Weighing new security in offshore refinancing and restructuring

By Peter Vas, Loeb Smith Attorneys
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With local and global inflation at their highest in decades, rising interest rates, continuing supply chain woes and the effects of the Russia-Ukraine conflict being felt across Asia, many businesses that are established in the British Virgin Islands (BVI) and the Cayman Islands are scrutinising the available tools to avoid liquidity issues and potential insolvency. The economic fallout from covid-19 and related restrictive measures, along with bond defaults by various PRC property developers, has only exacerbated this crisis.

Peter Vas Loeb Smith Attorneys
Peter Vas
Loeb Smith Attorneys

In this article, the authors consider whether refinancing or restructuring an existing secured facility necessitates the retaking of existing security governed by BVI or Cayman Islands law. This is likely to be a point of interest to many secured lenders across the Asian market in the current distressed environment, given the increasing volume of refinancing and restructuring transactions.

The starting point is to review the existing facility agreement to determine whether an amendment is required to be made to its terms in connection with the proposed changes. For example, in the context of the London inter-bank offered rate (Libor) transition, many existing facility agreements incorporate the Loan Market Association’s replacement screen rate clause, as a result of which no amendments will be necessary. If, on the other hand, the parties wish to amend the interest periods and/or the financial undertakings that are provided by the obligor group, it is highly likely that an amendment to the terms of the facility agreement will be required.

Secured obligations

Assuming that an amendment is required, it is necessary to consider the definition of “secured obligations” (or equivalent definition) in the security documents to determine whether the amended obligations will continue to fall within that definition. Most commonly, the definition will reference liabilities that are secured under a particular set of finance documents, including the facility agreement. A well-drafted definition will also refer to those finance documents “as amended from time to time”. If that is the case, the next question is whether the secured party can construe the secured obligations as capturing the amended obligations.

Interpreting definition

There are two important points in this context. The first is whether the proposed amendment to the facility agreement is sufficiently fundamental that it can result in the amended facility agreement being treated as a new agreement. The second is whether the amendment takes the secured obligations beyond the “general purview” of what the parties contemplated when entering into the original transaction.

If the amendment is sufficiently fundamental that it could result in a new agreement, or if it takes the secured obligations beyond the “general purview” of what was originally contemplated, new security will be required.

It is worth noting that foreign counsel may also be considering the same issues in a refinancing or a restructuring transaction. The approach taken by foreign counsel will usually have a bearing on whether new security is ultimately created from a BVI or a Cayman Islands law perspective, particularly if common law underpins the jurisdiction on which the foreign law firm is advising.

Secured parties and obligors should take note of the following practical points:

    • If a security package is found to be ineffective or does not capture all of the secured obligations, then it is highly likely that the relevant chargor will be in breach of its representations and undertakings in the applicable finance documents, as well as any obligation to notify the finance parties of a breach. Therefore, chargors (as well as secured parties) should seek offshore legal advice.
    • A well-advised secured party may request security confirmations and legal opinions in respect of the BVI and Cayman Islands obligors if a facility agreement is amended, even if new security is not required to be created. Whether this is necessary will depend on the risk appetite of the relevant lenders and market practice. For example, it is no longer customary to seek security reconfirmations and/or legal opinions if the amendments solely address the Libor transition.
    • If the obligors have appointed an agent in the facility agreement to execute documents on their behalf, a secured party should consider whether it is happy for the obligors’ agent to execute the amendment agreement on each obligor’s behalf. Market practice is usually to request each obligor to execute the agreement to the extent that it contains a guarantee and/or a security reconfirmation.

Peter Vas is a partner at Loeb Smith Attorneys in Hong Kong. Robert Farrell also contributed to this article

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