An analysis of the use of security trusts in syndicated finance

Abstract

Access to finance is indispensable for the functioning and prosperity of a modern market economy. When the credit demanded by a prospective debtor is large, debt finance, either through syndicated loans or bond issues, is generally the preferred mode of financing as opposed to equity finance. The concept of finance is examined in Chapter 1 where the focus is mainly on the philosophy behind the concept of syndicated finance. The manner how syndicated loans are transacted is explored, and the multitude of parties and documentation involved in such transactions are examined. Accordingly, Chapter 1 serves to introduce the reader to the basic concepts underlying syndicated finance since such concepts act as a backdrop to the examination of security trusts. There are several forms of security which are operative in different jurisdictions. Chapter 2 specifically deals with the salient features of each of the forms of security available within the Maltese legal system. In so doing, emphasis is placed mostly on the how the security is publicised and enforced. When loans are syndicated, the granting of security arrangements is rendered more complex. As a consequence, the industry depends on an efficient legal mechanism that facilitates the collective security arrangements within secured syndicated finance structures. The Maltese legislator opted to adopt the concept of trusts within its jurisdiction, including the notion of security trusts. Chapter 3, focuses on this concept of security trusts as introduced in the Maltese legal system, it accentuates its advantages and illustrates the manner in which they are regulated in the Maltese Civil Code under Article 2095E. The concept of security trusts however is not universally accepted. Civil law jurisdictions that do not recognise the common law concept of trusts use other mechanisms similar to security trusts to deal with the practical anomalies that emerge from providing security collectively to a syndicate of financiers. A selection of these civil law jurisdictions and their civil law devices, are reviewed under Chapter 4. Ultimately, the conclusion exposes the fact that the adoption of security trusts emerges as the best solution to assist parties involved in syndicated finance transactions and in general to facilitate the whole process of collective security arrangements.