A sinking fund collateral account and a pledge agreement is funding arrangement in which the borrowing is securitized by collateral in form of pledging a sinking fund account created with the collateral agent specifically for the purpose. In other words this arrangement can be viewed as funding against some fixed receivables in future by the borrower and the sinking fund act as a collector of those receivables and these future collections act as collateral.
In case of default the collateral agent is authorized to withdraw the funds from this account to fulfill the borrower’s obligation. The sinking fund collateral and pledge agreement should be drafted in a such an efficient manner that it gives complete explanation on the amount of loan, the interest rate, repayment terms, the sinking fund account details, the collateral agent details, the amount to be deposited in the sinking fund, the events which would trigger the withdrawal from the sinking fund and the instructions to return the amount to the borrower on successful completion of the terms in the agreement.
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