Transfer by Novation – Impact on a Spanish Security Package

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Transfer by novation – impact on a Spanish security package

| by louisa watt, paulina spencer and beatriz causapé

he secondary debt market was traditionally linked to the It is essential to consider the transaction as a whole to ensure Toriginal syndication of large loans and the transfer by that all formalities required by the relevant law are complied banks of participations in such loans to the secondary market, with for the purposes of assigning to the buyer all the seller’s allowing them to divest some of their exposure. In the current rights – not only under the financing, but also under the secu- economic climate, however, there are few new primary deals rity package granted for the loan. and secondary trading is more commonly related to loans English law governed facility agreements usually provide where syndication has already been completed. Sellers are lenders with the ability to transfer a loan either by assignment motivated to limit their exposure to bad or doubtful debts and of rights and benefits or by novation of rights, benefits and risky assets. Buyers, on the other hand, see an opportunity obligations. A debt is a chose in action and an assignment to acquire a position at a discount to face value with the transfers the existing debt and replaces the current lender expectation that the borrower will either remain solvent and with a new lender without extinguishing the original contract. repay in full, or the loan will be repaid in part in the event of Contrast this with a novation, which essentially creates a new an insolvency. contract between three parties resulting in the existing debt This scenario, combined with the current lack of liquidity in being cancelled and a ‘new’ debt being created. Under Eng- the financial markets and the over-exposure of Spanish banks lish law, only the benefit of a claim to repayment of a loan to certain sectors such as real estate, has made Spain a coun- is assignable and it is not possible to assign an obligation to try of opportunity and speculation for investors. lend to a third party (“A debtor cannot relieve himself of his Par and distressed debt transactions in the European market liability to his creditor by assigning the burden of the obliga- are usually completed using the secondary trading documents tion to someone else; this can only be brought about by the published by the Loan Market Association, which are gov- consent of all three, and involves the release of the original erned by English law. However, the underlying credit docu- debtor”; Tollhurst v Associated Portland Cement Manufactur- ments may be subject to different laws. ers, 1900). As such, a transfer by way of novation is generally In particular, the security package is always subject to the preferred. For example, where party A is the borrower, B the borrower’s local law, as per the lex rei sitae principle, while transferor and C the transferee, novation results in B being English law frequently governs the financing agreement. In released from its obligations by A at the request of C, which these multi-jurisdictional legal structures, buyers should be is good consideration for C to assume the obligations to A. A extremely careful when formalising the transfer of the loan. new debt arises owed by C to A and the contract between A 8

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and B is discharged. and the security would need to be renewed. In practice this Where a facility is secured, under a typical English law syn- would require the obligors and the new lender to re-grant all dicated loan structure, the agreements will create the secu- the security interests before a notary ex novo. Formalities for rity interest in favour of a security trustee (called the security the renewal would need to be complied with, including re- agent) who has the power to enforce and distribute receipts to ceiving obligor consent and the consent of the other lenders the lenders. As the trustee has title to the security and is the (which may not be forthcoming). Novation also results in the beneficiary of the covenant to pay, transfers by novation or resetting of hardening periods to zero and notarial fees, regis- assignment do not impair the security package from an Eng- try costs and taxes would be payable. lish law perspective as the trustee holds the security and any Before buying any debt commitments and pricing a particu- payments it receives on trust for the lenders under the facility lar transaction, it is therefore highly important for debt buyers from time to time. to consider how the transfer will be legally implemented and The main disadvantage of the English law financing struc- assess whether the above formalities can be effectively met. ture is that from a Spanish law perspective the trust may not Although this sounds burdensome and expensive, the price a be recognised. Accessory security and security registered in new lender may have to pay if the Spanish security package is the name of the lenders must be held by the creditor directly not correctly transferred is much higher: being an unsecured or through an agent and not via a trustee. With an agency lender. arrangement, the lenders themselves are the beneficiaries of the covenant to pay, so a transfer by novation will release the Louisa Watt is a partner and Paulina Spencer is an transferor’s debt as well as the security and a new unsecured associate at Richards Kibbe & Orbe LLP, and Beatriz debt will arise in favour of the new lender. In contrast, a trans- Causapé is an associate at Cuatrecasas, Gonçalves Pereira. fer by assignment does not extinguish the original debt and Ms Watt can be contacted on +44 (0) 20 7382 4862 or by the security is preserved. email: [email protected]. Ms Spencer can be contacted on A transfer by novation therefore has potentially serious +44 (0)20 7382 4865 or by email: [email protected]. negative consequences from a Spanish law perspective, as it Ms Causapé can be contacted on +34 93 290 54 47 or by essentially discharges the original debt and security package email: [email protected].

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