In this Blog we discuss the basic framework of a lending transaction, which consists of the credit product provided by one or more lenders and secured by personal property or real property.

General

The active providers of secured finance are varied, but financings tend to be principally provided by Canadian chartered banks, but also by non-bank financial institutions. For smaller transactions (ie, typically less than C$10 million), transactions with Canadian chartered banks and non-bank financial institutions, standard form documentation of the bank or financial institution would typically be used. For medium-size and larger deals, loan documentation is tailored for each transaction and negotiated on a case-by-case basis.

Syndication

Syndicated credit facilities are commonly structured with a lead lender as the administrative and collateral agent for the lending syndicate. The law does not restrict the administrative agent from acting on behalf of the other bank syndicate members. Often there are also one or two lead arrangers or syndication agents that may or may not be the same lender as the administrative agent. Among other functions, the administrative agent facilitates the exchange of information between the borrower and the lenders. While the agent acts on behalf of the syndicate, the loan documentation would typically require unanimous lender consent for changes to things such as interest rates, amortization and payment terms, term to maturity, security and releases thereof, while a majority or 66.6% of lender consent is required for other amendments to covenants and loan documentation. It would be typical in Canada in the context of a syndicated credit facility to have an administrative agent or collateral agent hold security for a lending syndicate.

Interest

Typically, interest on Canadian dollar-denominated loans is calculated with reference to the Canadian prime rate, which is usually defined in credit documentation to be the greater of either the administrative agent’s prime rate for loans made in Canada to Canadian borrowers or the 30-day Canadian dollar offered rate (CDOR) (described below) plus 1%.

Canadian dollar loans are also commonly available to be drawn in the form of bankers’ acceptances. Rather than loans which bear interest, bankers’ acceptances consist of drafts that are issued by the borrower and accepted by the lenders, with a face amount and a specified maturity date. The drafts are purchased by the lenders at a discount to their face amount and the borrower receives the discounted proceeds as a loan. The discount rate at which the lenders purchase the drafts is often based on the CDOR rate, a screen rate published for various terms to maturity of bankers’ acceptances in a manner similar to the London Interbank Offered Rate. On the maturity date for the bankers’ acceptances, the borrower is required to pay the full face amount of the bankers’ acceptances to the lenders.

Use and Creation of Guarantees

Guarantees are generally documented in the loan agreement or in a standalone agreement. They commonly include an indemnity, which is not subject to the same number of defences as a guarantee, including waivers of defences associated with increases or other changes to the guaranteed obligations, amendments of the loan documentation, defects in enforceability of the guaranteed obligations and changes in the structure of the borrower.

Security and Subordination

Each Canadian province and territory (other than Quebec) has a personal property security act, which applies to consensual security interests in most types of personal property. Each province and territory’s personal property security act provides for methods of perfecting a security interest that vary according to the type of collateral, provided that security in all types of collateral subject to the personal property security act may be perfected by registering a financing statement in the personal property security registry of the province or territory. The priority of security interests subject to the personal property security act and perfected by registration is generally determined according to the order of registration. Therefore, it is typical for a lender to file a financing statement against a borrower before, and in anticipation of, taking security from the borrower, in order for the lender to predetermine, to the extent possible, the priority of the security when it is granted. Financing statements may be filed in multiple provinces or territories, depending on the nature and location of the collateral and the location of the debtor (as determined under the personal property security act).

The lender may require that other creditors ‒ especially secured creditors ‒ of the borrower enter into intercreditor arrangements with the lender to contractually subordinate their security to the lender or otherwise address priorities as between the creditors.

Personal property security legislation that applies to most types of personal property exists in each Canadian province and territory. Pursuant to such legislation, a security interest can be granted over most types of personal property pursuant to a single general security agreement, which charges inventory, equipment, accounts (including receivables and bank accounts), securities and other personal property, whether existing or subsequently acquired. Subject to any agreement between the parties to postpone attachment, the security will attach immediately to personal property in which the debtor has rights and, on acquisition of rights therein, in subsequently acquired personal property.

Enforcing Security

Before enforcing security, a lender must demand that the debtor repay the loan, and give the debtor reasonable time to do so. The lender must comply with these requirements even if the debtor waived these rights in the loan and security documents. The secured lender (and any receiver it may appoint) must act in good faith and in a commercially reasonable manner when selling or otherwise disposing of the secured assets. The lender also must give advance notice of the intention to realize on security. If the lender fails to meet these obligations at any stage of the enforcement process, it may be liable to the debtor or other creditors for damages.

The team at BH Legal has extensive experience with lending transactions. Let us know how we can help at info@bhlegal.ca.

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