parallel debt

International

trust structures are used for holding security in secured syndicated facilities (syndicated facility) so that such security remains valid for a fluctuating group of lenders, without the need to retake or re-register such security if a lender changes. In jurisdictions where trusts are not recognised, parallel debt provisions may sometimes be used to achieve a similar commercial result.

Under such provisions, the covenant to pay the secured obligations to the beneficiaries under the security trust (security trustee) (that is, the lenders or finance parties from time to time) is replaced (or supplemented by) a parallel debt obligation. Under this, the obligor acknowledges an independent and separate debt to the security trustee entity (who may be re-characterised as a security or collateral agent) for sums equal to the secured obligations under the finance documents as and when they fall due. Under a typical parallel debt arrangement, a bank, or its nominee, is appointed security agent to hold and administer the security on behalf of each of the lenders or finance parties. The security agent then holds the benefit of its claim to the parallel debt for the benefit, and as the property, of those lenders (or finance parties).

A parallel debt obligation differs from a covenant to pay in that typically:

• it purports to create an immediate debt, whereas a covenant to pay is an obligation to pay on demand; and

• it includes a statement that if either the underlying obligations to the lenders (or finance parties) or the parallel debt is reduced, the corresponding debt is also reduced (also known as a pro tanto provision) so as to prevent double recovery from the obligor of the same debt.