Q&A: guarantees and security for high-yield debt in Portugal

Guarantees and security

Guarantees

Outline how guarantees among companies in a group typically operate in a high-yield deal in your jurisdiction. Are there limitations on guarantees?

Deals may comprise the granting of guarantees by material subsidiaries of the issuer and, in cases where the issuer is not the top holding company, also by its parent company, as well as by any material sister companies – respectively, upstream, downstream and cross-stream guarantees. These guarantors usually also act as such under the overlapping senior facilities agreement (if any).

In light of the PCC, a Portuguese guarantor may only secure third parties’ obligations if there is a justified corporate self-interest for it in granting the relevant guarantees or security or if the guarantor is in a group or control relationship with the entity whose obligations are being secured.

The PCC construes ‘control relationship’ as including relationships between companies where one company holds, directly or indirectly, the majority of the share capital or the voting rights in another company or otherwise has the right to appoint the majority of the members of its board of directors or supervisory board. A ‘group relationship’, in turn, includes relationships between Portuguese companies where one is fully owned or controlled, directly or indirectly, by the other; or between companies that are bound by a group agreement or a subordination agreement, whereby one company is subject to the instructions or management of the other.

In the absence of such a control or group interest, the validity of the collateral may be challenged on the grounds of its granting lacking a justified corporate self-interest, as the interested parties (eg, shareholders, creditors and stakeholders) may argue that it is contrary to the purpose of the company or that it may hinder the company’s financial ability in the satisfaction of their rights against the company.

Moreover, obligations under such guarantees or security shall not extend to any use of the proceeds of the bonds for the purpose of acquiring shares or quotas representing the share capital of the guarantor or the parent guarantor, or refinancing a previous debt incurred for the acquisition of shares or quotas representing the share capital of the guarantor or its parent guarantor. Deals breaching these limitations would constitute unlawful financial assistance pursuant to article 322 of the PCC. As a result, certain contracts pertaining to such high-yield bonds’ guarantees or security typically include guarantee limitation language to clarify and ensure that under no circumstance can any such guarantees or security granted by a guarantor be used to pay or secure any of the above-mentioned.

Finally, due either to land registry formalities (as is the case of the granting of mortgages over properties) or to tax reasons (in particular the payment of stamp duty), obligations under high-yield bonds’ guarantees or collateral granted by the guarantors are typically limited to an agreed maximum secured amount (often established as an aggregate maximum amount should there be multiple guarantees). As a result, the guarantors will not have a direct obligation to repay any amounts once the relevant maximum secured amount has been reached, as applicable.

Collateral package

What is the typical collateral package for high-yield debt securities in your jurisdiction?

Collateral packages for high-yield debt securities in Portugal vary according to the type of assets owned by the issuer and its subsidiaries as well as the relevant sector of activity and may include security granted without affecting the day‑to‑day business of the guarantors.

These typically include:

• mortgages over properties and movable assets subject to registration (such as manufacturing plants, ships and other vehicles)
• pledges over equity, bank accounts, operational assets and equipment; or
• assignments of receivables by way of…