Security rights in debt refinancing

Introduction

Security rights in corporate debt refinancing are reduced to a few legal figures. Generally, in this type of process not only the financial conditions of the debt will be modified. Financing entities may demand the granting of new security rights, as well as strengthening existing security rights.

The basis for granting these security rights consists in the credit enhancement of the banks´s position. In other words, the security right is the consideration received by the banks in exchange for taking risks for a long period of time. It is necessary to reinforce their credit positioning, which will be achieved thanks to the granting of these security rights.

What does the financed company receive in return?

The financial institutions will agree to modifying the financial conditions to which the company’s debt was subject. Some examples are: extending the financing’s due date and adapting payment schedules, as well as adapting financial ratios to new economic circumstances or improving interest rate conditions.

Security rights in debt refinancing

Security rights provide the creditor with enhanced security, because they involve the subordination of certain assets to the performance of the obligation.

This gives the creditor an exclusive right to satisfy his credit with the amount obtained before any other creditor. Due to their characteristics, mortgage and the pledge are two particularly suitable figures for the protection of the credit.

Chattel mortgage and real estate mortgage

The creditor can collect his credit by selling the mortgaged property. This improves financial conditions because it provides security. In the deed and registration of the mortgage the credit (the cause) that is the object of the restructuring must be stated. In addition to the amount and due date of the secured obligation.

Mortgage of maximums

It’s main peculiarity is that some of the elements of the secured obligation are not determined at the time of its creation, such as the amount of the obligation. However, what will be determined beforehand is the maximum to which the mortgage liability for non-compliance with the obligations amounts. This maximum amount will be entered in the Register even if the amount of the obligation does not reach that quantity.

The mortgage is constituted as a security right of one or more obligations, present or future, even though they are not fully identified. For the constitution of the mortgage, the legal acts from which future obligations may arise must be described. The term of the mortgage and the method of calculating the secured cash balance must also be indicated. This way, the costs of creating specific mortgages are simplified.

Pledge over stocks and shares

The value of the stocks and shares must match the value of the funding granted. The shares may be sold to recover capital when the debtor has not complied his obligations.

However, in a situation of insolvency, the value of the shares or holdings may be very low.

The holder of these stocks and shares shall also be the holder of the rights that the mentioned stocks and shares grant, although they are subject to a pledge. Without prejudice to any other provision in the company’s statute. When the pledge is executed, the rights attached to the stocks and shares will be transferred together with them. Until the time of enforcement, the rights will remain with the grantor even if the secured obligation is not performed.

Pledge over credits

The security right is found in the credit claim transmitted to the creditor. The most difficult thing is to determine the amount of money needed when providing a security right. Can a future credit be pledged? Yes. Pledges of future receivables are valid and enforceable if the future receivable is sufficiently identified.

Pledge over Bank Accounts

When the financing institution and the depositary of the credit are the same entity, an enforcement clause is insufficient for the security right. In order for the beneficiary to be able to dispose of the cash, he must have some legal or contractual faculty that limits the debtor’s power of disposal. The fact that the debtor may continue to dispose of its funds does not provide security for the financing entity. The financing institution must control the pledged current account. This control will be carried out through different mechanisms, such as the obligation to maintain a positive balance in the account at all times.

The promise of pledge and mortgage

The promise is not a security right. The promise is a commitment to provide a security right on an asset. It can be agreed that the promise will be kept at a certain time. Until then, the asset can be considered free of any charges and encumbrances.

The promise of a pledge and mortgage does not carry any rights in the asset. Failing to perform the secured obligation does not result in enforcement of the asset in priority over other creditors. Unless the promise has been fulfilled and the security right has been perfected.