Jacqueline Cook, Of Counsel, sums up the key messages from Sullivan’s May webinar.

Geoffrey Wynne considered what financiers could do if things start to go wrong in a trade, export or project finance transaction and asked participants to consider a few key questions:

1. could you anticipate a fraud;
2. is the financing structure sturdy; and
3. could the structure facilitate mis-selling in any way?   

With these in mind, the message is clear:

1. carry out transaction due diligence before signing;
2. monitor the income generating assets throughout the life of the transaction; and
3. respect the financing structure.

Transactional Due Diligence

With increased regulation and the emphasis from governments and regulators on anti-money laundering, KYC, anti-bribery, and financial sanctions checks, market participants must be meticulous with the transaction due diligence needed for a trade, export or project finance transaction.

Knowing the corporate structure and background of the entity planning to generate income is one thing, but assessing its ability to generate receivables and protect that income stream is quite another.

The questions are: What is that entity’s role in the structure? Does the financier understand the nuances of the particular market?

Then ask how likely is the entity to generate the receivables to meet its repayment obligations under the financing? We need to know whether the initial due diligence alerts the financier to anything which could indicate that the entity may not perform its obligations and the impact of this on the extent and quality of the anticipated receivables.

Monitoring

Building in early warning signs into transaction documentation will allow some element of flex to deal with an unexpected or potential default before a transaction heads towards a liquidation situation.

Geoff’s other key messages include:

1. Not only to document the right to monitor but actually to make sure that the financier carries that monitoring on an ongoing basis – even daily.
2. Check that the underlying asset actually exists, and employ monitors to check the warehouse.
3. Be alert to what is happening in the wider world that could affect, delay or prevent the receivable being turned into cash.
4. Query: is there a delay in the supply chain or are there transport delays or even natural disasters or world events which could prevent the debtor receiving the goods and delay payment of the receivable, (think COVID pandemic and national lockdowns and restrictions on movement of goods, paper documents and people)?

The need for initial transaction due diligence, then ongoing monitoring is all aimed toward protection of the quality of the receivable.

Respect the financing structure

If things are going wrong, an alternative to liquidation would be to look at restructuring options. If the underlying asset is of a good quality, there may be a way to restructure and keep the transaction going.

Geoff suggested that some of the key things to consider here are:

• the ranking of unsecured and secured creditors, and the effects of a fixed or floating charge;
• whether other banks and creditors are they likely to enforce any security; and
• who is the coordinator, or who runs the negotiations in an intercreditor or standstill arrangement.

In an enforcement situation, the secured creditor must be sure that the trade debt could be sold to a third party, to generate a sum to cover the outstanding debt or that the receivables will continue to mature and pay into a charged account.

So, the structure of the transaction is important. Thinking about (i) whether notice of assignment should be given and if so, when; (ii) if and when payment instructions should be given: (iii) working out where the collection account should be; and (iv) whether the collection account is a blocked charged account, are all key aspects of structuring.

In a syndicated transaction or where there are various financings it is relevant to look at (i) the relationship between the various financiers and any security agent; (ii) any consents needed; (iii) whether to issue any waiver or reservation of rights letter; and (iv) which financier should act as coordinator or run the negotiations for a restructuring, so that the best can be made of the negotiations to recoup future receivables.

In summary: Documentation and Action

The protection of trade debt is essential.

Protection will come from a combination of (i) initial and thorough due diligence on the receivables and obligor, (ii) clear documentation of the rights of the banks and obligations of the parties in a strong financing structure, including any security and any intercreditor arrangements, and (iii) action by the financier to monitor the assets, the market and its obligor. Financiers, of course, have to be alive to what is happening outside on the world stage and in the warehouse to act on the early warning signs and exercise the rights built into the transaction documentation.