For LMA REF development financing, security is granted in favor of the Security Trustee for the Lenders and, if any, the Hedge Counterparties. A REF development transaction Security Package includes:
- A “Security Agreement” from the Borrower, including a mortgage of the Property;
- A “Shareholder’s Security Agreement” in the form of Security of the Shareholders, as Guarantors, over the shares of the Borrower and, possibly, over the Shareholder’s Subordinated Debt; and
- A “Subordinated Creditor’s Security Agreement” over any subordinated debt provided to the Shareholders.
Where shareholders of the borrower are operating companies, the borrower in REF development is an SPV specially set up to ensure that it have no assets, liabilities or operations outside the transaction. This limits the risk of claims and to provide lenders recourse to all of the SPV’s assets and its shareholders’ shares. The proceeds from the sale of a Property first goes to repaying the relevant loan.
In addition to basing their credit risk assessment on the loan to value of the property and facility documentation, as lenders do with REF investment transactions, in REF development transactions they also consider the property development specifications and transaction documents. The lenders focus closely on borrower compliance with the project specifications and the risk of any cost overruns during the property’s development.
If the project is unfinished by the “longstop date” and in the event of noncompliance with the specifications and transaction documents, the senior lenders to take over the project through the security package, collateral warranty protections and borrower development undertakings, and the guarantee in order to ensure project completion.