This COLLATERAL ASSIGNMENT OF HEDGE (this “Assignment”) dated as of _____________, 200__ (the “Effective Date”), is made by __________________, a _____________, with an office at _________________ (“Borrower”), in favor of ___________________, a _____________, with an office at ______________________ (with its successors and assigns, “Administrative Agent”). Capitalized terms used but not defined in this Assignment shall have the same meanings as in the Loan Agreement dated as of the Effective Date (as amended from time to time, the “Loan Agreement”), between Borrower, as borrower, and Administrative Agent, as Administrative Agent for the benefit of the Lenders,1 and if not defined in the Loan Agreement shall have the definitions in the Hedge (as defined below).
[Signature Page Follows.]
IN WITNESS WHEREOF, Borrower has executed this Assignment as of the Effective Date.
BORROWER:
NAME OF ENTITY
[SIGNATURE BLOCK]
Attached:
Issuer Confirmation
Exhibit A – Description or Copy of Hedge
ISSUER CONFIRMATION
Issuer accepts, agrees to, and acknowledges the foregoing Assignment and all its terms. In the event of any inconsistency between the Assignment and the Hedge, the Assignment shall govern and modify the Hedge.
ISSUER
[SIGNATURE BLOCK]
Date: ______________________, 200__
EXHIBIT A
DESCRIPTION OF HEDGE AND ISSUER
Issuer |
____________________ |
Hedge (Master Agreement) |
____________ Agreement (________ Reference No. _____), dated as of __________, as supplemented by [the Schedule(s) thereto dated as of the same date and] as amended from time to time (in compliance with the foregoing Assignment) between Issuer and Borrower |
Amendment(s) |
Transaction Amendment (__________ Reference No. _________) dated as of ____________ |
Confirmation(s) as of Effective Date |
Confirmation(s) issued under Issuer’s Reference No. _____ dated as of __________ |
1 If the Loan Agreement describes the lenders as, for example, the “Secured Parties,” conform all references.
2 The Loan Agreement should define “Obligations” broadly enough to pick up all obligations under this Assignment, all other loan and security documents, and of course the Loan Agreement itself.
3Administrative Agent must perfect this security interest. Because the Hedge is a general intangible, Administrative Agent will need to file a UCC financing statement, in the jurisdiction where Borrower is located under UCC § 9-307 (usually the jurisdiction of organization), identifying the Hedge as collateral. This is true even if Issuer is Administrative Agent or Administrative Agent’s affiliate. If the Hedge were a bank deposit in the same institution, entirely different perfection rules would govern. Use of those rules for a Hedge could produce disaster.
4 Issuer will typically be the lender’s “swap desk.” That institution’s involvement in the transaction will usually assure it an “inside track” for the swap assignment. Borrower may still hold a reverse auction just to keep everyone honest. The “bidding package” should include a copy of the Collateral Assignment of Hedge that will be required. For purposes of closing documentation and perfection of security interests, the lender should treat the swap issuer as an independent third party.
5 International Swaps and Derivatives Association, Inc. (“ISDA”), formerly the International Swap Dealers Association, has promulgated a standard document format for Hedges, vastly simplifying transactions that once required extensive negotiations. Most Issuers still use the 1992 ISDA documents, although ISDA issued new ones in 2002. ISDA documentation for any Hedge will typically consist of three pieces: (1) a Master Agreement; (2) a Schedule to the Master Agreement, giving details about the parties and other matters, and modifying some terms of the Master Agreement; and (3) a Confirmation to memorialize the terms of a specific hedging transaction. Item “1” is an ISDA printed form and quite standard. Item “2” reflects the tastes of each Issuer, often overriding specific provisions of the ISDA printed form. Item “3” should precisely match the terms of the loan being hedged. A lender accepting a hedge pledge should review all three components (emphasizing the last). Although this model hedge pledge seeks to cure the most common problems in Hedge documents, other issues could arise as well. The time to fix them is before the closing (or else not close). For a discussion of how Hedges work and what a lender should watch for, see the Guinn and Harvey article cited in the introductory paragraph. Issuers sometimes use non-ISDA Hedge documents, requiring greater scrutiny by all parties, particularly as to definitions.
6 A single Master Agreement can relate to more than one Transaction (as defined in the Master Agreement). A Hedge involving a real estate single-purpose entity should, however, typically relate to only one Transaction. The Master Agreement should cover no other Transactions involving that entity or anyone else.
7 The preceding sentence favors Issuer rather than Administrative Agent, but Issuers often request it.
8 Standard ISDA documents (both the 1992 and 2002 editions) prohibit assignment. Even if an Issuer does not enter into an ISDA Master Agreement, the Hedge documentation may incorporate the ISDA Master Agreement by reference (along with its assignment prohibition). Any Hedge will, however, nearly always constitute a “payment intangible” under the UCC. Therefore, UCC § 9-406 will override Borrower’s agreement with Issuer not to grant a security interest in the Hedge and will validate the security interest this Assignment creates. UCC § 9-406 will not, however, override the Transfer prohibition in this Assignment.
9 As the preceding footnote explains, Administrative Agent normally does not need Issuer’s consent to obtain a good security interest, even if the Hedge documents require it. Nevertheless, Administrative Agent typically should, and do, obtain Issuer’s assurances and covenants as set forth in this Assignment.
10 Issuer’s waiver of set-off and netting can be critical to giving Administrative Agent the benefit of its bargain. Absent this waiver, Issuer could “net” (or offset) any payments it might owe under other (unrelated) Transactions under the same Master Agreement. Moreover, given the widespread use of separate “netting agreements” in the world of swaps, Issuer could probably even net its obligations under the Hedge against Issuer’s obligations under unrelated hedge documents with the same Borrower or perhaps such Borrower’s affiliates. Any such “netting” could dilute or eliminate the protection against interest rate volatility that Administrative Agent wanted to achieve. Guinn and Harvey (cited in the introductory paragraph) discuss these concerns at greater length.
11 The Loan Agreement should say, once, that if an Event of Default has been cured and is no longer continuing, then it no longer exists. This avoids any need to repeat the same concept again and again with every reference to “Event of Default.”
12 This paragraph applies only if: (a) the Hedge consists of a swap or other product that imposes obligations on Borrower; (b) the Security Documents secure those obligations; and (c) the Hedge documents do not already cover this matter.
13 For reasons explained in the next two footnotes, delete this paragraph if Issuer uses the 2002 ISDA Master Agreement.
14 When a Hedge terminates prematurely, the “loser” in the transaction must pay the “winner” an amount to compensate the “winner” for the loss of future interest rate protection. The “Market Quotation” method (seen only in the 1992 ISDA Master Agreement) measures that compensation based on an average of marketplace quotations of how much the winner would need to pay to buy equivalent protection for the remaining term of the Hedge. The “Loss” method allows the winner to calculate its total losses based on a number of elements, some of which can be rather hard to pin down (and hence rather easy to overstate). The “Market Quotation” method is both easier to apply and more objective. The 2002 ISDA Master Agreement eliminates both methods, replacing them with a “Close-Out Amount,” much like the 1992 “Market Quotation” method.
15 The “First Method” prohibits a defaulting party (or an “affected party,” such as a party whose merger triggered an unexpected termination) from ever receiving a termination payment. The “Second Method” allows either party to receive a termination payment, if such party was the “winner” at the time the Hedge terminated. The 2002 Master Agreement eliminates this distinction, using the “Second Method” calculation in all cases.
16 Though not essential, the last sentence can eliminate a separate direction letter, assuming the parties are ready to identify the account to receive Hedge Payments. This paragraph assumes Issuer will pay Hedge Payments directly to Administrative Agent, eliminating some potential risks and delays. Administrative Agent will particularly prefer direct payment if the loan requires a “hard lockbox” for rents, as the two are functionally equivalent. Borrower will usually prefer the following language instead of this paragraph: “If either (a) Administrative Agent notifies Issuer that any Event of Default exists; or (b) the Hedge terminates or is in default for any reason, then unless and until Administrative Agent consents otherwise in writing, Issuer shall pay all Hedge Payments only as Administrative Agent directs in writing.”
17 Define this term in the Loan Agreement to mean all rights and remedies of Administrative Agent, whether under the Loan Documents, at law (including the UCC), or in equity.
18 The parties may want to move these provisions into the Loan Agreement or other basic “deal document.”
19 The Nonrecourse Clause should perhaps include a carveout for Borrower’s failure to apply correctly any Hedge Payments that Borrower might receive, functionally equivalent to a misapplication of rental income.
20 Administrative Agent’s financing statement must list Borrower’s full and exact legal name. This sentence provides a cross-check. Administrative Agent should, of course, confirm the name independently and not rely solely on Borrower’s assurances.
21 This may represent the single most important paragraph in every legal document. It refers not only to this Assignment and Administrative Agent’s security, but also the parties’ entire relationship regarding the loan, the security, and anything related. Recent California cases limit the enforceability of jury trial waivers. Those cases may alone justify choosing New York law if the parties have not already done so for other reasons.
NY\530142.15
CHAPTER 07 ‑ COLLATERALIZATION OF DEPOSITS SECTION 0100 ‑
collateral
COLLATERAL ASSIGNMENT OF HEDGE JOSHUA STEIN LATHAM
Tags: assignment of, this assignment, collateral, joshua, assignment, hedge, stein, latham