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Transaction guardians: Security agents in unitranche loan facilities

Transaction guardians: Security agents in unitranche loan facilities

Forming a key part of the loan and debt capital markets, Sinead McIntosh, Ocorian Associate Director - Product Development examines the role of a security agent in unitranche debt financing and identifies the benefits they provide to transacting parties.

Following the financial crisis, the leveraged buy-out market was brought to a grinding halt. Changes to the capital adequacy requirements simultaneously increased the amount of capital that had to be held against any loan, as well as increasing the term of a loan considered leveraged to greater than five years. Banks swiftly responded by withdrawing from the loan market and where they did remain, they reduced the length of all new loans to below the five year threshold, consequently reducing absolute amounts of liquidity available for transactions. The resulting excess demand was soon met by amongst others, alternative debt providers, direct lending funds and unitranche debt.

Unitranche debt, as the name suggests, is a single tranche loan blending senior and junior debt. Its popularity has surged over the last decade, largely because it offers borrowers flexible, covenant-lite financing documented in a single loan agreement, making the transaction cheaper and faster to execute than multi-tranche facilities. Typically, unitranche debt also features similar security packages to those lenders would expect to see in traditional leveraged facilities.

The security packages give lenders control over the borrower's assets, enabling them to take control and realise the assets if the borrower fails to repay the loan. Creating a security package in which each creditor has a financial interest, rather than granting separate security to each creditor, is considerably cheaper and more efficient. This is regardless of whether it is a simple or highly complex, multi-jurisdictional structure, not least because it allows for the transfer of interests between lenders without altering the underlying package. 

All interests in the security package are then held on trust by a security agent, who in accordance with the terms of the governing documentation, acts impartially from the borrower, protects creditor rights, can enforce security upon default and crucially, prevents individual creditors from accelerating independently and financially damaging the transaction and its parties. 

There are two key attributes to a security agent:

Impartiality - The security agent acts on behalf of the creditors as a collective group and that group needs the comfort that the security agent is not unduly influenced by any particular creditor or indeed the borrower. That comfort is best achieved by appointing an independent institution rather than an arm of one of the creditors, as used to be commonly seen in syndicated facilities.

Experience - The duties of the security agent are extensive and require experience of managing transactions through credit cycles, being in a position to utilise best practice, having market knowledge to navigate through the complex process of enforcement, and maintaining clarity on the risk profile of the transaction as the process progresses. The security agent should also have a track record of managing the complex relationships and differing commercial objectives of ad hoc creditor groups and, by using their market experience, will be able to work with those groups and the borrower to facilitate solutions even in the most contentious of situations.

Ocorian offers a full suite of trust and agency services to the loan and bond markets, including (but not limited to) security trustee/agent, facility agent, private placement paying agent, calculation agent and registrar. Learn more about our Loan Administration offering here.

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