executed by the funds managers and ultimately served on the lenders.
Nevertheless, the Investment Manager will wish to discuss restrictions that will allow the Creditor to exercise all the Investment Manager's powers against a defaulter investment. As an example, a unit trustee will usually want to retain full oversight over the sale of interest from a defaulted investor). Investment in a single investment company is customary if the investment company is organised and/or domiciled in several different jurisdiction, which may include overseas jurisdiction.
While it is important for a creditor to be able to collect funds from potential buyers after a failure, this can be a complex procedure if a reluctant overseas buyer is present. It is likely that the creditor would have to obtain a judgement against that sponsor from a judicial body in the jurisdictions in which the creditor is domiciled, and then the creditor would have to have that judgement recognised and enforceable in the jurisdictions in which the creditor is domiciled.
It is necessary to review the organisational documentation of the Company, the Memorandum of Association, each Underwriting Contract and all subsidiary certificates to make sure that there are no restrictions on the Company concluding the Investment Loan Agreements and mortgaging the unsecured Equity Pledges and related Pledges of Collateral Asset. In some cases, the organisational documentation of a funds limits the creditworthiness of the funds, with the exception of interim financings (e.g. an investment loan programme).
Where this is the case, the Fund's organisational documentation may also restrict the amount that can be raised, such as no more than 15-25% of the total committed amount. Furthermore, a creditor must certify that there are no set-off or counterclaim or defences to the call for funds, or under what conditions an investor has the right not to finance its tie-up of funds at a point in history when the creditor asserts its claims under the loan documentation.
One or more investor (s) may, for example, have contractually agreed privileges from the fund's organisational document (s) or accompanying letter(s) exempted from their obligation to make contributions of principal to certain sectors or to certain investment activities that give rise to certain fiscal aspects (e.g. non-related trade taxpayer return for exempted investors) or potentially ERISA issued (e.g. a forbidden operation for privately funded pensions).
Those privileges could have an impact on the credit basis. There is a period when a funds executive plans for an investment loan programme before and not after the creation of the funds. As an example, the Investment Fund Manager, in liaison with advice from a lawyer in the jurisdictions in which the investment funds are organised, should establish whether the investment funds have an intrinsic right under current legislation, or whether it is necessary to incorporate admission requirements in the organisational documentation (or in subscriptions entered into by investors) in order to do the following:
Borrowing; pledging of uncovered principal and the right of the Investment Company's Investment manager to make principal withdrawals; disclosure of information about the investor's finances and clients; ensuring the liabilities of the Fund's affiliates if a affiliate of the Investment Company will be the debtor and the Investment Company is obliged to ensure the liabilities of the affiliate.
In order to fulfil certain creditor contract conditions, special conditions may be necessary, such as the consent of the investor to make additional and/or regular adjustments to its finances and/or to acknowledge to the creditor that the creditor has been provided with a lien on its principal obligations. Consulting with the lawyer and one or two creditors prior to the completion of the funds document on what terms should be included in the funds document and what disclosure to the investor is necessary in this regard will assist the conclusion of these credit agreements.
Investment credit programmes can be a useful funding tool for corporate investment vehicles, as the growing prevalence shows. Planing for them as part of the funding build-up rather than after all funding documentation has been carved in pieces can make it easier to implement a programme on the best possible footing.