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Main Characteristics and Advantages of a Parallel Debt Mechanism
Under a parallel debt mechanism, in addition to the obligor’s prime obligation to pay or repay amounts owed by it to its creditors, the obligor undertakes in parallel to pay an equal amount to the security agent. This parallel debt is therefore an independent and separate debt owed to the security agent, which mirrors the debt owed to the secured finance parties under the finance documents. The documentation provides that any payments by the obligor to the security agent under the parallel debt discharges the obligors’ debt to the lenders, and vice versa.
Parallel debt provisions include a statement that, if either the underlying obligations to the finance parties or the parallel debt is reduced, the corresponding debt is also reduced so as to prevent double recovery from the obligor of the same debt. The parallel debt may therefore at no time exceed the obligor’s primary obligations towards the lenders.
All monies received or recovered by the security agent under the parallel debt are required to be applied in accordance with the “order of application” provisions (generally referred to as waterfall provisions) included in the relevant intercreditor agreement.
As a result of the existence of a parallel debt structure, any security for the obligations under the financing may be granted both in favor of the lenders and in favor of the security agent/parallel debt creditor, or indeed only in favor of the security agent/parallel debt creditor. The administration and enforcement of the security, granted with respect to the parallel debt, is much simplified, since it is unaffected by any change in the identity of the lenders. Also, it helps to deal with the requirement that certain types of French law security interest (e.g., pledges of shares) clearly identify the beneficiaries at the time of the grant (including their registered names and registered office), which may be an impossible task in some instances,
Number 1128 | 24 January 2011
such as the case where upon issue the proceeds of a high yield are paid into an escrow account, to be released only at a later date upon certain conditions having been met (such as an acquisition or a refinancing occurring), i.e., at a time when it is no longer possible to identify specifically the beneficiaries to be secured.
The Belvédère Court of Appeal Decision
In May 2006, Belvédère SA (Belvédère), an international beverage company principally producing vodka, spirits and wine, issued €375,000,000 Floating Rate Notes (FRN) repayable in 2013. The FRN were governed by an indenture entered into among Belvédère and certain of its subsidiaries, The Bank of New York Mellon as trustee, Natixis SA (France) as security agent for the French law security documents and Raiffeisen Bank Polska (Poland) as security agent for Polish law security documents. There was also entered into a New York law governed collateral sharing agreement, creating a parallel debt obligation from Belvédère and the relevant subsidiaries towards each security agent acting as creditor for its own account (and not as representative for the other finance parties). The collateral sharing agreement also provided that the aggregate amount of debt owed by Belvédère and its subsidiaries would not be modified as a consequence of the parallel debt, to avoid that any amount should become payable twice to the security agent and to the finance parties.
In July 2008, French safeguard (i.e., insolvency-type) proceedings were commenced against Belvédère and its subsidiaries. Creditors whose claims arose prior to the commencement of these proceedings had to file their claims within a specified period of time.
Natixis SA as security agent declared its own claim against Belvédère and its subsidiaries pursuant to the parallel debt provisions included in the collateral sharing agreement. The FRN holders also declared their claims separately.