Will Securing Syndicated Loans be Easier in Hungary?
→ Gergely Szalóki
From 15 March 2014, Hungarian law will recognise the concept of trust, and the problems with securing syndicated loans under Hungarian law seem to be solved.
The current situation under Hungarian law
If a syndicate of banks provides funds to the debtor, usually the security trustee, being a member of the syndicate, holds in trust the security interest(s) established over the assets of the debtor on behalf of the other syndicate members. So far, the implementation of this structure has been difficult under Hungarian law.
What is the problem with securing syndicated loans under Hungarian law?
Security interests in Hungary are generally subject to a registration requirement (with limited exceptions). However, as Hungarian law does not recognise the concept of trust, the trustee cannot hold the security interest on behalf of other syndicate members, meaning that only registered lenders become secured. This, together with the accessory nature of security interests, led to the development of various solutions from the lawyers.
One obvious solution would be registering all syndicate members. But this is burdensome since every case when the syndicate members change must be notified to the relevant registry by deleting every member leaving and registering every new member joining the syndicate. This creates a very inflexible structure: clearly not what the parties want.
Registering only the trustee is the other option. But this gives rise to other concerns, as such security interest (due to the accessory nature of the security interests) would cover only the individual claim of the trustee (since only the trustee is registered); the claims of other syndicate members remain unsecured. Using a parallel debt structure, which is widely known in international financing, might be mere gambling as the recognition of this structure is not tested in Hungary. Such abstract debt might raise public policy concerns in Hungary.
Solutions so far
One solution was getting around the general accessory nature of security interests. The independent mortgage, which is very similar to the accessory mortgage in practice, is non-accessory (similarly to the German Grundschuld) and thus not tied to the underlying claim. This became a widely used tool, as the secured amount does not follow the amount of the individual claim of the trustee. So the whole debt may be secured, just by setting out the secured amount equalling thereto, and only the trustee of the syndicate is registered as security holder.
Still, some minor problems remain in the structure. The main problem is that, as only the trustee is registered, only the trustee is deemed secured under Hungarian law. The other syndicate members will have no in rem right over the encumbered assets.
Beside this “orthodox” solution, there is also a rather unorthodox way of pooling security, although this solution is not wide-spread in Hungary. In this structure, the trustee issues a bank guarantee in favour of the syndicate members, which secures the individual claims of each syndicate member. In turn, the security interest provided by the debtor secures the indemnification claim of the trustee under the bank guarantee. However, this solution is rather limited by the cash flow of and the solvency prescription to the trustee.
The new Hungarian Civil Code provides for the most obvious solution
The Hungarian legislation has changed its position towards the concept of trust. The new Hungarian Civil Code, entering into force on 15 March 2014, will recognise the concept of trust generally and also provide specific rules to the security trustee structure. But it might take years until Hungarian courts establish interpretative practice thereon.
The main rules on security trustee in the new Hungarian Civil Code
The lenders may appoint in writing any person or entity, either among themselves or an unrelated third party, as security trustee. Such appointment must be registered with the registry where the security interest is registered in. So only the trustee will be registered as the holder of the security interest. Nevertheless – and contrary to the current rules – the security interest will cover the entire claim of the syndicate, and the members of the syndicate will have in rem right over the debtor’s assets. However, only the security trustee may exercise the rights stemming from the security interest. The enforcement proceeds, once collected by the security trustee, are not deemed as part of the assets of the security trustee. Thus, the creditors of the security trustee may not seek satisfaction from the enforcement proceeds even in an insolvency proceeding.
Securing syndicated loans will be easier in Hungary
By recognising the concept of trust, the new Hungarian Civil Code will end the development of even more and more creative solutions when it comes to securing syndicated loans. Although it will generate less work for banking lawyers, they widely welcome the new set of rules on the security trustee structure.