AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin
Under the terms of the intercreditor agreement, hedge counterparties will typically benefit from security and will rank pari passu in right of pay- ment and right of enforcement proceeds with the senior lenders (and, in unitranche structures, will rank super senior alongside revolving credit providers). However, the intercreditor agreement will typi- cally contain restrictions on the hedge counter- parties’ right to: • terminate the hedging arrangements prior to enforcement; • make amendments to the terms of the hedg- ing documents; • take enforcement action; or • benefit from additional guarantees and/or security. These restrictions are often coupled with provi- sions that enable the hedges to be novated to a new hedge provider in certain circumstances. Such hedging arrangements are typically docu- mented using the market standard ISDA Master Agreement and Schedule, with some modifica- tions by way of the Schedule for local law issues and market practice. 5. Security 5.1 Types of Security Commonly Used Acquisition financings in the domestic market are typically secured. Any security interests in real estate must be in the form prescribed by the jurisdiction where the relevant land is located. The granting of security over “personal prop- erty” by Australian companies is governed by the PPSA. Security will nearly always be granted in favour of a security trustee, who will hold the
security for the benefit of the secured parties (including lenders, hedge providers and the facil- ity agent). A general security agreement is used to secure all types of property (other than real estate, which under Australian law must be secured by way of a real property mortgage). Typically, all obligors enter into a general security agreement to grant all asset security. If all asset security is not agreed, specific security can be granted over a particular asset under a specific security deed (commonly used for standalone security over shares or bank accounts). Security will be provided by each borrower, rel- evant holding companies and sufficient operat- ing companies to ensure compliance with the guarantor coverage test. The latter category of obligors will generally accede and grant security within a prescribed timeframe post-funding (from 45 to 120 days, depending on the sponsor’s bargaining power). The key reason for this is to allow sufficient time for such operating companies to complete “whitewash” process, as described in more detail in 5.5 Financial Assistance . The guarantor coverage test typically requires entities that own between 80% and 95% of the target group’s assets and contribute between 80% and 95% of the target group’s EBITDA to grant guarantees and security in favour of the financiers. Each of the main asset classes is considered
below. Shares
Shares are considered “personal property” under the PPSA, and security interests may be
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