Three English High Court judgments published in the last 24 months relate to the role performed by and the duties and obligations of facility agents and security trustees in syndicated loan transactions.
By Mike Rainey (partner), Liz Lyon (senior associate) and Charity Kirby (trainee), King & Spalding Separate Capacities
The case of Landesbank Hessen-Thuringen Girozentrale and others v Bayerische Landesbank, London Branch , concerned a facility agreement under which Bayerische Landesbank (“BLB”) acted in various capacities including arranger, facility agent, security agent and lender (not uncommon in a syndicated loan transaction).
The facility agreement provided that if any amount received under the finance documents fell short of the amount due (“shortfall amount”), the shortfall amount would be applied: first, to any unpaid fees, expenses or costs (including break costs and hedging break costs) of the facility agent; second, to any unpaid fees and expenses of the lenders; third, to unpaid interest; fourth, to unpaid principal; and fifth to other amounts due under the finance documents.
BLB also entered into hedging agreements with the borrower. It claimed that in the event the hedging agreements were terminated, early termination costs should be paid to it ahead of interest and principal (i.e. pursuant to the first limb of the waterfall). The court held that when the phrase “facility agent” was used, it was a reference to BLB acting in its capacity as facility agent only and did not include reference to BLB acting in any other capacity (e.g. as hedging lender). The facility agreement had carefully and consistently distinguished between the different roles in which BLB was acting. Amounts to be paid to BLB as hedging lender in connection with any early termination of the hedging could not be recouped within the first category of the waterfall provision – the court holding such amounts fell within the fifth category of that provision.
If an entity is acting in several capacities under a finance document, such finance document must clearly set out the rights and obligations of that entity in each of its capacities.
Limited role of facility agent
The case of Torre Asset Funding Limited v The Royal Bank of Scotland  involved a complex structured lending to a property company. The claimants were lenders at the junior mezzanine level (B1 lenders) who did not recover amounts owed to them following enforcement of the security. The claim was brought against RBS who held a number of roles within the structure, including agent for the B1 lenders (the “Agent”) and lender at the junior subordinated mezzanine level (B2 lender). Each tier of lending had its own facility agreement, and the relationship between the lenders at each level was governed by an intercreditor agreement. The documents broadly followed Loan Market Association (“LMA”) terms.
As the borrower encountered financial difficulties, it entered correspondence with RBS in which it proposed that interest be rolled up until maturity on the B2 loan (i.e. the loan subordinate to the B1 loan) (the “Proposal”). These negotiations continued for some months before RBS approached the claimants for consent to the Proposal, which they ultimately gave.
The claimants argued (amongst other things) that the Proposal constituted an event of default under the facility agreement (i.e. “A [borrower] …by reason of actual or anticipated financial difficulties, commences negotiations with one or more of its creditors with a view to rescheduling any of its indebtedness”), and that RBS as Agent had breached the terms of the B1 loan agreement and the intercreditor agreement by failing to bring this event of default to the attention of the claimants.
The judge agreed that the Proposal did indeed trigger an event of default. However, there was no breach of duty on the part of RBS (acting as Agent) in omitting to notify the claimants that this event of default had occurred.
The precise duties of an agent in any particular case are determined by the express terms of the agreement between the parties. In this case, the express terms of the agreements required the Agent to pass on information “on becoming aware” of any default. In order to trigger this provision the Agent would need to be aware not just of the event or circumstance giving rise to the event of default, but also “that it qualifies (or would qualify) as an event of default”. This interpretation was supported by a provision stating that the “duties of the Agent under the Finance Documents are solely mechanical and administrative in nature”. It would be inconsistent with that provision to require the Agent to make a substantive, evaluative judgment whether, on the facts, an event of default had occurred.
The court held that there are no clearly defined set of general duties as a matter of common law that are automatically imposed upon an agent in financing transactions, and there is limited scope for implying additional obligations into detailed finance contracts between sophisticated parties.
Agents typically perform a very limited role in syndicated finance transactions (mechanical and administrative in nature). Unless specifically provided for in the finance documents an agent will not be expected to undertake work which requires substantive evaluative judgment.
Security trustee not a fiduciary when enforcing security
In the case of Saltri III Ltd v MD Mezzanine S.A. Sicar & Ors , the High Court was asked to consider the liability of a security trustee in enforcing security as part of a non-consensual restructuring of a leveraged finance transaction. The original transaction involved a senior and mezzanine loan, with the inter-relationship between the lenders governed by an intercreditor agreement. The documents were essentially on LMA terms.
The borrower experienced severe financial difficulties. The senior lenders instructed the security trustee (in accordance with the intercreditor agreement) to enforce the security and transfer the business of the borrower to a special purpose vehicle owned by one of the senior lenders for the purpose of the restructuring.
Amongst the claims made by the mezzanine lenders were allegations that the security trustee breached its duty under the intercreditor agreement and, more broadly, breached its fiduciary duty to the mezzanine lenders.
The court noted that a person could act as a fiduciary in some respects, and not in others. Where sophisticated parties have entered into commercial contracts to govern their relationship, the scope and nature of such duties would be defined by those agreements. Here, the mezzanine lenders’ interests had been subordinated to those of the senior lenders, and the security trustee was obliged to follow the instructions of the senior lenders, even if these instructions were detrimental to the interests of the mezzanine lenders. The intercreditor agreement expressly provided that in the context of the enforcement of the security, the extent of the duties owed by the security trustee to the mezzanine lenders was no different to or greater than those owed by a mortgagee to a mortgagor under general law, which is not a fiduciary duty.
A mortgagee is entitled to act in its own interests even if this is detrimental to the interests of the mortgagor as to both the manner and timing of enforcement. However, a mortgagee will be under a general duty:
- to take reasonable care to obtain the true market value of and/or the best price reasonably obtainable for the security at the time of sale or disposal; and
- to exercise the power of sale bona fide and for its proper purpose.
If, as here, the sale was to a connected person, the burden of proving the mortgagee had acted fairly and taken reasonable care to obtain the best price reasonably obtainable shifted to the mortgagee.
A security trustee takes its instructions from the relevant instructing group as specified in the finance documents. Save for the duties set out in (a) and (b) above a security trustee does not have a wider duty to act in the interests of parties outside of the instructing group unless specifically provided for in such finance documents.
The express terms of any finance document are paramount. English courts are reluctant to import wide-ranging duties on the basis of implied terms or broader concepts of agency or fiduciary relationships. If a party wants a facility agent or security trustee to undertake a specific duty, or an entity acting in several capacities requires a specific right, these will need to be expressly set out in the documentation.