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Securing syndicated loans

Hungarian legislation has changed its position on the concept of trust. The new Hungarian Civil Code, which enters into force on March 15, 2014, will recognize the concept of trust generally and also provide specific rules for the security trustee structure. But it might take years until Hungarian courts establish interpretative practice thereon.

The current situation under Hungarian law

If a syndicate of banks provides funds to a debtor, the security trustee, being a member of the syndicate, usually 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. However, as Hungarian law does not recognize the concept of trust, the trustee cannot hold the security interest on behalf of other syndicate members; i.e. only the trustee becomes secured.

One obvious solution would be registering all syndicate members. But this is burdensome since every time one of the syndicate members change the relevant registry must be notified. 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 their accessory nature) 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 also be an option, but the recognition of this structure is not yet tested in Hungary. Such abstract debt might raise public policy concerns in Hungary.

Solutions so far

Beside the above mentioned parallel debt structure, 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. So the whole debt may be secured, just by setting out the secured amount equaling thereto, and only the trustee of the syndicate is registered as security holder. Still, some minor problems remain since only the trustee is deemed secured under Hungarian law. The other syndicate members will have no in rem right over the encumbered assets.

Another way of pooling security, although this solution is not widespread in Hungary, is when the trustee issues a bank guarantee in favor of the syndicate members, which secures the individual claims of each 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 and the solvency prescription of the trustee.

Securing syndicated loans will be easier in Hungary

As of March 15, the syndicate may appoint in writing any person or entity, either among themselves or an unrelated third party, as security trustee. Such appointment must be registered in the same registry as the security interest. 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.

By recognizing the concept of trust, the new Hungarian Civil Code will end the development of ever 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.

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