Loans & Secured Financing - Africa Legal Network · involving guarantees or collateral from...

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Loans & Secured Financing

Loans & Secured FinancingContributing editorGeorge E Zobitz

2018© Law Business Research 2017

Loans & Secured Financing 2018

Contributing editorGeorge E Zobitz

Cravath, Swaine & Moore LLP

PublisherGideon [email protected]

SubscriptionsSophie [email protected]

Senior business development managers Alan [email protected]

Adam [email protected]

Dan [email protected]

Published by Law Business Research Ltd87 Lancaster Road London, W11 1QQ, UKTel: +44 20 3708 4199Fax: +44 20 7229 6910

© Law Business Research Ltd 2017No photocopying without a CLA licence.First published 2015Third editionISSN 2059-5476

The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer–client relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. The information provided was verified between July and August 2017. Be advised that this is a developing area.

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© Law Business Research 2017

CONTENTS

2 Getting the Deal Through – Loans & Secured Financing 2018

Global overview 5George E Zobitz and Christopher J KellyCravath, Swaine & Moore LLP

British Virgin Islands 7Ashley Davies and Omonike Robinson-PickeringWalkers

Cayman Islands 13Rob Jackson and Zoë HallamWalkers

Dominican Republic 19Manuel Troncoso HernándezOMG

Egypt 24Mahmoud Bassiouny and Nadia AbdallahMatouk Bassiouny

Germany 31Stephan Brandes, Philipp von Ploetz and Andreas HerrSZA Schilling, Zutt & Anschütz Rechtsanwalts AG

Greece 37Athanasia G TseneBernitsas Law Firm

Indonesia 44Ibrahim Sjarief Assegaf, Ahmad Fikri Harahap, First Deddy Ariyanto and Luciana Fransiska ButarbutarAssegaf Hamzah & Partners

Italy 54Maurizio Delfino and Martin PugsleyStudio Legale Delfino e Associati Willkie Farr & Gallagher LLP

Japan 60Masayuki FukudaNagashima Ohno & Tsunematsu

Kenya 66Sonal Sejpal, Mona Doshi and Akash DevaniAnjarwalla & Khanna

Luxembourg 74Peter-Jan Bossuyt and Denis Van Den BulkeVANDENBULKE

Netherlands 82Elizabeth van Schilfgaarde, David Viëtor, Diederik Vriesendorp and Janneke de GoeijNautaDutilh

Nigeria 87Onyinye Chukwu, Oluwatoyin Nathaniel and Ukamaka OkoliG Elias & Co

Russia 93Svetlana DashevskayaOrrick, Herrington & Sutcliffe LLP

Spain 98Toni BariosCases & Lacambra

Switzerland 104Patrick Hünerwadel and Marcel TranchetLenz & Staehelin

United Kingdom 109Azadeh Nassiri and Gabrielle EreiraSlaughter and May

United States 115George E Zobitz and Christopher J KellyCravath, Swaine & Moore LLP

Uzbekistan 123Nail Hassanov and Maxim DogonkinKosta Legal


KENYA Anjarwalla & Khanna


KenyaSonal Sejpal, Mona Doshi and Akash DevaniAnjarwalla & Khanna

Loans and secured financings

1 What are the primary advantages and disadvantages in your jurisdiction of incurring indebtedness in the form of bank loans versus debt securities?

In our jurisdiction, the most common form of debt is bank loans. There are a handful of large corporates that have issued debt securi-ties. The advantage of debt securities over bank loans is primarily pric-ing. However, debt securities involve longer processes as the Capital Markets Authority is involved. The securities market is notably not very developed or sophisticated. Bank credit tends to be more expensive, and generally over-collateralised. However, while debt securities may be priced lower than bank credit, the associated disclosure and due diligence requirements and resulting delays lead many enterprises to shy away from seeking debt securities.

2 What are the most common forms of bank loan facilities? Discuss any other types of facilities commonly made available to the debtor in addition to, or as part of, the bank loan facilities.

The common types of facilities are term loans and overdraft facili-ties. We also see trade finance (letters of credit, invoice discount facilities) and commodity finance. Lately, development finance and project finance (in areas such as energy and infrastructure) have become more prevalent.

3 Describe the types of investors that participate in bank loan financings and the overlap with the investors that participate in debt securities financings.

We do not normally see hedge funds or pension funds participating in traditional bank loan financings. We do, however, see increased activ-ity by private equity funds who provide short-term loans (normally with an equity swap or conversion as part of the structuring). Private equity investors also participate in the few corporate debt securities we have in our market. Hedge funds are not that established in our market.

4 How are the terms of a bank loan facility affected by the type of investors participating in such facility?

In most of the syndicated facilities, the participating lenders are mostly banks. Where a term loan facility (not originated by a bank) has vari-ous non-bank participating investors, for example, private equity funds etc, then the terms tend to take on more equity-focused debt-to-equity conversion features. Withholding tax exemption is not available other than to licensed businesses.

5 Are bank loan facilities used as ‘bridges’ to permanent debt security financings? How do the structure and terms of bridge facilities deviate from those of a typical bank loan facility?

Yes, bank loan facilities are normally used in bridge financing. The structure of bridge loans tends to be secured and short term (tenors of less than one year).

6 What role do agents or trustees play in administering bank loan facilities with multiple investors?

The terms of the agents or trustees are typically set out in the facility agreement together with indemnification and reimbursement roles. These are contractual matters that are negotiated from deal to deal.

7 Describe the primary roles and typical fees of the financial institutions that arrange and syndicate bank loan facilities.

Typically, the primary roles of financial institutions are facility agent, mandated lead arranger and security trustee. Fees vary from transac-tion to transaction depending on the size of the financing and the rela-tionship with the borrower (typical fees include arranger fee, security trustee fee and commitment fees). The arranger to a financing would typically also be the lead lender and would take on the responsibility of being transaction leader or coordinator.

8 In cross-border transactions or secured transactions involving guarantees or collateral from entities organised in multiple jurisdictions, which jurisdiction’s laws govern the bank loan documentation?

With respect to cross-border transactions and Kenya in particular, for enforceability reasons, we would normally have the governing law as the jurisdiction where the collateral is situated. In this regard, it should be noted that our company laws only permit the registra-tion of securities created by a company that is incorporated in Kenya. Loan documentation on the other hand may be governed by the laws of the jurisdiction selected by the parties. In this respect, we tend to see a plethora of English law governed facility agreements as reciprocal arrangements exist between Kenya and England concerning English court judgments.

Regulation

9 Describe how capital and liquidity requirements impact the structure of bank loan facilities, including the availability of related facilities.

In line with Basel III, guideline 4.1.3 of the Central Bank of Kenya’s (CBK) Prudential Guidelines of 2013 sets the minimum absolute core capital requirement for banks, mortgage finance companies and finan-cial institutions as follows:• banks and mortgage finance companies: 1 billion Kenya shil-

lings; and• financial institutions: 200 million shillings.

While there was a proposal in the 2016/2017 fiscal budget to raise the core capital for financial institutions to 5 billion shillings, the proposal was rejected by the Kenyan parliament and the requisite amendments to the Banking Act were therefore not effected. This is the second time this proposal has been rejected before Parliament, the first being in 2015.


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The CBK notably objected to the proposals on increase of capital adequacy, which were seen as locking out smaller lenders. The CBK, on 16 November 2016, issued a Guidance Note on the Internal Capital Adequacy Assessment Process, which rather than prescribing fixed capital thresholds instead requires institutions to ‘[ensure] that total capital levels are adequate and consistent with their strategies, busi-ness plans, risk profiles and operating environment on a going concern basis’. This approach may be more accommodating of smaller lenders who offer certain niche services in the Kenyan market.

The lending capabilities of lenders especially issuance of loans for bigger projects is therefore limited. This has led to loans being offered through loan syndications, a practice that is gaining popular-ity in Kenya. In addition, foreign banks with higher core capitals have improved lending capabilities by acting through their subsidiaries.

10 For public company debtors, are there disclosure requirements applicable to bank loan facilities?

Typically there are no disclosure requirements applicable. However, where the facility is for a substantial amount, the public company debtor may be required by the lender to disclose, inter alia, details of the management (directors), shareholders, audited accounts, pre-existing debts, etc.

11 How is the use of bank loan proceeds by the debtor regulated? What liability could investors be exposed to if the debtor uses the proceeds contrary to regulations? Can investors mitigate their liability?

The bank typically stipulates in the facility letter or letter of offer what the bank loan proceeds must be used for.

The Proceeds of Crime and Anti-Money Laundering Act, the Prevention of Fraud (Investments) Act, the Prevention of Terrorism Act No. 30 of 2012, the Prevention of Organised Crimes Act, the Anti-Corruption and Economic Crimes Act and the Banking Act, to the extent that these laws make it an offence for any individual or organisation to open, operate, finance, recruit or assist any person or organisation engaged in terrorist activities. Section 6 of the Prevention of Organised Crime Act No. 6 of 2010 (the POC Act) criminalises attempting, aiding, abetting, counselling, procuring or conspiring with another to commit an offence under the Act. The maximum penalty upon conviction is a fine of 1 million Kenya shillings or imprisonment for a term not exceed-ing 14 years, or both. A lender could therefore be held directly liable for facilitating the offences under section 6 of the POC Act.

Under section 15(1) of the POC Act a lender could be required to produce all information and to deliver documents and records regard-ing any business transaction conducted by or on behalf of any person where the Attorney General has reasonable ground to suspect that person of committing an offence under the POC Act. A lender’s prem-ises can also be searched and any documents or records removed for this purpose.

The use of loan proceeds by a debtor is also regulated through the provisions of the loan documentation, for instance making it an event of default if the borrower acts in contravention of the law or provisions of the documentation.

Guideline 10.3.4 of the Risk Management Guidelines 2013 on lend-ing principles requires, inter alia, that where funds are being used for a project, institutions should satisfy themselves that funds are not used for purposes other than financing the project.

12 Are there regulations that limit an investor’s ability to extend credit to debtors organised or operating in particular jurisdictions? What liability are investors exposed to if they lend to such debtors? Can the investors mitigate their liability?

There are no limitations to investors’ ability to extend credit to debtors organised or operating in particular jurisdictions.

13 Are there limitations on an investor’s ability to extend credit to a debtor based on the debtor’s leverage profile?

Yes. Banks, financial institutions and mortgage finance companies in Kenya are prohibited from granting to any person or permitting to be outstanding any advance or credit facility or give any financial guaran-tee or incur any other liability on behalf of any person, so that the total value of the advances, credit facilities, financial guarantees and other

liabilities in respect of that person at any time exceeds 25 per cent of its core capital, unless authorised by the CBK.

14 Do regulations limit the rate of interest that can be charged on bank loans?

Banks are required to peg the minimum Kenya shillings loan rates to the Kenya Banks Reference Rate (KBRR).

Section 44A(1) and (2) of the Banking Act limits the maximum amount that a bank can recover from a debtor. The maximum amount is the sum of the following: the principal owing when the loan becomes non-performing; interest as agreed contractually between the debtor and bank, not exceeding the principal owing when the loan becomes non-performing; and expenses incurred in the recovery of any amounts owed by the debtor. This section does not, however, apply to limit any interest under a court order accruing after the order is made.

Via the Banking Amendment Act of 2016 (which commenced on 14 September 2016), the Banking Act (Cap 488, Laws of Kenya) was amended to introduce a new section 33B, which introduced an interest rate ceiling cap for any credit facility in Kenya set at no more than 4 per cent of the base rate set and published by the CBK. The CBK rate is set pursuant to section 36(4) of the Central Bank Act, which requires the CBK to publish the lowest rate of interest it charges on loans to banks and microfinance institutions. The penalty for banks or financial insti-tutions in contravention of section 33B is a fine of 1 million Kenya shil-lings or in default the chief executive officer shall be liable to a one-year prison term.

The Consumer Protection Act, contains provisions relating to cer-tain types of credit agreements requiring lenders to disclose whether or not interest would accrue on the unpaid amounts and if such interest is accruing the lender must disclose the interest rate, in the absence of which the lender is treated as having waived the interest.

15 What limitations are there on investors funding bank loans in a currency other than the local currency?

There is no formal exchange control regime in force in Kenya after the repeal of the Exchange Control Act in 1995. However, there are certain limited conditions and procedural requirements that apply in connec-tion with the repatriation of foreign currency from Kenya that should be noted. For instance, section 7 of the Foreign Investments Protection Act allows for the transfer of profits out of Kenya by a holder of a cer-tificate, in respect of the approved enterprise to which such certificate relates. This includes the principal and interest of any loan specified in the certificate. The transfer should, however, be in an approved foreign currency and at the prevailing rate of exchange.

Imposition of prepayment premiums or penalties by lenders on a borrower in respect of loans is prohibited under section 62(1) of the Consumer Protection Act No. 46 of 2012.

16 Describe any other regulatory requirements that have an impact on the structuring or the availability of bank loan facilities.

Imposition of prepayment premiums or penalties by lenders on a borrower in respect of loans is prohibited under section 62(1) of the Consumer Protection Act.

Sections 441 to 443 of the Companies Act 2015 prohibit a public company from giving financial assistance to a person or entity for the purchase of the company’s shares.

Withholding tax is charged at 15 per cent with respect to interest on loans. However, exemptions apply to loans from financial instruc-tions licensed by the CBK as such structuring of the loan facility will be affected by withholding tax requirements and may influence the rate of interest charged.

The Banking Act prohibits a banking institution from granting or permitting to be outstanding:• any advance or credit facility to any company against the security

of the company’s own shares;• any advance, credit facility or financial guarantee to or in favour

of any company in which the banking institution holds, directly or indirectly or has a beneficial interest in more than 25 per cent of the share capital of that company;

• any unsecured advances in respect of any of its employees or their associates (however, facilities granted to staff members within




schemes approved by the board and serviced by salary through a check-off system are allowed); and

• any advances, loan or credit facilities, which are unsecured, or which are not fully secured to any of its officers or their associates; where facilities to insiders are secured by guarantees, these guar-antees should be supported by tangible or other securities with proven market value that are duly charged and registered in favour of the institution.

In compliance with constitutional requirements on consumer protec-tion requiring provision of information necessary for the consumers to gain full benefits of goods and services, the Kenya Bankers Association in conjunction with CBK introduced the annual percentage rate (APR) pricing mechanism, where banks are now required to disclose the total costs associated with a loan and set this out in a loan repayment sched-ule – as per Guideline 3.4.4 of the Prudential Guidelines. The APR, takes into account the interest rate component; bank charges and fees; and third-party costs, including legal fees, insurance costs, valuation fees and government levies. In line with this, was the introduction of the Kenya Banks Reference Rate (KBRR) as a uniform base lending rate across the banking sector to enable consumers compare the pricing of loan products. Banks are now required to disclose to their customers the premium levied by banks above KBRR as their lending rate and should cover the identified loan-associated risks.

Note that when the interest rate cap is set below the market rate of interest, the set ceiling becomes the price of loans (in our case 14.5 per cent) and results in a decrease in the amount of credit supplied given that lenders’ expenses and costs cannot be recovered when interest rates are held down. The introduction of an interest rate cap in Kenya has led to a reduction in profits with banks looking for other avenues to return to profitability. Lenders in the market attempted to raise arrangement fees, tariffs, commissions and other costs as a way of getting around the lending cap. The CBK, however, by way of Banking Circular No. 6 of 2016 clarified that any arbitrary increment of charges is illegal pursuant to:• section 44 of the Banking Act, which provides that no institution

shall increase its rate of banking or other charges except with the prior approval of the Cabinet Secretary of Finance; and

• Regulation 2 of the Banking (Increase of Rate of Banking and Other Charges) Regulations, 2006, which provides that an applica-tion for approval of increase in the rate of banking or other charges under section 44 of the Act ought to be submitted to the Cabinet Secretary through the Governor of the CBK.

These restrictions have an overall impact on the availability of credit.

Security interests and guarantees

17 Which entities in the organisational structure typically provide collateral and guarantee support for bank loan financings? Are there limitations on which entities in the organisational structure are permitted to provide such support?

Typically parent and holding companies provide collateral and guar-antee support for loan financing to their subsidiaries while sister com-panies provide the same to each other as there are no legal restrictions on issuing guarantees subject to any limitations in the constitutional documents of the entity.

For public companies, members’ approval is required for a com-pany to issue a guarantee or provide security to secure the obligations of a director of the company, a director of a holding company and to a person connected with a director of the company or of a holding com-pany. For private companies, members’ approval is required for a com-pany to issue a guarantee or provide security to secure the obligations of a director of the company or a director of a holding company.

If a company is issuing a guarantee or security in favour of another company, the company providing the guarantee or security must show that it will derive some commercial benefit.

18 What types of obligations typically share with the bank loan obligations in the collateral and guarantee support? If so, are all such obligations equally and ratably covered by the collateral and guarantee support?

Unsecured obligations would rank after secured obligations and swap and hedging obligations would rank as provided in the agreement.

19 Which categories of assets are commonly pledged to secure bank loan financings? Describe any limitations on the pledge of assets.

The assets that are commonly pledged in Kenya are land, shares and company assets. Securities over land, shares and company assets are registered at the Registry of Lands and the Registry of Companies, respectively. The limitations on the charge over land is that land in Kenya is subject to overriding interests that need not be registered and as such a creditor may be unaware of the overriding interests that may be detrimental to the security.

In addition to the above, it also possible to create a charge over the following assets:• cash deposits by way of charge over bank account;• insurance proceeds by way of assignment of insurance policies; and• contractual rights by way of assignment of receivables from

the contracts.

The Movable Property Security Rights Act was recently passed in Kenya, and it provides a legal framework for dealing with security rights in moveable assets including:• transactions that secure payment or performance of obligations,

without regard to its form and irrespective of the person who owns the collateral;

• collateral (defined in the Act as (i) a moveable asset that is subject to a security right or (ii) a receivable that is subject of an outright transfer) by way of: • chattels mortgage;• credit purchase transaction;• credit sale agreement;• floating and fixed charge;• pledge;• trust indenture;• trust receipt; and• financial lease or any other transaction that secures payment

or performance of an obligation; and• outright transfer of a receivable.

20 Describe the method of creating or attaching a security interest on the main categories of assets.

Charge over landUnder the land laws enacted in May 2012, namely the Land Act (Act No. 6 of 2012) (the Land Act) and the Land Registration Act (Act No. 3 of 2012), there are currently only two types of securities that are capa-ble of being created over immoveable property, namely: an informal charge; or a formal charge.

A formal charge is created where a chargor creates security over land in favour of a lender and the security is registered at the Lands Registry and the Companies Registry (if in relation to a charge created by a company).

An informal charge is created where a chargor deposits a written undertaking with the chargee to charge the property or deposits a docu-ment of title with the chargee.

Charge over company assetsA specific debenture is a charge created over a specific asset of a com-pany whereas an all-assets debenture is a charge created over the whole or substantially the whole of a company’s assets.

Section 878 of the Companies Act 2015 provides that any charge created by a company shall be lodged for registration at the Companies Registry.

Security can be created over ships and aircrafts in the form of a mortgage and are registrable at the relevant registry. A ship mortgage is registrable with the Companies Registry and the Kenya Maritime Authority whereas an aircraft mortgage is registrable at the Companies




Registry only as we currently do not have a separate registry for air-craft mortgages.

Charge over company sharesA charge over shares is created by the holder of the shares in a com-pany and is registered in accordance with section 878 of the Companies Act 2015.

CollateralRegistration of collateral pursuant to section 8 of the Movable Property Security Rights Act 2017 and regulations made thereunder.

21 What steps are necessary to perfect a security interest on the main categories of assets? What are the consequences of failing to perfect a security interest?

The perfection of a security involves the payment of stamp duty appli-cable on the security and registration of the security at the relevant reg-istry. Failure to perfect a security would mean that the creditor is treated as an unsecured creditor. Pursuant to section 885 of the Companies Act a security created by a company must be registered within 30 days from the day on which the security is created.

Security documents must be stamped within 30 days of the date of the security document. If the security document is executed outside Kenya, then it must be stamped within 30 days of execution or after the date the security document is first received in Kenya.

22 Can security interests extend to future-acquired assets? Can security interests secure future-incurred obligations?

Yes, security interests can extend to future-acquired assets and obliga-tions. Under an all assets debenture the company secures, in addition to all present assets, future assets also.

23 Describe any maintenance requirements to avoid the automatic termination or expiration of security interests.

Securities are created as continuing securities and are usually only dis-charged once all obligations are fulfilled.

24 Are security interests on an asset automatically released following its sale by the debtor? If so, are the releases mandated by law or contract?

There is no automatic release. Release of security interest over an asset involves the holder of the security signing, stamping and registering a document of discharge at the relevant registry.

25 What defences does a guarantor have against claims for non-fulfilment of guarantee obligations? Can such defences be waived?

A guarantor has the following defences against claims for non-fulfil-ment of guarantee obligations:• the extension of time: the court reaffirmed the principle that where

a creditor affords more time to the debtor without the consent of the guarantor then the guarantor stands discharged from liability (Rouse v Bradford Banking Co Limited [1894] AC 586, HL);

• variation to the contract: the court stated that where the agreement between the principals is amended in a way that is not obviously unsubstantial or for the benefit of the guarantor without his or her consent then the guarantor is discharged. Similarly if the loan amount is increased without the guarantor’s consent the guarantor would be released from obligation (Bolton v Salmon [1891] 2 Ch 48);

• release of the debtor: the court affirmed that where a creditor releases a security the guarantor would have a defence for non-fulfilment of guarantee obligations (Re Walker, Sheffield Banking Co v Clayton [1892] 1 Ch 621); and

• lack of consideration: a company that gives a guarantee and does not receive a commercial benefit from the issuance of the guaran-tee will have a defence of lack of consideration.

There are a number of other defences including duress, undue influ-ence, misrepresentation and non est factum that are available to guarantors. Waiver of the defences is dependent on the defence; for example, it is not possible to waive the defence of lack of consideration.

26 Describe any parallel debt or similar requirements applicable in a secured bank loan financing where an agent acts for multiple investors.

In circumstances where an agent acts for multiple investors in a secured loan financing, the investors may structure the financing in a way that involves security trustee and syndicated loan arrangements.

27 What are the most common methods of enforcing security interests? What are the limitations on enforcement?

The common methods of enforcing security interests are:• suing the debtor for the money due and owing under the secu-

rity interest;• appointment of a receiver of the income (if any) under the security;• taking possession of the security by the receiver; and• sale of the security.

The limitations on the enforcement mechanism may be contractual as provided for in an intercreditor agreement. The Land Act of Kenya also limits a chargee’s action for money on a security secured by a charge, and provides that a court may order the postponement of any proceed-ings until a chargee has exhausted all other remedies relating to the charged land.

Inside insolvencyUnder the new Insolvency Act 2015, a holder of a qualifying floating charge is entitled to appoint an administrator in respect of a company creating a security. A qualifying floating charge is a charge over the whole or substantially the whole of the assets of a company. The docu-ment creating the qualifying floating charge must expressly state that section 534 of the Insolvency Act applies to the floating charge. The administrator’s major role is to rescue the business of the company and has various powers including but not limited to the power to dispose of the assets of the company.

On liquidation of a company, all claims against the company shall be admissible as proof against the company. The liquidator has the power to deal with all the assets of the company save for those assets that have been charged to secured creditors by way of fixed charge. For floating charge security, the security holder is paid out of the pro-ceeds of the liquidation after the preferential creditors as set out in the Insolvency Act have been paid.

28 Describe the impact of fraudulent conveyance, financial assistance, thin capitalisation, corporate benefit and similar doctrines on the structure of bank loan financings.

Fraudulent conveyanceThe structure of bank loan financing in the context of acquisition financing counters the effects of fraudulent conveyancing by ensuring that attempts to challenge, terminate, impair, suspend or forfeit a bor-rower’s title and/or interest to the security would be events of default. A fraudulent conveyance of property that is taken as security would render the security unenforceable.

Financial assistanceFor private companies financial assistance is not prohibited under the Companies Act 2015; however, for public companies there are excep-tions set out in section 446 of the Act as to when financial assistance can be given by a public company.

Thin capitalisationIf 25 per cent of a company is controlled by foreigners, thin capitalisa-tion rules apply. The rules would not directly affect the financing but preclude the company from deducting interest on loans to reduce tax-able profits if it is thinly capitalised.

Corporate benefitA company must derive a corporate benefit before guaranteeing the obligations of another company; where corporate benefit is not appar-ent, the structure of the bank loan financing may include a corporate benefit agreement.




Intercreditor matters

29 What types of payment or lien subordination arrangements, or both, are common where the debtor has obligations owing to more than one class of creditors?

Subordination agreements can be of different types. A distinction can be made between contingent subordination and absolute subordina-tion. A contingent subordination agreement provides that a creditor will have its rights or entitlements subordinated only in the event of speci-fied circumstances, usually insolvency or bankruptcy. An absolute or complete subordination agreement is one that is not contingent on any event other than the validity and enforceability of the agreement itself.

Another distinction in subordination agreements is between secu-rity subordination and payment or debt subordination. The security subordination involves the secured debt of, at least, the subordinated creditor. With this type of subordination, the subordinated creditor loses the priority to collateral it otherwise would have against the sen-ior creditor. The second type of subordination alters the order in which payment will be made to the creditors and might or might not involve secured debt.

The challenge in enforceability of subordination arrangements is the rule of interpretation of contracts under contract law. It is possi-ble that the court will be called upon to interpret the provisions of the subordination agreement. Some subordination agreements will con-tain a specific reference to the rights purportedly granted, assigned, or waived, making the court’s job simple, at least on the question of con-tract interpretation. Other subordination agreements rely upon general language forcing the court to determine exactly what was contemplated by the parties. Where the drafting is clear, the courts have generally been willing to enforce the agreement as written. Where the drafting is not clear, the result is much harder to predict and senior creditors bear the risk of ambiguity in intercreditor agreements.

30 What creditor groups are typically included as parties to the intercreditor agreement? Are all creditor groups treated the same under the intercreditor agreement?

Subordination agreements can involve a number of parties. They can be between two creditors or alternatively the debtor may also be a party. Usually, it is the secured creditors who enter into intercreditor agree-ments (with the debtor as one of the parties) to set out the modalities and steps that may be taken in an enforcement of securities.

31 Are junior creditors typically stayed from enforcing remedies until senior creditors have been repaid? What enforcement rights do junior creditors have prior to the repayment of senior debt?

Typically, first lien lenders will require that they maintain the exclusive right to realise on the collateral package for a specified period follow-ing a borrower default and that the second lien lenders waive numer-ous rights that otherwise would be granted to them as secured lenders. The rights granted in favour of the first lien lenders, however, gener-ally are counterbalanced by certain protections afforded to the second lien lenders. The second lien lenders may have a right to be consulted before action is taken. The second lien lenders may also have the right to limit the amount of debt that the borrower can incur. Further, the sec-ond lien lenders may have the right to restrict amendments to first lien credit documentation, for example, extending maturities or increasing interest rates.

Junior secured creditors may take enforcement action without con-sent or having to wait for senior creditors. Intercreditor agreements may, however, provide differently.

The Insolvency Act 2015 provides a list of preferential creditors and prioritises the remuneration of the bankruptcy trustee, liquidator, any person who applied to the Court for the order adjudging a person bank-rupt or placing a company in liquidation, persons involved in the pres-ervation of the company’s assets, then wages and salaries to employees, then finally the taxes under the different tax regimes.

32 What rights do junior creditors have during a bankruptcy or insolvency proceeding involving the debtor?

The rights of a junior creditor in bankruptcy proceedings will depend on whether the junior creditor is a secured or an unsecured creditor. As discussed in question 31, a secured creditor takes priority over an

unsecured creditor if there are competing claims to the property or to the proceeds from the sale of the property. A junior creditor who is a secured creditor is guaranteed certain rights, regardless of subordina-tion. These rights include the right to assert and prove its claim, the right to seek court-ordered protection for its security, the right to have a stay lifted under proper circumstances, the right to participate in the voting for confirmation or rejection of any plan of reorganisation, the right to object to confirmation and the right to file a plan where applicable.

For an unsecured junior creditor, after all expenses have been paid in full in a winding up, the company’s unsecured debts are paid in prior-ity to all other debts. These debts rank equally among themselves after the payment of the liquidation expenses and are required to be paid in full, unless the assets are insufficient to meet them, in which case they share the assets between themselves in proportion to their debts.

The Insolvency Act 2015 provides for the concept of administration which is a procedure allowing for the reorganisation of a company or the realisation of its assets under the protection of a statutory morato-rium. During this period of statutory moratorium, all creditors are pre-vented from taking action to enforce their claims against the company, where the company is the debtor. Specifically, once a statutory mora-torium is in place creditors cannot commence insolvency proceedings against the debtor, secured creditors cannot enforce security over the assets of the debtor and a creditor cannot exercise the right to distrain or repossess assets in the debtor’s possession.

33 How do the terms of the intercreditor arrangement change if creditor groups will be secured on a pari passu basis?

Where creditors are secured on a pari passu basis, the intercreditor agreement will contain a provision stating that the creditors ‘rank pari passu’ with each other regardless of when the securities were created.

What this means is that all creditors of an insolvent company are to be treated ‘equally’ by having their pre-insolvency claims met rateably. Thus where creditor groups are secured on a pari passu basis, this has the effect of striking down all agreements that have as their object or result the unfair preference of a particular creditor.

Loan document terms

34 What forms or standardised terms are commonly used to prepare the bank loan documentation?

In Kenya, most banks have their own standardised terms, which are covered in their facility letters, agreements or offer letters that set out preliminary terms of the loan. In syndicated loans, most banks would adopt Loan Market Association (LMA) documentation.

35 What are the customary pricing or interest rate structures for bank loans? Do the pricing or interest rate structures change if the bank loan is denominated in a currency other than the domestic currency?

There are two main types of loan interest rate structures in Kenya: fixed rate and variable rate. The pricing on the interest rate is determined by reference to the CBK rate (which is currently 10.5 per cent) and by adding the agreed margin (which is currently capped at four percentage points above the CBK’s benchmark rate).

The interest rate does change if the loan is denominated in a foreign currency. For loans denominated in foreign currencies (eg, US dollars) banks normally use the LIBOR rate.

36 What other bank loan yield determinants are commonly used?Normally, the commercial practice is that bank loans are not issued with original issue discount. However, when dealing with LMA facility agreements or sophisticated borrowers, pricing floors may be negoti-ated as interest rate determinants.

37 Describe any yield protection provisions typically included in the bank loan documentation.

Increased costs and withholding tax gross-up provisions are common-place. Change in circumstances clauses are not typical but would be included in high-value borrowings by sophisticated borrowers. For LMA documentation there may be provisions relating to the Foreign Account Tax Compliance Act of 2009 (FATCA), which seeks to penetrate bank secrecy rules to address tax evasion and is likely to have an impact on




Update and trends

There have been several developments and emerging trends in the banking industry in Kenya, some of which are discussed below.

ICT integration in the Kenyan banking sectorCommercial banks in Kenya have taken cognisance of the growing ICT infrastructure in Kenya and have since integrated banking systems on various ICT platforms. To simplify the ease of doing banking business in Kenya, banks have now developed apps to be utilised by custom-ers with smartphones to access various banking services. This shift in doing banking business has been due to various economic factors:• Kenya has achieved an unprecedented level of mobile penetration

and according to the Communications Authority of Kenya, there are now 37.8 million mobile subscriptions, which means we now have a market penetration of 88.1 per cent. These numbers suggest that in a few years Kenya may achieve 100 per cent mobile penetration.

• Kenya leads the world when it comes to mobile money transactions, thanks to the mercurial rise of Safaricom’s M-Pesa. According to the CBK, as of December 2016 there have been transactions worth over 316 billion Kenya shillings using mobile money. There is hardly a service or product that cannot be paid for using mobile money in Kenya these days.

• Kenya’s internet usage is largely carried out via mobile devices. According to the Communications Authority of Kenya’s latest quarterly statistics, there are 21.6 million internet subscriptions in Kenya and 99 per cent of those are mobile. In addition, there are over 6.3 million broadband mobile subscriptions.

• Kenya is seeing an unprecedented uptake of smartphones. In particular, low-cost android smartphones that sell for as little as 4,000 shillings. Due to this trend, we are seeing the rise of social media and over the top (OTT) mobile apps that are consumed at a much higher rate than mobile data.

Based on these statistics it has therefore become a necessity for banks to develop apps that will grant their customers better ease of access to their services.

Increased presence of mobile app-based lendersThis trend is only in its infancy but is beginning to penetrate the lend-ing business in Kenya and has already started to have an impact on commercial banks’ lending. Investors keen on joining the lending business have developed mobile apps such as Mkopo Rahisi, Pesa Sasa and Saida, which are fast gaining currency as disruptive lenders that leverage on big data, algorithms on social media such as Facebook, and mobile money transaction history to issue near-instant unsecured loans via mobile money. The loans that these services issue target Kenyans who need loans quickly and can pay back in a matter of days that they would normally never be granted by a bank or more tradi-tional micro-lender. The interest rates are quite high but the allure of speedy loans and a reliable mobile app-based offering are changing the financial services technology space in Kenya as far as consumers are concerned – banked or unbanked.

E-banking mobile payment platform continues to soarThis platform continues to be a key trend in the Kenyan economy by enabling a large cross-section of the population to be incorporated into the formal banking sector without going to a bank since they can per-form basic banking transactions by mobile phone. Since 2007 Kenyans have been able to open up a digital account on their mobile phone, send and receive money, pay utility bills and obtain credit. Users can also withdraw money from ATMs. Such services have become possible through technology pioneered by mobile network operator Safaricom (a subsidiary of Vodafone Plc) and started with a mobile money transfer system called M-Pesa. Safaricom is not classified as a deposit-taking institution and therefore does not need to be licensed under the Banking Act. Since then all the other mobile network operators operat-ing in Kenya have followed suit to provide similar services. The mobile money transfer service is estimated to be used by over 15 million people in Kenya and the estimated average volume of money transacted, according to the CBK, is 128 billion Kenya shillings per month.

Interest rate cappingThe Kenyan parliament enacted the Banking (Amendment) Act 2016, which put a cap on the rate of interest charged for loans by commercial banks and fixed the minimum rate of interest that such institutions must pay on deposits held. The Act set the maximum interest rate chargeable for a credit facility in Kenya at no more than 4 per cent

above the base rate set and published by the CBK. In addition, the Act stipulates that the minimum interest granted on a deposit held in inter-est earning in Kenya to at least 70 per cent, the base set and published by the CBK. The enactment of this law was met with uproar from vari-ous stakeholders in the banking sector (including the Treasury and CBK chairman) most of whom argued that the move would lead to slowed growth in the banking sector and to a decline in uptake of loans and negatively affect the economy. The proponents of the Act, how-ever, countered that capping of interest rates was necessitated by the perception of a skewed credit pricing model that has been employed by the banking sector, which saw banks make superfluous profits at the expense of the borrowers. All in all, the capping of the interest rates – even though welcomed by borrowers – saw a decline in approved loans with the CBK quarterly report indicating that loan approvals declined by 6 per cent between December 2016 and February 2017. This is despite the fact that there was an exponential increase in loan applications. Commercial banks have tightened their lending and there has been a shift towards lending to more secure borrowers against the backdrop of reducing risks exemplified by the interest rates capping.

Introduction of the new Insolvency Act 2015Previously insolvency in Kenya was based on the Companies Act 1948, which was adopted from the UK. The Insolvency Act 2015 similarly borrows heavily from the English Insolvency Act of 1986. Unlike the previous legislation, the new Insolvency Act seeks to redeem insolvent companies through administration as opposed to liquidation. The Act focuses more on assisting insolvent corporate bodies whose financial position is redeemable to continue operating as going concerns so that they may be able to meet their financial obligations to the satisfaction of their creditors. The Act also provides for mechanisms through which companies can reschedule their debts to extend the repayment period instead of immediately commencing liquidation proceedings in court.

Bribery Act 2016Kenya recently enacted the Bribery Act 2016, which comes in the wake of changes and new appointments to the Ethics and Anti-Corruption Commission in a bid to battle corruption in all sectors of the coun-try’s economy. The Act applies to all individuals and entities in the private and public sectors (including banks). Previously, the law did not impose significant responsibilities on the private sector in the fight against corruption. Significantly, the Act now imposes express duties on private entities and individuals; for example, the duty to prevent and report incidents of bribery, as well as the requirement to have in place procedures for the prevention of bribery. It prescribes penalties for pri-vate entities and individuals who fail to adhere to the provisions of the Act. The new law has wide-ranging implications for clients in Kenya, or operating in Kenya from abroad. Its effectiveness is yet to be tested, but with the hefty penalties the implications should be factored into all business activities, and businesses need to review their compliance programmes. The Act has far-reaching implications for those doing business in Kenya or with Kenyan entities, alongside other extraterrito-rial statutes on bribery such as the US Foreign Corrupt Practices Act and the UK Bribery Act.

Movable Property Security Rights Act 2017In a move aimed at the securities market in Kenya, Parliament enacted the Movable Property Security Rights Act with the aim of provid-ing for the use of moveable property as collateral for credit facilities and enhancing the ability of individuals and entities to access credit using moveable assets. It does this mainly by establishing the Office of Registrar of security rights and by providing for the registration of security rights in moveable property. The Act makes it easier for per-sons who do not own real property to secure a credit line by facilitating borrowing against their various types of moveable assets.

Ease of doing business in Kenya enhancedThe government is keen to build on the gains made in enhancing the ease of doing business. Over the past three years, Kenya’s ranking in the World Bank’s Ease of Doing Business index has improved by 44 places and in 2016 Kenya was among the best reformers globally. The rise in ranking is attributable to reforms that improve access to credit, making it easy to start businesses and introduction of e-government services, all of which have reduced costs and increased accessibility. In an effort to sustain the successes achieved, the government plans to introduce a one-stop centre for investors while creating an investor-friendly website with details of regulations and available invest-ment opportunities.




loan documentation where non-US entities receive US-source interest and other payments.

Section 62(1) of the Consumer Protection Act prohibits the imposi-tion of prepayment premiums or penalties on borrowers.

38 Do bank loan agreements typically allow additional debt that is secured on a pari passu basis with the senior secured bank loans?

Yes, banks in Kenya allow additional debt that is secured on a pari passu basis. However, security documents usually provide that the borrower must not have or incur any other financial indebtedness nor grant secu-rity interests to third parties without the consent of the lender.

39 What types of financial maintenance covenants are commonly included in bank loan documentation, and how are such covenants calculated?

Financial maintenance covenants are negotiated specifically for differ-ent transactions. The types of financial maintenance covenants include:• maintenance of minimum working capital and debt service cover-

age ratios;• maintenance of minimum net worth;• restrictions on other borrowings, shareholder salaries, distribu-

tions, or dividends;• restrictions on the use of borrowed funds; • restrictions on compensation packages for officers;• limits on borrowing bases; and• financial covenant ratios including debt to equity, value of net

assets, financial indebtedness over earnings before interest and tax, current ratio (current assets to current liabilities).

In addition, banks usually establish other covenants, sometimes labelled ‘non-financial’ in the loan document, such as requirements to:• provide annual audits or reviews by a certified public accountant

or auditor;• provide interim unaudited financial statements and other finan-

cial information; • maintain minimum levels of business insurance;• maintain physical assets to certain standards; and• engage only in permissible business lines.

Equity or cash or additional security cures may be incorporated to cure breach of financial maintenance obligations of the borrower.

Each bank would have its own formula to calculate the ratios and limits depending on the transaction at hand.

40 Describe any other covenants restricting the operation of the debtor’s business commonly included in the bank loan documentation.

Covenants are negotiated on a transaction-specific basis. These cov-enants include positive covenants, negative covenants and information covenants. Negative covenants include a negative pledge, restrictions

on change of control and changes to the group structure and/or a change of business and restrictions on financial indebtedness.

41 What types of events typically trigger mandatory prepayment requirements? May the debtor reinvest asset sale or casualty event proceeds in its business in lieu of prepaying the bank loans? Describe other common exceptions to the mandatory prepayment requirements.

Types of events triggering mandatory prepayment include:• cross-default – where a borrower defaults under one of its other

credit facilities;• failure of the borrower to pay any money or discharge any obliga-

tion in a material respect;• appointment of receiver, insolvency practitioner, administrator or

liquidator of borrower;• misrepresentation by the borrower with respect to any mate-

rial information;• expropriation of material assets of the borrower;• political and economic risks likely to affect repayment of the loan;• creditor process (eg, winding-up petitions instituted by creditors);• insolvency events (eg, where the borrower is unable or admits ina-

bility to pay its debts as they fall due or suspends making payments on any of its debts);

• litigation (eg, where the borrower is involved in any litigation pro-cess or is threatened by litigation that may materially affect its abil-ity to repay the loan); and

• change of control, where the control of the borrower, usually a change in shareholding, is materially altered it becomes a manda-tory obligation for the borrower to prepay.

Provisions relating to whether the debtor may reinvest asset sale or cas-ualty event proceeds in its business in lieu of prepaying the bank loans are usually not provided for.

Exceptions to the mandatory prepayment requirements are not usually provided for.

42 Describe generally the debtor’s indemnification and expense reimbursement obligations, referencing any common exceptions to these obligations.

It is a typical standard term to have the debtor covenant to indemnify the bank on a full and unqualified basis in circumstances such as: • all costs, charges, taxes, liabilities, damages and expenses suffered

by the bank in relation or incidental to the negotiation preparation and completion of the security;

• where any action proceeding or claim is brought by or against the bank for or in relation to, for example, enforcement of the security;

• in connection with the negotiation and completion of any further securities or other instrument or document supplemental to or col-lateral with the securities;

• in connection with costs incurred in any proposed transaction concerning the secured assets for which the borrower needs the bank’s consent;

Sonal Sejpal [email protected] Mona Doshi [email protected] Akash Devani [email protected]

The Oval, 3rd FloorJunction of Ring Rd Parklands & Jalaram RdWestlands, NairobiKenya

Tel: +254 20 364 0000 / +254 703 032 000Fax: +254 20 364 0201www.africalegalnetwork.com/kenya




• costs incurred in effecting any registration that the bank may deem necessary or expedient or for the proper protection of its security;

• in connection with the expenses incurred by the bank in the main-tenance repair or insurance of the charged assets;

• all losses, actions, claims, expenses, demands and liabilities for anything done or omitted in the exercise of the powers conferred or implied by the security document; and

• in relation to legal fees owing to the advocates or other professional or technical advisers of the bank in respect of their work done.

The common exception is where any expenses or obligations are expressly imposed on the bank by statutory law and the transfer of such expense or obligation to the account of the borrower is prohibited.


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