Crash Course in Covenants and Collateral

Transcription

1 Crash Course in Covenants and Collateral Robert J. Heinrich Emily L.M. Clubb May 19, 2016

2 Structuring Considerations Borrowers and guarantors Consider who ultimately gets the funds Cross-defaulting/guarantying/collateralization Fraudulent transfer issues/preferences Consideration is key Common enterprise clause 1

3 Structuring Considerations Deemed Dividends U.S. Borrowers: Beware of deemed dividends where pledge or guaranty involves a foreign controlled corporation Limit U.S. pledges of stock of first-tier foreign subsidiaries to 65% of total voting stock No upstream guaranties by foreign subsidiaries No collateral grants by foreign subsidiaries 2

4 Commonly Negotiated Items Covenants and representations Affirmative/negative Financial Defaults Payoffs Cross-defaulting/guarantying/collateralization 3

5 Covenants and Representations Base definitions Indebtedness Investments Liens Qualifiers Materiality (e.g., "in all material respects," "material adverse effect") Knowledge (When? Whose knowledge?) 4

6 Covenants and Representations (cont.) Baskets and thresholds Examples Baskets for types of permitted indebtedness Minimum thresholds for providing notice of damages, or judgments of a certain value Applicability Borrower and subsidiaries Material subsidiaries Guarantors 5

7 Financial Covenants Fixed charge coverage ratio Indicates a borrower's ability to satisfy fixed financing expenses (interests and leases) Debt service coverage ratio Measures ability of cash flow to pay current debt obligations 6

8 Financial Covenants (cont.) Minimum tangible net worth Shows physical net worth of a company Cap on operating leases Cap on capital expenditures Usually an annual limitation 7

9 Defaults General insecurity clause When is it needed? Are financial covenants set to alert lender of potential default? Is it a new company or new relationship that has not yet been tested? 8

10 Defaults (cont.) Cross Defaults Bankruptcy Defaults Automatic acceleration Grace/Cure Periods 9

11 Payoff Letters What should you ask for? Define "all obligations" Immediately release liens Possessory collateral Commonly negotiated items Indemnity Global release of claims Clarify who files termination statements 10

12 Collateral Perfection by Filing Filing a UCC financing statement Perfect most types of collateral General intangibles Inventory and equipment Commercial tort claims Accounts receivable Exceptions if control or possession is mandatory or permissive Investment property Deposit accounts 11

13 UCC Financing Statement Reminders Debtor name Certified articles Individuals Collateral description "All assets" generally works Commercial tort claims (specificity) Location, forms, fees Fixture filings E.g., Florida, Louisiana, Tennessee, St. Louis 12

14 Perfecting Investment Property Uncertificated securities File financing statement Certificated securities Deliver certificated security to lender Deliver signed blank stock power (allows transfer of ownership of certificated securities) Usually file financing statement as well Securities account Control agreement 13

15 Issues in Perfecting LLC Interest Review organizational documents for: Reference to Article 8 as governing Restrictions on transfer UCC Anti-Assignment Rules can override those provisions Some states do not have standard antiassignment rules (Delaware) Consent from other members 14

16 Perfecting Security Interests in Deposit Accounts Lender is the bank that maintains deposit account Control agreement if lender is not the bank that maintains deposit account Deposit account is in the name of the lender 15

17 Intellectual Property Copyrights U.S. Copyright Act preempts UCC for perfection and priority For copyright registrations and applications, but not unregistered copyrights File Notice of Security Interest in Copyrights with U.S. Copyright Office List out the specific copyrights covered Trade Secrets No federal preemption 16

18 Intellectual Property (cont.) Trademarks and patents Filings under UCC are sufficient for perfection Recording in U.S. Patent and Trademark Office provides protection against subsequent bona fide purchasers Common practice for all intellectual property File UCC financing statement Record Notice of Security Interest in appropriate office 17

19 Vehicles (Certificates of Title) Electronic filing with DOT Listing lender as lien holder Can search electronic filings online Filing alone not enough Need underlying security agreement 18

20 Real estate Life insurance Collateral Not Covered by UCC 19

21 Life Insurance Not governed by UCC Filing is not effective for perfection Collateral assignment Generally on insurer's form Needs insurer's acknowledgement Must be assigned by policy owner In-force ledger From insurance company prior to closing Shows other liens, current status of policy 20

22 Special Lien Issues for Agricultural and Food and Beverage Lenders Food Security Act of 1985 Perishable Agricultural Commodities Act Packers and Stockyards Act State law issues 21