Syndicated loan transactions may have links with jurisdictions other than England - one such link is that assets located in other jurisdictions may fall within the security package. This creates an issue for the effectiveness of the English law trust structure. A number of civil law jurisdictions do not recognise the concept of a trust and especially do not recognise a trust purporting to cover assets located in their jurisdiction. In addition, many jurisdictions do not accept that it is possible to grant security to A (the security agent) in order to secure money owed to B (the lenders).
However a solution has been developed in the form of parallel debt. A parallel debt provision involves the borrower acknowledging an additional debt owed by it to the security agent. This additional, independent debt exists simultaneously or “in parallel” with the debt owed by the borrower to the lenders, and is in an amount equal to the amount owed by the borrower to the lenders. Security is then granted by the borrower in favour of the parallel creditor (the security agent) to secure the parallel debt. The security holder remains the same, notwithstanding the changes to the pool of lenders following syndication.
Despite the borrower agreeing to an additional, parallel stream of debt owed to the security agent, the borrower is not agreeing to double its financial obligations. The parallel debt provision usually provides that any payment by the borrower to the security agent in respect of the parallel debt discharges the borrower’s debt to the lenders, and vice versa.
Although this concept of parallel debt has been in use for some years, it is not without risk. In a parallel debt structure, if the security agent becomes insolvent, the security which is held by the security agent as a parallel creditor may be available to the creditors of the security agent. There may also be challenges under certain jurisdictions regarding the validity of parallel debt: as there is little judicial authority approving the structure, legal uncertainty regarding its recognition looms.