A Collateral Agent is a financial institution that accepts and holds the security or collateral under a syndicated loan agreement. Its role is to carry out all the necessary procedures with respect to the collateral. The agencies are the middleman that oversees the transaction and provides security to both parties that their respective interests will be enforced in the case of default.
When Do You Need a Collateral Agent?
The purpose of a collateral or security agent is to accept the security documents and enforcing them in the event of a default. It may hold certain types of collateral where the physical possession of the security is required and take all necessary actions in order to keep the said collateral safe such as keeping documents in a fire-proof safe or vault. In some jurisdictions, it is mandatory for a deed that recognizes the security agent as the secured agent to be executed in order for it to be able to take any actions with regard to the collateral. The deed must also expressly mention that the security agent will only act under the direction of the lenders and will not have any discretionary powers. If and when the default occurs, the security agent is called upon by the lenders to enforce the collateral. Following this, the agent will remit the proceeds from the enforcement of the collateral to the lenders and will charge its fees.
Inclusions in Collateral Agent Agreement
A collateral agent or security agent agreement will include the effective date of the document, the names of the parties to contract, the appointment of the institution as a security agent, the duties of the security agent and its limitations. provisions for recourse through the security agent, the rights of the secured parties against the obligor. It should also include other clauses that allow the security agent to seek professional help or advice, resignation of the security agent, its fees and establishment of the relationship between the security agent and the secured parties that ensures that the security agent does not take any arbitrary decisions with regard to the collateral, except under the direction of the lenders.
How to Draft Collateral Agent Agreement
Procedure to draft collateral agent agreement:
- Mention the effective date of the agreement.
- Identify the parties to the contract.
- Establish the financial institution as a security agent by including an appointment clause.
- Include a clause whereby the borrower grants a security interest in the collateral.
- Establish the duties of the security agent regarding the collateral.
- Make provisions for the fees and indemnity of the security agent.
- Make provisions for enforcement in case of default and establish that the security agent will only act under the direction of the lenders and will not make any arbitrary decisions with regard to the collateral.
- Include standard provisions for warranty, waiver, and the limitation of liability. Also, include any other clauses or terms that may be required by federal, state, or international legislation or conventions.
- Have the representatives of the parties to the contract and their respective witnesses to sign the agreement in order to make it legal.
As with any legal agreement, caution must be exercised when framing the terms and conditions in order to avoid unexpected liabilities.
Benefits of Collateral Agent
- Reduces the risk of the lenders by securing the loan with a collateral.
- Allows borrowers with a greater flexibility to repay the loan.
- Ensures the safety of the secured property against any physical damage by protecting it in well-guarded, fire-proof facilities.
- Provides easier enforcement incase of default.
- Acts as an unbiased third party that oversees the transaction and ensures that both parties fulfill their obligations towards each other and carries out the required procedures in the event of default by either party.
Key Terms/Clauses in Collateral Agent Agreement
The following key terms must be included in a security agent agreement:
- Appointment: This clause establishes a financial institution as a security agent and authorizes it to perform all the duties that a security agent would perform under the agreement.
- Relationship: This clause establishes the relationship between the security agent, the lenders and the borrowers. It must also expressly mention that the security agent’s role is ministerial in nature and will only act under the instruction of the lenders in matters regarding the collateral.
- Fees: This is a provision that clearly states the fees and indemnity of the security agent including terms that detail how the fees will be paid and if it is to be deducted from the proceeds of the collateral in the case of default.
- Duties: This provision clearly establishes the duties that the agent is expected to perform under the agreement.
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