Taking Cross-Border Security: Is Parallel Debt Always Necessary?

Parallel debt structures are a familiar feature of cross-border financings but it’s worth noting, are not required in all cases.

The Security Trust 

English law syndicated financings typically rely on the concept of a security trust.  The transaction creditors appoint a security trustee that holds the security that the debtor group enters into on trust for those creditors. Security trust arrangements have a range of benefits, including:

• simplifying the administration of the facility;
• avoiding the need for an intercreditor agreement (in the absence of other creditors); and
• streamlining the enforcement process by having a single entity enforce the security on behalf of each secured creditor.

Parallel Debt 

Many civil law jurisdictions, however, do not recognise the English law concept of a trust.   The solution in cross-border transactions in such jurisdictions is often to create a parallel debt structure. This circumvents the need for a debtor to grant security in favour of multiple secured creditors.  Instead, a parallel debt structure is established whereby each debtor creates a debt in favour of the security trustee in addition to their debt in favour of the other secured creditors. The security trustee relies on this claim in its own name when enforcing the security interests. 

When is parallel debt not required? 

Whilst parallel debt structures are routinely used in English law financings in such circumstances, taking security in civil jurisdictions will not always require this structure. A key example is Germany, where there is a distinction between ‘non-accessory’ or ‘abstract’ security interests that do not directly link the security interest to a particular claim or debt, such as a Grundschuld (land charge) and ‘accessory’ security interests which must tie back to a particular claim or debt. Non-accessory or abstract security interests can therefore subsist without the need for a parallel debt structure. 

Advice should always be sought from qualified lawyers in the foreign jurisdiction in question and Burges Salmon has a bespoke network of preferred firms in each foreign jurisdiction that it works closely with on cross-border matters. For more details, please contact a member of the Banking and Finance Team.   

Christopher Herford, Director, Burges Salmon LLP