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#10485 - Structured Finance - Debt Finance

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STRUCTURED FINANCE & DERIVATIVES

Structured finance may involve greater amounts of risk from different sources.
- Market risk
- Operating risk
- Environmental and political risk
- SPV [no assets – but tax advantages and potentially lower costs]
Tools for dealing with risk:
- Due diligence (more extensive)
- Conditions Precedent
- Representations
- Undertakings
- Events of Default
- Security package may have to be varied according to the transaction

Property finance

ISSUE/TOOL	DUE DILIGENCE	CONDITIONS PRECEDENT	REPRESENTATIONS	UNDERTAKINGS	EVENTS OF DEFAULT	SECURITY
Borrower is an SPV and parent refuses to give a guarantee.	Valuation of property Review terms of leases Review insurance policy	Report on title from SPV’s lawyers Valuation report Confirmation of insurance policy Planning permissions Confirmation no existing security Land Registry forms/registrations Standard occupational leases	Ranking of security (i.e. first-ranked) Borrower has good title to property Report on title is accurate	Negative pledge Keep property in good repair Pay insurance premiums	Substantial damage of property Compulsory purchase of property	Comfort letter from parent Charge by way of legal mortgage over property Fixed charge over future property/assets Floating charge over all remaining assets
Rental income is the only revenue stream that SPV can use to service the loan (Need to value the revenue stream and restrict income from being used for other purposes)	Review business plan; realistic?	Copy of business plan Evidence of parent equity/debt investment, where relevant Interest rate swap agreement Signed notices of assignment of rental income Subordination agreement (where relevant)	Ranking of security No dividends to be paid to parent company No further financial indebtedness No repayment of subordinated loan (where relevant)	Payment of rent into rent account + no withdrawals without bank’s consent Payment of insurance into specified account + no withdrawals without bank’s consent...

Borrower is an SPV and parent refuses to give a guarantee.

Valuation of property

Review terms of leases

Review insurance policy

Report on title from SPV’s lawyers

Valuation report

Confirmation of insurance policy

Planning permissions

Confirmation no existing security

Land Registry forms/registrations

Standard occupational leases

Ranking of security (i.e. first-ranked)

Borrower has good title to property

Report on title is accurate

Negative pledge

Keep property in good repair

Pay insurance premiums

Substantial damage of property

Compulsory purchase of property

Comfort letter from parent

Charge by way of legal mortgage over property

Fixed charge over future property/assets

Floating charge over all remaining assets

Rental income is the only revenue stream that SPV can use to service the loan (Need to value the revenue stream and restrict income from being used for other purposes)

Review business plan; realistic?

Copy of business plan

Evidence of parent equity/debt investment, where relevant

Interest rate swap agreement

Signed notices of assignment of rental income

Subordination agreement (where relevant)

Ranking of security

No dividends to be paid to parent company

No further financial indebtedness

No repayment of subordinated loan (where relevant)

Payment of rent into rent account + no withdrawals without bank’s consent

Payment of insurance into specified account + no withdrawals without bank’s consent...

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#10485 - Structured Finance - Debt Finance

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