Lending for the Private Rented Sector (PRS) seminar

We had a great turnout on Thursday morning for the Lending for the Private Rented Sector (PRS) seminar at our London offices. We had over 60 external attendees, with clients from RBS, Savills, Barclays, Capita Asset Services, Lloyds Banking Group, and Wells Fargo. Presenters included Francisca Sepulveda of Reed Smith, George Cotterell of Venn Partners, Gareth Blacker of the Homes and Communities Agency (HCA), Sharon Quinlan of Barclays, and Tom Stenhouse of Patrizia UK.

Discussion centred on the healthy interest in the PRS market from established developers as well as new entrants to the market; with some commercial developers showing interest in this sector. It was discussed how lenders do remain cautious due to scarce historic information available to fully understand the risks; particularly in the transition phase between PC and a site being fully or near-fully let. In addition, the length of development time for a PRS scheme is a barrier to a number of lenders in the market. To combat these risks, quality sites, developers and investors with a track record are crucial.

HCA spoke about how they provide a flexible package of assistance for infrastructure development; ranging from the letter of comfort scheme, operated by Venn Partners, to providing mezzanine and infrastructure finance. It was noted that HCA mezzanine finance is not intended to compete against the mezzanine lenders in the market, but rather assist where the mezzanine slice would not reach a high enough yield (among other factors). Once fully or near-fully let, a PRS facility operates in the same way as the other residential deals that lenders have been acquainted with for some time.

For more information on this seminar, please contact Louise Coleman.

Basel III imposes new rules for HVCRE

Basel III regulations governing high volatility commercial real estate (HVCRE) went into effect. The HVCRE rules require lenders to assign a higher risk weighting to loans for the acquisition, development or construction (ADC) of commercial real estate.

For more information, please check out the following articles on the Real Estate Legal Update blog:

New York’s Revised UCC – Winds of Change (Part 2 of 2)

In this second and last part of this series (click here for Part 1) we discuss the changes to Article 9 (Secured Transactions) of the Uniform Commercial Code of the State of New York (the “NYUCC”), as recently amended by Chapter 505 of the New York Assembly Session Laws of 2014 (the “Act”) and the pitfalls to beware of given differences between the NYUCC, as amended, and those recommended amendments by the National Commissioners on Uniform State Laws (“NCCUSL”) and the American Law Institute (“ALI”).

NYUCC Article 9 (Secured Transactions)

As revised, Article 9 prescribes new requirements for NYUCC financing statements with respect to individual debtors, certain business trusts, decedent’s estates and trusts.

The most important concern that arises for creditors is whether the Act invalidates filed financing statements naming individual debtors. This is because the Act fails to adopt the detailed set of transition rules contained in the 2010 amendments (the “proposed amendments”) promulgated by NCCUSL and ALI. As a result, debtors and creditors should be aware of the new provisions as they may need to:

  • revise their forms of UCC-1 statement and procedures for NYUCC filings;
  • amend pre-existing UCC-1 financing statements;
  • revise collateral documentation; and
  • understand how the differences between the NYUCC as revised and the Uniform Commercial Code as in effect in other states can impact the creation and perfection of security interests when the governing law is not that of the NYUCC.

Collateral Documentation

The Act provides for additional methods of obtaining control of a deposit account. Accordingly, a secured party can achieve control:

  • through an agent;
  • by the acknowledgement that a party already in control holds for its benefit;
  • by listing its name on the account; or
  • by indicating in the name on the account that she holds a security interest.

As a result, parties to secured transactions and their counsel may need to revise their forms of security agreements granting security over cash deposits, to provide that perfection of security by control can arise through a contractual relationship with another party gaining or previously having control over the deposit account.

Further, the Act adopts a non-uniform provision, modelled after the Uniform Commercial Code as in effect in the State of Delaware, providing that a secured party shall be deemed to have control over a deposit account, even if the depository bank’s obligation to comply with instructions from the secured party under the relevant deposit account control agreement is subject to conditions set by said depository bank, as long as such conditions do not include the requirement of further consents from the debtor. Parties should be aware that provisions in deposit account control agreements reflecting this change may not be effective in transactions where the cash collateral is not governed by the NYUCC however, as such revisions are not in effect in several other states.

UCC-1 Financing Statements

The Act adopts certain important revisions with respect to naming individual debtors and registered entity debtors on UCC-1 financing statements. However, it does not adopt uniform revisions eliminating some requirements with respect to the form of the UCC-1 financing statements to be filed, even though such revisions are in effect in most other states.

Naming Individual Debtors

In regard to sufficiency of an individual debtor’s name as set out in Article 9 Section 503(a)(4), the Act adopts the Alternative A “Only If” approach suggested by the proposed amendments. This means that the name used for an individual on a financing statement must now reflect the name set forth in her current driver’s license.

Naming Registered Entity Debtors

With respect to debtors that are organizations, the Act retains the requirement that the financing statement provide the type of organization and jurisdiction of organization for such debtor.

Prior to the amendments, Article 9, provided that the correct name of a registered entity was “the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization which shows the debtor to have been organized.” As a result, problems had arisen with respect to the definition of the term “public record” since certain entities often file various documents publicly.

The Act addresses the issue of the exact source for determining the correct name of a debtor that is a registered entity by: a) setting forth a new definition designed to determine what constitutes a “public organic record” and b) setting forth which public organic record controls when there is more than one such record. Further, the Act clarifies that the definition of “registered organization” includes statutory trusts. The amendments further clarified that good standing certificates, which are not records filed by the relevant entity, are not “public organic records” for the purpose of determining the name to be used in the UCC-1 filing.

Form of Financing Statement

The Act does not incorporate the language of the proposed amendments with regard to Section 9-516 of Article 9, which removes the requirement to include the organizational type, jurisdiction of organization and state issued identification number of the debtor from the form of UCC-1 to be filed in New York State. In contrast, almost all other states have adopted this revision and are currently accepting the new form UCC-1 that omits this information. As a result, parties to secured transactions should ensure that they file the correct form of UCC-1, as New York is one of the states that will not accept the new form UCC-1.

Is my financing statement still effective?

The proposed amendments provided for a delayed effective date to allow parties in secured transactions to adjust their practices to the new requirements. A second important feature of the proposed amendments is that they provided for a five year grace period during which secured parties would have the opportunity to revise pre-amendment filings and satisfy the new debtor name requirements, after which the old financing statements would be automatically invalidated. However, the Act contains no such provision; neither does it clarify the effective date for the amendments introduced.

The Act simply provides that it “shall take effect immediately and shall apply to transactions entered into after such date”. Whether that means that the Act applies to the pre-amendment transactions (as suggested by the “immediately” prong) or not (as suggested by the “ transactions entered into after such date” prong) is yet to be seen. And, with no legislative guidance on the matter, the Act has left the legal community in disagreement.

So, secured parties are legitimately concerned as to whether their preexisting financing statements are still effective.

To prevent further headaches, it seems wise for parties in pre-existing secured transactions to amend financing statements if these are found inadequate to fulfill the requirements of the revised Article 9. For example, a pre-existing financing statement using a different human name would have to be revised to reflect the name of the debtor shown on her driver’s license. And, to preserve any perfection that depends on the pre-amendment name, parties should rather add the new name in the “new debtor” box than file a name amendment.


New York’s Revised UCC – Winds of Change (Part 1 of 2)

New York is the jurisdiction of choice for a majority of international and interstate financial transactions. Thus, lending lawyers and their clients should pay special attention to Chapter 505 of the New York Assembly Session Laws of 2014 (the “Act”), which amends the Uniform Commercial Code of the State of New York (the “NYUCC”).

Over the past decade, various scholars and practicing attorneys had expressed concerns that the NYUCC was outdated.

In response to such concerns, the Act constitutes a significant modernization of the NYUCC. Nonetheless, the Act fails to completely modernize the NYUCC, as it does not fully adopt the 2010 amendments to Article 9 (Secured Transactions) (the “proposed amendments”) promulgated by the National Commissioners on Uniform State Laws and the American Law Institute. Instead, it contains significant non-uniform departures from the official text of the proposed amendments.

Moreover, to this date, New York remains the only state that has not adopted the 1990 amendments to Article 3 (Negotiable Instruments) and Article 4 (Bank Deposits and Collections). This creates confusion and differences in statutory procedures among different states. Practitioners and clients should be aware of these differences.

This post sets forth the changes to Article 1 (General Provisions), Article 7 (Documents of Title) and Article 8 (Investment Securities) of the NYUCC. Stay tuned for the second part in this series that will address the changes to Article 9 (Secured Transactions) and the problems arising out of the failure to adopt the transition provisions that have been adopted by other states.

NYUCC Article 1 (General Provisions)

Article 1 contains general rules of applicability and defined terms for transactions governed by the NYUCC. It is worth noting that, since the Act renumbers various sections of the NYUCC, certain loan opinion letters and transaction documents may need to be revised to reflect these changes.

  • The Act retains the prior subjective “honesty in fact” definition of good faith (known as the “good heart / empty head” standard) instead of adopting the objective definition of good faith that calls for both “honesty in fact” and “observance of reasonable commercial standards of fair dealing”. Even though most NYUCC provisions, as revised, contain their own definitions of “good faith”, this choice means that the subjective good faith test still applies with respect to Articles 3 and 4, since New York retains the older versions of these Articles;
  • With respect to the concept of reservation of rights with regard to performance or acceptance of contract terms, Section 1-308 of the NYUCC retains the old reservation of rights language, which means that the old accord and satisfaction law remains in effect; and
  • The Act excludes rare coins from the definition of “money” in order to facilitate the perfection of security interests in rare coins collections and inventory.

NYUCC Article 7 (Documents of Title)

Article 7 (Documents of Title) governs documents of title, such as bills of lading and warehouse receipts, which evidence the right to goods in transit or storage. While documents have traditionally been issued in paper form, the digitalization of commerce has led to the creation of various forms of electronic documents. Reflecting this change, the Act introduces a category of documents named “electronic documents.”

The conforming amendments to Article 9 provide that perfection in an electronic document can be achieved by control. The test to establish such “control” is set forth as follows:

a “person has control […] if a system employed for evidencing the transfer of interests in the electronic document reliably establishes that person as the person to which the electronic document was issued or transferred.”


The Act further enumerates a list of criteria which establish “control”. A more detailed discussion on control issues will follow in Part 2 of this series.

NYUCC Article 8 (Investment Securities)

The Act amends Article 8 to overrule the controversial ruling of the New York State Court of Appeals in Highland Capital Management LP v. Schneider, 8. N.Y. 3d (N.Y. App. 2007).

In Highland, the court held that promissory notes not traded on an exchange could, in certain circumstances, constitute securities under Article 8 rather than instruments under Article 3. The court reasoned that since the definition of “security” under Article 8 Section 102(a)(15) includes interest in an issuer or its property “the transfer of which may be registered upon books maintained for that purpose, by or on behalf of the issuer,” and since in that case the maker could maintain such a registry, then the notes would be considered “securities.”

To resolve this issue, the Act clarifies that an interest in an issuer is not a security under Article 8 merely because the issuer maintains records other than for registration of transfer or could but does not in fact maintain books for registering transfers.

The Not-So-Remote Possibility of the Bankruptcy of a Bankruptcy Remote Entity

A bankruptcy remote entity is a special-purpose vehicle (or special purpose entity) (“SPV”) that is formed to hold a defined group of assets and to protect them from being administered as property of a bankruptcy estate. See Paloian v. LaSalle Bank Nat’l Assn (In re Doctors Hospital of Hyde Park, Inc.), 507 B.R. 558, 701, 702 (N.D. Ill. 2013). Bankruptcy remote entities are intended to separate the credit quality of assets upon which financing is based from the credit and bankruptcy risks of the entities involved in the financing. See id. However, “bankruptcy remote “does not necessarily mean “bankruptcy proof.” Lenders should recognize the bankruptcy risks that cannot be eliminated, even if the borrower is bankruptcy remote entities.

Bankruptcy Remote Entities

To achieve bankruptcy remote status, the borrower must be legally separate from all affiliated entities. Id. Amongst other things, the borrower should have its own organizational documents, maintain all corporate formalities, maintain separate books and records, maintain separate accounts, prepare separate financial statements, avoid commingling of its assets with those of any other person, act solely in its own corporate name and through its own officers and agents, and conduct only arm-length transactions with affiliated entities. Id. The SPV should also be prohibited from incurring debt or other obligations, and limited in its purpose and the activities in which it may engage. The SPV’s sole asset is frequently the property securing a loan or debt obligation and its sole purpose should be to own and manage that property. The corporate documents may also attempt to create impediments to a bankruptcy filing. For example, they may impose limitations on the directors ability to authorize a bankruptcy filing. These restrictions reduce (but do not eliminate) the risk that the SPV will file for bankruptcy, be forced into bankruptcy, or otherwise be adversely affected by a bankruptcy of its affiliates. Continue Reading

Revised Pennsylvania Statute Creates Power of Attorney Chaos

The Pennsylvania Legislature enacted extensive changes to Title 56 of the Decedents, Estates and Fiduciaries Code affecting powers of attorney, effective as of January 1, 2015. The amendments create a number of issues for creditors in commercial transactions and individuals and businesses engaging in the transfer of equity interests, bonds or other assets of a business.

The general rules applicable to execution of a power of attorney require, in part, that the power of attorney be acknowledged before a notary and witnessed by two individuals older than eighteen years of age. Prior to the recent amendments, Title 56 exempted from the notary acknowledgement and witness requirements certain transactions including:

  • powers granted to or for the benefit of creditors in commercial transactions,
  • a power granted for the sole purpose of facilitating the transfer of stock, bonds or other assets,
  • a power contained in a governing document for a corporation, partnership, limited liability company or other legal entity by which a director, partner or member authorizes another to do things on behalf of the entity; and
  • a warrant of attorney to confess judgment.

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Dead Hand Provisions: A Lesson for Lenders from the Delaware Chancery Court

In Pontiac General Employees Retirement System v. Ballantine, et al., the Delaware Chancery Court refused to dismiss a claim against a lender for aiding and abetting a breach of fiduciary duty by the borrower’s directors. The claim was based on a “dead hand proxy put” provision in the credit agreement, which defined “continuing directors” – for purposes of determining whether there had been “change in control” – to exclude any director nominated in connection with, or as a result of, a dissident-proxy challenge (actual or threatened), even if the then-current directors ultimately approved their appointment.

The court rejected the Lender’s argument that it did not “knowingly participate” in the alleged breach because the credit agreement was negotiated at “arm’s-length”. The court stated that:

[W]hen you are an arm’s-length contractual counterparty, you are permitted, and the law allows you, to negotiate for the best deal that you can get. What it doesn’t allow you to do is to propose terms, insist on terms, demand terms, contemplate terms, incorporate terms that take advantage of a conflict of interest that the fiduciary counterparts on the other side of the negotiating table face.

The court also stated its prior opinions were sufficient to put the lender “on notice” that such provisions were “highly suspect and could potentially lead to a breach of duty on the part of” a borrower’s directors.

In light of this recent development, administrative agents and lenders need to reconsider the legal risk in incorporating these types of change of control provisions in new facilities and when amending, modifying or joining any existing facility.

Alternative Investment Vehicles & Subscription Facilities: A look at Protecting Lenders’ Collateral

Private funds often seek subscription facilities for short term bridging of capital calls in order to, among other things, avoid the need to call capital in advance of closing an investment and backstop late capital call proceeds from the fund’s limited partners.  As collateral, lenders providing such facilities receive a security interest in investors’ capital commitments, capital contributions and the general partner’s right to make capital calls on the investors and enforce payment thereof. 

A common issue for lenders arises when a fund creates Alternative Investment Vehicles (“AIVs”).  In this instance, capital can be called from investors by a general partner of the AIV to finance investments, regardless of whether the AIV is a borrower or whether the investment is financed with proceeds of the subscription facility or not.  Two primary market approaches have developed to protect the lender’s security interest in this instance:

  1. Incurrence and Maintenance Covenants.  The first approach is to require that a borrowing base test be satisfied at the time of making a loan (“incurrence”) as well as at all times the loan is outstanding (“maintenance”).  The ratio for the financial test is set at an amount derived from the lender’s internal financial models to ensure sufficient collateral coverage; the level of risk associated with this ratio may also affect pricing for the transaction.  The ratio should be set at the level at which the lender is no longer comfortable that the commitments will be sufficient to repay the loans in full.
  2. Require all existing and future AIVs to become Borrowers.  Under the second approach, all AIVs are joined as borrowers (and any future AIVs are required to become borrowers).  Each AIV-borrower is severally liable for the amounts it borrows, and each AIV pledges to the lender the account into which the proceeds of the capital calls will be remitted and the general partner pledges its rights and remedies with respect of such call capital.

Although the second approach is often appealing to lenders, it will include additional time and financial expenses for later AIVs formed.  Moreover, this option still allows an AIV-borrower to call capital, diminishing the total unfunded capital commitments, for investments not financed with loan proceeds (but funded with the cash from the capital call itself).  Because of the several nature of the loans, having an AIV as a borrower does not allow the lender to call capital of that AIV to pay loans of other borrowers – rather, only to repay loans made to the particular AIV.  If the AIV borrows no funds, no capital call of its investors would be made to repay the loans. 

For these reasons, the general protections for a lender making a subscription facility available to a private fund are the incurrence and maintenance covenants described above.  As a business matter, the lender should ensure the ratios of those covenants provide sufficient collateralization of loans to be made under the facility, such that even if unpaid capital were called for non-loan purposes, there is still sufficient collateral remaining to proceed against.  Although joining all AIVs as borrowers is an approach taken in the market, lenders and their counsel should examine whether the benefits provided to the lender offset the additional cost of joining such entities.

What now for banks in the physical commodities sector?

Banks play an important business role in the physical commodities sector by providing the much needed access to capital and related risk management, including through:

• extension of credit;
• project finance;
• market making and liquidity;
• risk management and hedging; and
• fostering competition.

These services are especially important to small and medium-sized companies that do not have the in-house cash flows, expertise or risk management capabilities of their larger competitors.
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Make Whole Provisions in Bankruptcy

Loan agreements and bond indentures often contain “make-whole” provisions, which provide yield protection to lenders and investors in the event of a repayment prior to maturity. They accomplish this by requiring the borrower to pay a premium for pre-payment of a loan. This allows lenders to lock-in a guaranteed rate of return when they agree to provide financing. Borrowers also benefit since the yield protection allows lenders to offer lower interest rates or fees than they would absent such protection.

As contractual provisions, lenders and investors expect make-whole provisions to be enforceable according to their terms. But, what happens if the borrower files a bankruptcy petition?

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