When a company is in financial distress, effective collateral management is of central importance. Collateral can be used to enable the company to access financing for reorganisation and also to protect the interests of its business partners. In reorganisation contexts, the tool of choice is a dual-purpose trust used for shares or security interests in physical property.
Financing
Restructuring or reorganising a company costs money. But it is precisely when a company is faced with such a situation that liquidity is a scarce commodity. So during this phase, the company’s financing providers are particularly important and needed. There is one key point here: Funding providers have to be convinced of both the effectiveness and feasibility of the necessary reorganisation measures. They normally also require security interests or “trust-building measures” in return for any reorganisation funding they provide.
This is where the dual-purpose trust, also known as a bilateral (security) trust, comes into play. Here a trustee, acting as a neutral third party, receives certain assets – the security collateral or trust property – from a trustor to serve as security for the financing providers or beneficiaries. The assets concerned may be physical assets (e.g. fixed and current assets) or shares in companies. In the former case, the trust is referred to as a dual-purpose or bilateral security trust, and in the latter case as a dual-purpose or bilateral share trust. The trustor holds these assets as security for the funding providers, on condition that under specific circumstances (i.e. regarding the satisfaction of a condition or an event of default, e.g. if the company undergoing restructuring or reorganisation becomes insolvent or agreed covenants are not complied with), either the security interests in physical property or shares are realised in favour of the beneficiary funding providers or – in the case of a share trust – either the management is replaced or an investor process is initiated.
The basis for this is a (security) trust agreement between the trustee and trustor(s) which precisely sets out the rights and obligations of the parties, what the security collateral or trust property comprises, in what circumstances the trustee is entitled to realise the security collateral or trust property, or in what circumstances it is required to initiate or implement operational and corporate actions with respect to the company to be reorganised. Even though the funding providers are not a party to this (security) trust agreement, it is a true contract for the benefit of a third party in accordance with section 328 of the Civil Code (Bürgerliches Gesetzbuch, BGB). As beneficiaries under the agreement, the funding providers thus have a direct claim against the trustee for payment of the realisation proceeds of the security collateral or trust property, less costs.
Collateral management
Bank and supplier pools bring together funding providers or secured suppliers with shared interests and represent them vis-à-vis the company or its insolvency administrators. Schultze & Braun manages bank pools as a neutral third party. The role of a bank pool manager is to represent the interests of the banks involved in funding or reorganising a company, to provide coordination, and to create a basis on which the banks can make decisions. In addition, the pool manager acts as a security trustee for the pool, accepting and administering pool securities and realising them if required. Supplier pools are formed by a pool manager in the event of a company’s insolvency. There is no additional cost to the pool suppliers for this. The supplier pool manager then ensures that the retention of title rights in the supplier pool are asserted, pursued and realised optimally in the insolvency proceedings. As a supplier of an insolvent company, you benefit from this because your security interests are managed and enforced on your behalf. The advantage to the insolvency administrator is that he or she has a central point of contact and does not have to negotiate with each supplier individually.
Schultze & Braun understands modern collateral management as an integral process spanning lending, assessment and provision of securities, via monitoring of day-to-day business operations, analysis of financial distress and support during reorganisation, through to return or realisation of securities.
And because every stage of reorganisation brings its own requirements, ongoing optimisation of securities is important, both for the company providing them and secured parties such as banks, credit insurers, central regulatory authorities, bondholders and institutional investors. Schultze & Braun’s collateral management activities therefore include examining and optimising the company’s collateral structure and, in the case of revolving collateral such as inventories or trade receivables, ensuring compliance with the principle of specificity, which requires collateral to be distinct and identifiable. Schultze & Braun also updates the content of collateral storage locations and resolves issues relating to the property of others. Further services involve monitoring compliance with financial indicators set out in the credit agreements and operational reorganisation measures such as those laid down in a restructuring report in accordance with standard IDW S6. For bondholders and holders of other capital market financing instruments, Schultze & Braun holds shares and security interests in property of the issuer on trust and initiates and manages a professional M&A process if required.
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