SOUTH AFRICA Law and Practice Contributed by: Ulrike Naumann, Alison Mellon, Joshua Janks and Aneria Bouwer, Bowmans
3.6 Asset-Based Financing Asset-based financing or lending is on the increase in South Africa. South African busi- nesses tend to require greater flexibility for their financial needs in the current climate. Asset- based financing is more common for borrow- ers in the manufacturing and services sectors in South Africa. Structures differ based on the asset being lent against but are like those used in other markets. For example, it is common for a company to use its trade receivables to receive financing through an invoice discounting arrangement with lend- ers. Lenders in South Africa do at times make borrowing base facilities available, in respect of inventory. However, these are not commonly used as part of acquisition finance transactions. Fixed assets are typically financed through an amortising term loan, which may form part of an acquisition finance transaction. Intercreditor agreements deal with various aspects of the relationship between the credi- tors in the transaction. In an acquisition finance transaction, the parties to the intercreditor agreement would typically be the senior lend- ers, hedge counterparties, a security SPV (see 5.1 Types of Security Commonly Used ) and, if applicable, any entities providing intra-group loans. There may also be a lender in respect of a general banking facility. The form of intercreditor agreement most often used in South African transactions follows ideas derived from the LMA format. However, it con- tains several changes for South African law 4. Intercreditor Agreements 4.1 Typical Elements
and practice and, overall, tends to be a simpler document. In addition, and depending on the structure of a transaction, it is common in South Africa for finance providers to agree to a sepa- rate subordination agreement in which junior or other creditors subordinate claims against the target or group companies in favour of senior lenders before and on insolvency. An intercreditor agreement outlines the ranking between the creditors and governs the agreed distribution of proceeds following the enforce- ment of security. The finance providers agree on the manner in which decisions should be made by all or a majority of the senior lenders, or all finance providers. Certain matters can only be decided by specific finance providers such as a hedge counterparty or the provider of any gener- al banking facility. Examples of decisions which typically require the consent of all senior lend- ers would be amendments to key definitions in the senior facilities agreement, and any amend- ments or waivers which amend the interest rate on those facilities. Parties other than the senior lenders are gen- erally restricted in the intercreditor agreement regarding any steps upon default or event of default and any enforcement of security, or from receiving payments prior to the scheduled date. Hedging parties are usually in the same position as the senior lenders with respect to security provided by the target group. However, the cir- cumstances in which hedge providers can close out their hedging arrangements are typically subject to restrictions (see 4.3 Role of Hedge Counterparties ). The intercreditor agreement will typically contain claw-back provisions which enable the facility agent to recover amounts received by a credi-
400 CHAMBERS.COM
Powered by FlippingBook