Structure a loan transaction

General

Who are the active providers of secure finance in your jurisdiction (for example, international banks, local banks, or non-bank financial institutions)?

Maltese banks play an important role in financing home ownership and businesses. However, Malta’s position as an international maritime, air and financial center, and as a booming economy attracting significant foreign direct investment, has led a number of international banks to provide secured financing facilities to Maltese borrowers or take collateral on Malta-based assets for borrowers. within a larger multinational group.

Is well-established documentation of market-compliant facilities used in your jurisdiction for secured lending transactions?

Yes. Local banking institutions have standard forms and documentation. In addition, notarial deeds published in connection with the granting of a loan or security generally contain widely standardized clauses required by the financing bank.

In the case of international banking institutions, the documentation used largely depends on the domicile of the financing bank. Such transactions tend to be largely governed by English law, with documentation from the London Market Association being used.

When it comes to an issue of financial instruments, the prospectus tends to be of a moderately standard format, but the collateral arrangements and structures may vary depending on the nature and structure of the collateral provided by the borrower or guarantors.

Syndication

Are syndicated secured loan facilities typical in your jurisdiction?

Syndicated facilities are rare for local banks, unless the facility creates significant exposure to the bank’s balance sheet, which is rare. These syndicated secured loan facilities are more typical of cross border loans.

How are syndicated facilities normally structured? Does the law in your jurisdiction allow the appointment of a facility agent to act on behalf of other members of the banking syndicate?

Syndicated facilities are normally governed by English law, while the security documentation relating to assets based in Malta is governed by Maltese law.

Facility agents may be appointed to act on behalf of the other members of the union in accordance with article 1856 of the Civil Code. Parallel debt structure agreements with applicable foreign law have also been used in cross-border transactions, with security matters relating to Malta being governed by Maltese law for considerations of validity and enforcement.

Does the law in your jurisdiction allow the holding in trust of collateral and guarantees by a collateral trustee for the benefit of the banking syndicate?

Yes. Section 2095E of the Civil Code and the Trust and Trustee Act provide a clear and comprehensive framework for the settlement and operation of security trust agreements.

Financing of special purpose vehicles

Is it common in secured financial transactions for Special Purpose Vehicles (SPVs) to be used to hold the funded assets? Would a guarantee generally be given on the shares of the SPV or would the lenders require a direct guarantee of the assets?

The establishment of SPVs in secured loan operations is rare in Malta. However, the regulation of securitization vehicles by the Malta Financial Services Authority has led to an increase in the establishment of SPVs in the competition of such structures.

In most cases where SPVs are used, the lender usually requires a guarantee on the shares of the SPV and, by binding the SPV as the guarantor of the loan, it also seeks a direct guarantee of the assets. Lenders would also generally require the SPV to provide appropriate covenants in that the consent of the lender would be required before the SPV undertakes other large borrowings.

Interest

Is interest most often calculated by reference to a bank base rate or a market standard variable reference rate (for example, LIBOR, EURIBOR or HIBOR)? If the latter, what is the most commonly used benchmark rate in your jurisdiction?

Local banks apply their own base rate which is used to calculate any loan rates that are calculated. These rates are established in accordance with the Interest Rates (Exemption) Regulations and regularly reviewed by each respective bank. The bank base rate is communicated to the market through public announcements and a publication on the bank’s website.

In cross-border transactions, the reference rate would generally be Libor or Euribor, the choice between the two being determined by the domicile of the lender or principal arranger of the facility.

Are there regulatory restrictions on the interest rate that can be charged on bank loans?

Although the Civil Code establishes a general rule that interest rates cannot exceed 8% per annum, the Interest Rates (Exemption) Regulations provide specific exceptions to this general rule, placing banking institutions and others specific financing vehicles and transactions defined outside the scope of the restriction, and thus allowing interest rates of more than 8% per annum.

The above restrictions only apply if the loan agreement concluded between the borrower and the lender is governed by Maltese law.

Use and constitution of guarantees

Are guarantees used in your jurisdiction?

Yes, collateral is commonly used in Malta mainly to enhance the security of secured lending transactions. A guarantee would be classified under the heading ‘surety’ in the Maltese Civil Code, which is the nomenclature used in formal legal documents.

What is the procedure for their creation?

The creation of a guarantee does not imply a high degree of formality in Maltese law. A guarantee is generally created by means of a written agreement under private signature signed between the guarantor and the lender, which establishes the specific obligations assumed by the guarantor towards the lender. Unless the warranty is guaranteed, a warranty does not need to be registered to become legally valid or enforceable.

The granting of guarantees upstream is subject to certain restrictions and formalities (see below). Also, in the case of married persons whose inheritance is subject to community of acquests, the consent of the spouse may be required in order to create a valid and enforceable guarantee.

Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (e.g. upstream guarantees)?

Section 110 of the Companies Act sets out a general rule prohibiting the granting of upstream guarantees by Maltese companies. However, this prohibition would not apply to private companies (as opposed to public companies), subject to the completion of specific formalities by these companies. These formalities mainly concern:

• approval by the board of directors of the company after having assessed the financial position of the company by means of a resolution of the board;
• affirmation of the resolution of the board of directors by the shareholders of the company by means of a shareholders’ resolution; and
• a deposit in the Companies Register confirming the satisfaction of these requirements.

It is important that all formalities are undertaken and that the corresponding form is filed with the Companies Register before financial assistance is granted.

The fraudulent preference provisions under section 303 of the Companies Act, as mentioned above, are also relevant for a lender to consider in obtaining a corporate guarantee. .

Subordination and priority

Describe the most common methods of structuring debt priority and security.

Structured finance transactions involving multiple layers of debt such as senior debt, mezzanine debt, hedge debt, and bond debt typically adopt an inter-creditor agreement dealing with priority and subordination agreements between the financial parties. Such agreements between creditors are largely governed by English law.

Documentary taxes and stamp duty

Are taxes, stamp duties or other charges payable on the granting of a loan, guarantee or security, or during its execution?

The granting or performance of a loan, guarantee or security interest does not in itself entail the payment of taxes, stamp duties or other charges. However, granting specific collateral will require deposits with various entities, which could include:

• the public register (for example, rights to real estate as well as general mortgages or floating charges);
• the Companies Register (for example, pledges of securities);
• the Directorate of Merchant Shipping (eg mortgages on Maltese flag vessels);
• the Directorate of Civil Aviation of Transport Malta (eg mortgages on fuselage or aircraft engines); and
• the European Intellectual Property Office (for example, a European trademark or patent).

The required declarations may result in certain disbursements on the basis of the public tariffs published by the authority concerned.

The tariff adopted by the Public Register, which receives the registration notes relating to special mortgages (guarantee on immovable property) and general mortgages (similar to a floating charge), is a ad valorem tariff, and is therefore costly in secure financing transactions.

Click on here to see the full article.