Debt finance

Lending

Unless exempted, lenders are required to be registered as credit providers and financial service providers with the applicable regulatory bodies.

Lending to individuals and/or juristic entities which fall within the scope of the National Credit Act (due to their lower level of annual turnover and asset value) is subject to greater regulatory scrutiny as the information that is required to be provided to those borrowers prior to entering into a credit is more extensive. The agreements also need to follow a prescribed format and must include certain prescribed information. There is a heavy onus on lenders in these circumstances to ensure that a borrower will not be over-indebted as a result of the credit made available by the lender to that borrower. A court may declare a contract which does not comply with the prescribed format unlawful and a lender will therefore not be able to enforce its rights thereunder.

All financial institutions are required to complete the necessary 'know-your-client' procedures in terms of the Financial Intelligence Centre Act before providing finance to a borrower. In relation to companies, these procedures involve the collection of information regarding the directors and shareholders of that company, ensuring that the company is duly registered in its jurisdiction of incorporation and that the company has filed the necessary tax returns for the preceding tax years.

Lending to state-owned enterprises and other government agencies is subject to a separate legislative regime. State-owned enterprises are created by statute and the provision of finance to those state-owned entities will need to comply with the provisions of the legislation which governs that entity as read together with the Public Finance Management Act.

Borrowing

Borrowers are generally not restricted by legislation from borrowing. There may, however, be restrictions contained in the particular borrower's constitutional documents with regards to the incurral of financial indebtedness. A detailed review of the borrower's constitutional documents should always be a prerequisite to providing financing.

Also, in relation to the provision of financial assistance, see Giving and taking guarantees and security. 

Loans

Other than pursuant to the provisions of the National Credit Act, as contemplated above, there is no prescribed structure for lending transactions and such transactions may be tailored to suit the commercial requirements of the parties.

A loan may be provided on a bilateral basis (a single lender providing the entire facility) or on a syndicated basis (multiple lenders providing portions of the overall facility) to one or multiple borrowers.

Loan durations

The duration of the loan is subject to negotiation between the parties. Generally, the duration of loans varies between:

• bridging loans – short-term loans, normally for up to three to six months (there are generally tighter operational restrictions placed on the borrower and the margin is higher than longer-term loans);
• term loans – provided for an agreed period of time and is made available for a specific purpose (the availability period of such loans ends once the borrower has utilized the loan for the applicable purpose);
• revolving loans – provided for an agreed period of time and may be redrawn if repaid; and
• working capital facilities – made available to the borrower for a period of 365 days and is repayable on demand (these types of loans are ordinarily utilized by the borrower to fund its general working capital requirements and may be redrawn if repaid).

Loan security

Loans may be secured or unsecured. For more information, see Giving and taking guarantees and security. 

Loan commitment

Loans may be committed or uncommitted. It is common, in relation to committed facilities, for the lender to charge a commitment fee for the duration of the availability period of the particular commitment. In order for a loan to qualify as being uncommitted, the provision of that loan must be subject to conditions which are in the lender's discretion (eg credit committee approval).

Loan repayment

Loan repayments vary according the commercial capabilities of the borrower and the purpose for which the transaction was implemented. Repayments vary between:

• capital bullet – the full amount of capital is repaid on the maturity date with interest being paid in arrears on each interest payment date (normally monthly or quarterly);
• equal payments – equal payments comprising capital and interest payable at set intervals during the term of the loan;
• equal capital payments – equal payments of capital plus accrued interest payable at set intervals during the term of the loan;
• sculpted profile – instalments vary according to the borrower's projected income during the term of the loan; and
• on demand – capital is repayable on demand with interest having been paid at set intervals during the term of the loan.

Preference shares

An alternative basis on which to provide financing is by way of subscribing for preference shares in the borrower. The advantage of using this type of funding is that the dividends that a preference shareholder receives (ie akin to the interest it would have received on a loan) is exempt from tax under South African tax legislation. In order to benefit from the exemption on dividends, the provision of finance by way of preference shares does, however, need to comply with the requirements set out in the Income Tax Act as to the purpose of such financing and the security provided for such financing. Failure to comply with the provisions of the Income Tax Act for preference share funding has the consequence that the dividends received on account of the preference shares are deemed to be interest (which is taxable) and, accordingly, the tax benefit of such preference share funding will be lost.

In the event of the insolvency of the borrower, a preference shareholder will rank behind secured creditors of the borrower and ahead of the ordinary shareholders of the borrower.

Lending to large corporations/institutional investors is less burdensome, particularly on enforcement, than lending to individuals or small corporations. Enforcement of a lender's rights under a loan advanced by a lender to an individual or any other entity regulated by the National Credit Act requires the lender to first refer the applicable borrower to a debt counsellor in order to agree a payment plan before the lender is entitled to enforce its rights under the applicable credit agreement.

A lender is also obliged to ensure that, when lending to an individual or small corporation, that individual or small corporation will not become over-indebted as a result of loan advanced by the lender. The lender must take reasonable steps to ascertain a borrower's understanding of the credit agreement it is to enter into, its debt repayment history and its existing financial means, prospects and obligations.

Under South African law, an agent does not have locus standi (the right to bring an action) in litigious proceedings before South African courts. South African law therefore does not recognize the provision of security in favor of an agent (on behalf of other parties) or in favor of a trust (other than a trust which has been properly established in accordance with South African law). Further, the Deeds Registries Act does not permit registerable security (mortgage bonds, special notarial bonds and general notarial bonds) to be registered in favor of an agent. Security, under South African law, should be provided to the finance parties directly or to a special purpose vehicle (Security SPV) as described below.

For syndicated lending transactions, the most common security structure in the South African markets, involves the creation of a guarantee and indemnity structure and the interposition of a Security SPV (which is owned by an independent orphan trust). Pursuant to the structure, the special purpose vehicle issues an on demand guarantee in favor of the finance parties, in terms of which the Security SPV undertakes to guarantee the obligations of the borrower in favor of the finance parties. The security providers then enter into an indemnity agreement in terms of which the security providers indemnify the Security SPV against any claims made against it under the guarantee. All security provided by the security providers is provided in favor of the Security SPV as security for the security providers' obligations under the indemnity agreement.

Generally

No contractual arrangement may breach a legal rule or public policy. Legal rules may be derived from statute or from the common law whereas public policy is a subjective determination made by a judge by taking into account various policy issues, including the spirit and purport of the Constitution of South Africa.

There are a number of rules regarding the charging of interest and penalties. For instance, the in duplum rule states that the amount of interest charged by a lender may not exceed the capital amount of the loan. Further, under and in terms of the Conventional Penalties Act, a creditor shall not be entitled to recover, in respect of an act or omission which is the subject of a penalty stipulation, both the penalty and damages or, except where the relevant contract explicitly provides, to recover damages in lieu of a penalty. A court may also reduce a penalty where it is of the opinion that the penalty is out of proportion to the prejudice suffered by the creditor.

The rights of a creditor may also be limited by application of insolvency, reorganization, business rescue or other similar laws and a creditor may therefore not be able to enforce its rights under a finance agreement to the full extent contemplated therein.

It is important that all financial assistance resolution have been passed as a failure to do so results in the provision of such financial assistance being void. For more information, see Giving and taking guarantees and security – restrictions.

Specific types of lending

Lending to individuals and small corporations which are subject to the National Credit Act requires the lender to take greater precautions in order to ensure that the borrower will not be over-indebted. For more information, see Lending and borrowing – borrower considerations.

Standard form documentation

Most syndicated and large bilateral financing transactions are governed by loan documentation based on the recommended forms published by the Loan Markets Association and which have been tailored to suit the South African market. Documentation developed in-house by the banks is more commonly used for smaller, bilateral finance arrangements.

None.