A secured term loan is a type of loan that is backed by collateral, such as assets or property, and is typically provided by a syndicate of bank creditors. When a corporate borrower defaults on such a loan, it can trigger a series of events that have significant consequences for all parties involved. In this article, we will explore what happens when a corporate creditor encounters an event of default with regards to a secured term loan, including the role of the security agent and the steps that the creditors may take to recover their funds.
Role of the Security Agent
In a syndicated secured term loan, the role of the security agent is to act as a representative of the syndicate of bank creditors. The security agent is responsible for managing the security provided by the borrower and ensuring that it is properly protected. In the event of a default, the security agent will also act as the point of contact between the syndicate of bank creditors and the borrower.
When an event of default occurs, the security agent will typically notify the borrower of the default and request that the borrower remedy the default within a specified timeframe. If the borrower is unable to remedy the default within the specified timeframe, the security agent will notify the syndicate of bank creditors and begin the process of enforcing the security provided by the borrower.
Enforcing Security
Enforcing the security provided by the borrower can take many forms, depending on the nature of the security and the terms of the loan agreement. In some cases, the security may be in the form of a mortgage over property, in which case the security agent may begin the process of foreclosure. In other cases, the security may be in the form of a pledge over shares in a company, in which case the security agent may begin the process of selling the shares.
The process of enforcing security can be complex and time-consuming, and it is typically carried out by the security agent on behalf of the syndicate of bank creditors. The goal of enforcing security is to recover as much of the outstanding debt as possible, in order to minimize the losses incurred by the syndicate of bank creditors.
Other Consequences of Default
In addition to enforcing security, default on a syndicated secured term loan can also have other consequences for the borrower. For example, the borrower may be required to pay default interest, which is typically a higher rate of interest than the standard rate. The borrower may also be required to pay fees and expenses associated with the default, such as legal fees and costs associated with the enforcement of security.
Furthermore, default on a syndicated secured term loan can damage the borrower's credit rating and make it more difficult for the borrower to secure financing in the future. It can also damage the borrower's reputation and relationships with its creditors, suppliers, and other stakeholders.
Conclusion
Default on a syndicated secured term loan can have significant consequences for all parties involved. When a corporate creditor encounters an event of default with regards to a secured term loan, it is important to understand the role of the security agent and the steps that the creditors may take to recover their funds. By working closely with the security agent and taking proactive steps to remedy the default, the borrower may be able to minimise the damage caused by the default and maintain a positive relationship with its creditors.
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About the author
Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of transactions across financing, M&A and derivatives with global corporates, private equity funds and financial sponsor groups.
About Langdon Capital
With a network of 700+ alternative investors, Langdon Capital raises debt and equity capital between £1m and £25m for high-growth and innovative companies in the technology, environmental impact and renewable energy sectors, who are preferably beyond a Series A funding round or equivalent, to help them fulfil their paths to profitability and growth ambitions.
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