When you apply to corporate financing, a security instrument is needed to ensure that the bank can collect the outstanding payments in the case of default. The type of security will be determined based on negotiation between you and the sales representative of MBSB Bank. The outcome of such negotiations will be recorded in your Letter of Offer (LO) of the underlying facility. In the following, we discuss the most important security instruments usually used with corporate financing.
A debenture is a type of security instrument issued by governments and corporations in the process of raising funds. A debenture is used to establish a legal claim over a range of company’s assets. An indenture is the legal agreement signed by the financer and the funds seeker to record the important clauses of the debenture, such as the maturity date, and the timing and amounts of profit payments. A debenture is usually associated with a single or multiple charges to secure collateralized assets in the case of default.
What is a charge?
A charge is a legal agreement signed by the chargor (customer) and the chargee (the bank). The charge agreement creates a legal claim over the asset in favor of the bank, which enables the bank to proceed with a legal action aiming at liquidating the asset and collecting the sale proceeds to settle your debt. Typically, the charge agreement is registered on the title of a property or a piece of land at the Land Office in order to inform potential buyers of the existence of the debt. That way, the bank will be the first in line to collect its monies. Once the charge is registered, the bank will have indefeasible interests in the property, meaning no past event can nullify or undo these interests.
A charge is different from a mortgage in that no assignment of the property rights is made to the financer. For more information about the differences between charges and mortgages, please see Charge vs. Mortgage. A charge puts some restrictions on the ability of the chargor to sell the property or to use its rental proceeds. Once the entire financed amount is paid off, the bank will remove the charge.
When a corporation assumes debt, it is either subordinated debt or unsubordinated debt. If a company defaults or files for bankruptcy, the liquidated assets of this company will be first used to pay the unsubordinated debt. Any cash in excess of the unsubordinated debt will then be allocated to the subordinated debt. MBSB Bank may require you to declare, via legal documents, the debt resulting from your corporate financing facility an unsubordinated debt.
An escrow account is an account opened and maintained by a customer of a financing facility, where the authority of utilizing the account’s funds is kept with the financing bank, and to be executed in accordance with the terms of the financing agreement. In the case of default, the financing bank has the right to set-off any credit balance in the escrow account against any outstanding balance in the financing facility account. MBSB Bank has the following escrow accounts:
As summarized in the Product Description Sheets of Corporate Financing, and discussed in more details in your Letter of Offer (LO), failing to meet your financial obligations, without agreeing with the bank on alternative payment arrangements, could result in the following consequences: