Banking and Finance

We appreciate that for any business support from their bank and the right finance is key to making their business successful. By combining our technical expertise along with commercial reality we strive to achieve our client’s objectives.

Our clients range from owner managed businesses through to national companies across various industry sectors.

We advise on a wide array of banking and finance transactions including:

  • Security;
  • Acquisition finance; and
  • Restructuring

We work closely with other professional advisors, namely corporate finance advisors and tax specialists, to ensure that the overall package is one which works for our clients from a number of perspectives.

Our clients have the benefit of knowing that they will receive a personal and proactive service in often complex borrowing and lending situations.

Should you need any banking and finance legal advice then please contact us on 01274 924200 or email us at banking@bakerreign.co.uk and a member of our banking and finance team will contact you.


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Security

There are a number of advantages of a lender taking security from a borrower. However, the main ones are that:

  • The lender would obtain rights against specific assets of the borrower if the borrower was unable to meet the claims of all of its creditors; and
  • The lender would obtain priority over the other creditors of the borrower in receiving their payment.

Types of security

Under English law four types of securities interests are recognised, namely: mortgages, charges, pledges and liens. Each of these types of security essentially creates a legal or equitable security interest in the assets of the borrower which enable the lender to appropriate them should the borrower default or fail to perform its underlying obligations.

It must be noted that each of the types of security grant different types of rights and they can be distinguished as follows:

  • Mortgages – a legal mortgage is created by the transfer or assignment of the legal title to an asset by way of security. This is subject to either an express or implied condition that upon the satisfaction or discharge of the obligation under which it was created that the transfer is transferred back to the borrower;
  • Charges – there is no transfer of title to the asset and therefore the charge is an equitable interest (except in relation to charges by way of a legal mortgage over land which were created pursuant to section 85 (1) of the Law of Property Act 1925 (“LPA 1925”). Effectively the charge is an agreement under which the borrower allows the lender to appropriate the asset and to apply the proceeds towards discharging the borrower’s obligations;
  • Pledges – this involves the actual or constructive transfer of the possession of an asset to the lender. It can be used for assets whose title transfer passes by delivery. The ownership of the asset remains with the borrower however the lender has the ability to sell the asset should the borrower default on their payment obligations; and
  • Liens – these arise from common law rights either by general usage or by agreement. They enable the lender the right to retain possession of an asset until the borrowers obligation has been satisfied and duly discharged. It must be noted that there is no power of sale conferred upon the lender however a power of sale is sometimes granted by virtue of an agreement between the parties or by way of custom.

Fixed and floating charges

Charges can be either fixed of floating. Generally only limited companies create floating charges. For a fixed charge the borrower will ordinarily grant a charge over its more permanent assets. These usually deal with land and fixtures and fittings. A fixed charge attaches immediately to the asset and the lender is given control as to the borrower’s ability to deal with those assets to which the fixed charge applies. Therefore without the consent of the lender the borrower is unable to dispose of the asset.

This position is different from that created under a floating charge. Under a floating charge the attachment is deferred until the position is crystallised. In this instance the lenders rights attach to a shifting class of assets which includes future assets. This leaves the borrower free to manage and dispose of assets in the ordinary course of their business. This is until the position becomes crystallised. Once the position does become crystallised the floating charge then converts into a fixed charge and becomes attached to all of the assets within the charged class which the borrower owns or acquires thereafter. At this point the borrower is unable to deal with the assets. It is important to note that the crystallisation of a floating charge does not need to be registered at Companies House as there is no new security being put into place.

Assignments

An assignment is generally the means under which security is created over choses in action. These are things such as debts or other contractual rights. The assignment can be contained within either a debenture which creates legal security over a number of assets or in a stand alone agreement.

An assignment can be either equitable or legal. To enable the assignment to qualify as a legal assignment it must comply with certain provisions of section 136 of the LPA 1925. These requirements are that:

  • The assignment must be in absolute form and not state to be by way of a charge only;
  • It must be signed by the assignor; and
  • Notice in writing must be given to the debtor.

If these conditions are met then the assignment is effective from the date of such notice to pass and transfer:

  • The legal rights to such debts;
  • All legal and other remedies; and
  • The ability to give good discharge for the debt without the agreement of the assignor.
Acquisition Finance

The term acquisition finance is used in relation to the debt element for the funding of an acquisition of a business and is prevalent with private equity transactions.

Leveraged finance

Leveraged finance describes transactions where debt is used to provide the funds for a buy-out, acquisition or leveraged recapitalisation. Leveraged finance is also used where the acquisition target has a high debt to EBITDA ratio (a high ratio is considered to be anything over 4:00 to 1:00) or it may have a high debt to net worth ratio.

Within a typical leveraged buy-out (“LBO”) the existing or new management along with the private equity funder will acquire a majority stake within the acquisition target. The acquisition itself is funded with both debt and equity. It is nearly always the case that the acquisition takes place via a special purpose vehicle (“SPV”) which has been created solely for the purpose of the acquisition of the acquisition target. Often the finance providers will obtain security and guarantees from the management team and also from the SPV. The intention of LBO is to ensure that the management team and the investors obtain a substantial profit when they seek to exit the business which is usually after a number of year.

Management buy-out (MBO) and management buy-in (MBI)

Where the LBO is instigated by the management rather than an investor this is known as an MBO. In other instances an LBO may be sought by a new management team and this is referred to as a management buy-in.

Acquisitions

There is not always a need for an investor and it is often the case that corporates may make acquisitions to simply increase their market share. In such instances the buyer would be referred to as a trade purchaser as opposed to an institutional purchaser.

It may also be the case that the buyer would have no need to use acquisition finance as they may have sufficient cash reserves to make the acquisition through their own funds or through their existing loan facilities.

Acquisition finance

Acquisition finance is provided by specialist lenders and they commonly use the following types of debt:

  • Senior debt;
  • Junior debt, which includes:
    • Mezzanine debt;
    • Second lien debt; and
    • PIK debt; or
  • High yield bonds.

One or more of the above types of debt structures may be used in the acquisition.
Sometimes the equity investors may subscribe for loan notes as opposed to investing purely in the equity of the SPV. Occasionally the seller may accept some part of the consideration being deferred and accept this deferred payment as a loan note.
The use of acquisition finance is not restricted to simply LBO’s but can also be utilised in instances of recapitalisations or the refinance of acquisition debt.

Restructuring

Where a company is undergoing financial difficulty it may be necessary to restructure the business. Ordinarily this may involve firstly stabilising the company by agreeing a standstill with its creditors. Following this due diligence will need to be undertaken on the business to understand the reasons as to why it is struggling and then reviewing the business plan to move forward. Should funding need to be raised then it is likely that a valuation of the business would need to be undertaken. Lastly, the implementation of the restructure agreement would need to be put into place.

Types of restructurings

There are a number of types of different methods for restructuring a company and they include the following:

  • Refinancing by new lenders;
  • Debt restructuring;
  • Transferring the business to a newco;
  • Injecting new money into the business by way of an equity injection;
  • Selling non-core assets of the business; or
  • Obtaining a debt write off in relation to an impaired debt.

Approval and valuation

Within the finance documents of the business it will state what percentages of lenders are required to approve any waivers or amendments for the restructuring. Typically for loans this is a majority of two thirds. However, with high yield bonds this changes to within 50% to 75%. An analysis of each of the finance documents is required in each specific case to ascertain the correct percentages.
Once there has been a valuation undertaken on the business this will enable the creditors to understand what the breakup value of the business is. It is at this point that dissenters will come forward and challenge the basis of the valuation of the business. If a deal cannot be struck with the dissenters then a more formal method of restructuring may be used. These often include:

  • Pre-pack administrations;
  • Company voluntary arrangements; or
  • Schemes of arrangement.

The benefits of restructuring as opposed to a formal liquidation

The main benefits would be:

  • Less publicity;
  • More flexibility;
  • They are likely to obtain a greater return than on liquidation; and
  • The existing management structure is to be retained.

The drawbacks of restructuring

With the restructuring process there would be no statutory moratorium and there is also no automatic cross-border recognition.