The Facility Agreement

As the fund finance market is dominated by non-Irish lenders, in most cases the facility agreement will not be governed by Irish law. There are, however, a number of Irish law specific points that should be included or addressed in a non-Irish-law-governed facility agreement.

Who needs to be a party?

For an Irish fund, in the vast majority of cases the fund vehicle itself (acting through its GP in the case of an ILP or 1907 Limited Partnership) is the only required party. In most cases it will be the directors of the relevant entity or its duly appointed attorney who will execute the facility agreement on behalf of the fund. As noted above, service providers may have a role in the capital call process or, in the case of the depositary or a sub-custodian, hold assets that are registered in its name.

However, notwithstanding these roles, the fund service providers are not usually required to sign the facility agreement. If contractual undertakings are required from the service providers, these would usually be included in a separate side letter in favour of the lenders or, in the case of the depositary or a sub-custodian, might be included in a depositary control deed. Any sub-custody arrangements should also be reviewed to determine if anything additional is required.

Where the transaction includes a master/feeder structure involving an Irish regulated feeder fund vehicle and a master fund which is the borrower, the Irish feeder fund will not sign the facility agreement and will provide any security under a cascading security structure. The Central Bank of Ireland is currently conducting a review of its rule in relation to “third party” security with a view to issuing a revised AIF Rulebook later this year.  If the restriction on “third party” security is removed, in most cases, cascading security will no longer be required.

Change of control

Change of control provisions in respect of an Irish vehicle may sometimes be subject to negotiation on fund finance transactions. Holding shares in an ICAV or limited partnership interests in an ILP or 1907 Limited Partnership does not give the holders (i.e. investors) “control” of the vehicle or a right to appoint/remove directors. As a result, the usual approach to other non-fund finance transactions (e.g. leverage transactions) of triggering a change of control in the event that there is a change to the shareholder(s) of the borrower may not be possible where the borrower is an Irish fund.

The change of control clause is usually modified to include, for example, a change of sponsor or investment advisor, particularly if such investment advisor is connected with the sponsor, and in some cases Key Person exits (although Key Person exits are commonly dealt with separately in the facility documentation). For ILPs and 1907 Limited Partnerships a change of control of the GP is often included. A change of control of the manager will need to be considered on a case-by-case basis. For example, if the manager is unrelated to the sponsor it would be unusual to include a change of control referable to it. Changes in key service providers will also be dealt with in the covenants as referenced below.

Representations and warranties, covenants and events of default

There are some Irish-specific modifications that will need to be made to the facility agreement in respect of representations and warranties, covenants and events of default. The representations as to status and regulatory status will need to be carefully assessed on a case-by-case basis for the particular fund vehicle. In an umbrella fund, for example, representations as to status are typically given in respect of both the umbrella and any relevant sub-fund and/or Section 110 Company or 1907 Limited Partnership. Representations and covenants in relation to the fund documentation, constitutional documents and subscription documents need to be carefully reviewed to ensure that they correctly reference the relevant documents for the fund, which may vary on a vehicle-by-vehicle basis, and any service provider documents relevant to the transaction, and to pick up any points which may have arisen from the due diligence on the fund.

Where the structure includes an Irish feeder fund (which, as noted above, will not be a party to the facility agreement), the representations may instead be given by the borrower in respect of such Irish feeder vehicle and covenants may instead be given by the borrower to procure compliance by the Irish feeder with the relevant terms of the facility agreement.

It is common in Ireland as in other jurisdictions to include prohibitions or restrictions on the borrower or other funds in the structure amending or changing the key service provider documents or replacing key service providers. There can be some debate on whether the fund should be permitted to amend or change the service provider documents subject to an agreed notice period, or to reflect required regulatory driven changes, or if consent should be required. In cases where a service provider has provided a side letter in favour of the lender as part of the security package, it would usually be a condition to appointing any replacement that the new service provider must also provide such a side letter in favour of the lender.

As the tax treatment of the fund and the facility is usually a key consideration, a careful review of the facility documentation from an Irish tax perspective is also undertaken. This will focus, for example, on withholding tax but also tax compliance. For example, in respect of a Section 110 Company, representations and covenants in relation to its status as a Section 110 Company and ongoing compliance with the legislative provisions will be included.

Where the representations and covenants have been modified, as described above most of the events of default will not need to be further modified. There are, however, certain insolvency references and processes specific to Ireland that will need to be included in insolvency-related events of default, and certain regulatory events of default will commonly be included. In a subscription-backed facility, a suspension of NAV event of default may also be considered.

Segregated liability – limited recourse and non-petition

For regulated Irish umbrella funds, well-settled language in the Irish market is included in facility agreements that provides that one sub-fund does not have responsibility for the liabilities of another sub-fund, and creditors cannot have recourse to another sub-fund’s assets for amounts owed by a sub-fund with which the creditors have contracted. There are usually some exceptions to the limitation on liability, for example, in the event of fraud.

Where a Section 110 Company is involved, it is a common borrower request that a clause is included limiting recourse to the specific assets over which security has been taken and restricting the lender’s ability to petition for a winding up of the vehicle if it does not pay its debts while the drafting is reasonably standardised it does need to be reviewed in the context of the particular deal.  For example, it should be carefully considered whether it is appropriate that there is no recourse to a shareholder on a subscription line facility. In our experience, limited recourse and non-petition references are frequently not included in term sheets, which can lead to issues if this is then requested as part of negotiations down the road.

Conditions precedent

The required conditions precedent will not be dissimilar to those required in other jurisdictions and will include the constitutional documents and fund documents, resolutions, certificates and finance and security documents. The market approach to opinions in Ireland on fund finance transactions is for the borrower’s counsel to provide the due incorporation and capacity opinion and lender’s counsel to provide the enforceability opinion in respect of Irish law-governed documents.

Legal Documentation: The Security Agreements

The required security will vary depending on the type of facility and the fund structure involved in the transaction. The type of security that is common on fund finance transaction is addressed elsewhere in this guide, and should be read in conjunction with this section on security in an Irish context. It is however important to emphasise the importance of due diligence and gathering a full understanding of the vehicles involved and how and where the assets of the fund are held, before drafting any security agreements. This exercise will be crucial in identifying what is required from a security perspective. A number of chapters could be written on security on fund finance transactions in an Irish context, but this section identifies some of the key points that arise most frequently.

Is Irish law the appropriate governing law of the security?

Due diligence is essential in this regard. From an Irish law perspective, the assets over which security is most often granted on fund finance transactions includes:

(i) capital call rights;

(ii) shares, limited partnership interests and profit participating notes;

(iii) contracts; and

(iv) cash and securities accounts.

If the governing law of the relevant contract, or the relevant fund documents and subscription agreement which includes the rights to call capital, is Irish law-governed, Irish law security will be required. The same analysis applies in respect of security over material contracts (for example, a management agreement documenting fees payable to the manager or GP); if the contract is Irish law-governed, Irish security will be required. For security over cash and securities accounts, Irish law security is usually granted only in cases where the account is an Irish account (security over bank accounts is explored further below).

If the entity that issues shares, limited partnership interests or profit participating notes is established in Ireland (e.g., an ICAV, an ILP, 1907 Limited Partnership or Section 110 Company), Irish law should be the governing law of the security over any related rights, including capital call rights.

Bank and securities accounts

There can be a little digging that needs to be done in relation to where a bank account is actually located. As a general rule of thumb, if the IBAN of the account commences with “IE” it is an Irish account, over which Irish security should be taken. Given the international nature of the Irish funds industry, the assets in which a fund is investing could be located anywhere in the world, and it is not normally practical or cost effective to take security in multiple jurisdictions.

From an Irish regulatory perspective, the depositary of the Irish fund is obliged to maintain a clear and up-to-date record of all fund holdings, and in many cases, assets are also registered in the name of the depositary. As part of the depositary fulfilling its duties, the depositary will maintain a securities account or electronic register of all such holdings. Irish law security is often taken over this securities account. A key due diligence point is to get details of the account identifier applicable to this Irish account. Depositaries in Ireland have different ways of expressing this identifier.

As is the case in many jurisdictions, security over cash and/or securities accounts is typically coupled with certain control rights. These are either included in a control agreement or could be included in the notice of creation of security, which is then acknowledged by the relevant counterparty. This will be the account bank for cash accounts or the depositary and potentially a sub-custodian for securities accounts. Where a party other than the fund has execution/transfer rights on the bank mandate, they should also be joined to the control agreement.

Security filings

Unless exempted from the filing requirement (for example, share security and security over bank accounts), security filings will be required to be made in Ireland for security granted by an Irish fund vehicle. For example, security created by an Investment Company or a Section 110 Company should be registered in the Irish Companies Registration Office and security created by an ICAV is registered with the CBI. Security granted by an ILP or 1907 Limited Partnership is registered against the name of the general partner and the ILP/1907 Limited Partnership. Security is usually granted in favour of a security agent/collateral agent, and, if these roles are transferred or taken on by another institution after the security has been filed, a filing noting such change also needs to be made to the relevant registry in Ireland. Where security is created over book debts, a filing called a section 100 notification also needs to be made with the Irish Revenue Commissioners.

Security documents can also be drafted under Irish law to obtain the benefits of the Financial Collateral Regulations, although the level of control required means this is the exception rather than the rule.

Consents and perfection – capital call rights

In the vast majority of cases, it should not be necessary to obtain third-party consent to the creation of security over capital call rights, but the fund and investor documents should be reviewed to confirm that this is the case. Security over capital call rights usually takes the form of a security assignment which is perfected by serving a notice of creation of security on each investor. It is not required in order to perfect the security that such notices be acknowledged; although acknowledgements may be necessary on a case-by-case basis, for example, where the notice of security contains undertakings from an investor which need to be contractually agreed (a common example of this would include transactions in which waiver of defences provisions are included in the investor notices, where such language is  not adequately covered in the fund documents).

It is important, from a lender’s perspective, to obtain evidence that notices have been sent, in cases where acknowledgments are not required. In a broadly held fund there may be reasons for the fund to make such changes. Baking these provisions into the fund documents at launch avoids having to go back to the investors.

Consents and perfection – shares, profit participating notes and limited partnership interests

It is not uncommon, as in other jurisdictions outside Ireland, that the constitutional or subscription documents of the issuer of shares, profit participating notes or limited partnership interests may contain restrictions or impose conditions on the creation of security and/or transfers, which presents obvious problems if shares/interests need to be transferred as part of an enforcement of security. Where security is taken over shares, profit participating notes or limited partnership interests, the due diligence will determine whether, and what, changes will be required to the constitutional documents, if consents are required from the issuer of shares, profit participating notes or limited partnership interests and what additional deliverables may be required to perfect and/or protect the enforceability of the security.

Read the rest of the Ireland chapter here. The full Guide is available here. The Working Guide to Fund Finance was first published by Brickfield Fund Finance Recruitment.

You can read more on our Fund Finance Group here.