(a) Is it more usual for the financing needs of these types of corporates to be satisfied out of capital (equity) raisings; retained earnings; or external borrowings?

 

Medium-scale enterprises use a mix of shareholders' funds, retained earnings and external borrowings to satisfy their financing needs. However, a growing enterprise usually finds that once it reaches a certain size, its financing needs outstrip its ability to satisfy them out of borrowings. It is usually at this stage that the enterprise converts itself from a private company into a public company, raises capital by an initial public offering of its shares, and seeks admission to the Official List of the Stock Exchange of Singapore so that its shares can be publicly traded.

(b) What are the main sources for borrowing for these types of corporates?

 

Main sources of borrowing are as follows :-

(i) secured and unsecured loans from banks and other financial institutions;

(ii) bonds;

(ii) intra group loans;

(v) loans from directors and shareholders.

(c) Is there significant competition among lenders and significant choice of sources for borrowing available to these types of corporates?

There is a significant choice of sources for borrowing for corporates. In addition to the local banks and financial institutions, corporates can also look to foreign banks and financial institutions for funding. Although several foreign banks have full banking licences, most foreign banks operate under restricted or offshore licences which prevent them from directly seeking business in Singapore Dollar domestic retail banking. Nevertheless, they are aggressive competitors in corporate lending and in local and foreign exchange transactions, loans and bills due to the level of expertise and quality of services they bring. The competition can only become keener as the Government of Singapore has recently announced further plans to widen the participation of international banks and financial institutions in Singapore.

(d)What is the present average rate of interest payable in respect of unsecured and secured debt?

 

The interest rates charged by banks and financial institutions in Singapore are usually at a margin above SIBOR, LIBOR or their respective prime lending rate or cost of funds with respect to the relevant currency. The precise margin depends on the lender's credit assessment of the borrower and whether the loan is secured or unsecured. As at 6 October 1998, the average of the prime rates of 12 banks in Singapore is 7.67%.

(e) Is finance generally available for long, medium and short-term borrowings?

 

Yes. Short term borrowings in Singapore are usually in the form of overdrafts and revolving loans. Other short term facilities include bill accepting and discounting facilities, the issuance of letters of credit and trust receipts. Medium and long term borrowings usually take the form of term loans.

(a) What part does the central bank of this economy play in the regulation of the banking and finance sector? Would it intervene or seek to influence the outcome or course of events if, example a large corporate with debt exposure to a number of banks was in financial difficulty?

 

The Monetary Authority of Singapore ("MAS") is responsible for regulating the financial and monetary environment of Singapore. It is nominally an independent statutory board, but the Chairman of the MAS is the Deputy Prime Minister.

The MAS performs all the functions of a central bank except for the currency issuing function which remains the responsibility of the Board of Commissioners of Currency. It formulates and implements Singapore's monetary and exchange rate polices; licenses and supervises banks, merchant banks, finance companies, insurance companies, money changers, remittance houses, securities dealers, investment advisers, futures brokers, futures trading advisers, futures pool operators and their respective representatives. The MAS also acts as a banker and lender of last resort to approved financial institutions and together with the Singapore Clearing House Pte Ltd and Banking Computer Services Pte Ltd, provides central clearing for cheques and local inter-bank settlements. It is also a banker and financial adviser to the Government of Singapore. The MAS would not intervene with respect to individual corporate failures. It would however initiate prior review processes in the event of potential systemic risks which affect the stability of Singapore's financial sector.

(b) Is there any tradition in this economy for a 'main' or 'house' or 'lead' bank to become involved as a chief negotiator or leader in the case of the financial difficulty or insolvency of a large corporate borrower with debt exposure to a number of banks?

 

While it is unusual for a single bank to take a leading role in negotiating with a corporate borrower in difficulty, it is common for a group of 3 or 4 banks nominated by all the creditor banks of a borrower to form a Steering Committee which then becomes the point of contact between the borrower and the creditors at large.

(a) Is assessment or analysis of lending risk widely practised in this economy?

 

Each bank undertakes the assessment or analysis of lending risk when deciding whether and if so on what terms to lend to a particular borrower. Furthermore, the MAS issues guidelines from time to time as to what type of lending activity it considers to be prudent banking practice.

(b) If so, does the average lending bank make adequate assessment of risk analysis when contemplating lending to a corporate borrower?

 

Yes. Banks and financial institutions usually obtain detailed financial statements from companies before deciding on whether to grant the loan facility and the amount of the loan. Projected cash-flows and profits or losses are also taken into account. An assessment or valuation is also made on the security given for the banking facilities. This would usually involve a formal valuation report on the security.

(c) Would it be usual or common for a lending bank to regularly monitor the financial performance of a corporate borrower?

 

Yes. It is common for banks and financial institutions regularly to monitor the financial performance of the borrower in order to decide if the banking facilities and/or the security therefor need to be reviewed. In many cases, the loan documentation itself will impose financial covenants on the borrower.

(d) Would it be usual or common for a lending bank to be regularly supplied with copies of the financial statements of a corporate borrower?

 

It is usual for loan and security documents to require the borrower to furnish to the lender relevant financial information on a regular basis. However, it is still up to the individual bank or financial institution to ensure that the financial information provided is carefully analysed.

(a) Is there a significant source of foreign bank lending in this economy?

 

Yes (as stated in B1[c]).

(b) If so, is it usual for this funding to be provided by the foreign bank/s alone or in combination with funding from local or domestic bank/s?

 

It depends on the size of the funding and the particular banks' perception of the risk involved. Syndicated loans are common in Singapore.

(c) Are you able to detect whether there are significant differences in approach and funding terms when a foreign bank is involved in the lending (as compared with a purely local or domestic funding)?

 

For Singapore dollar financing, Singapore banks and full licensed banks would be the main source of financing. Other than this, market practices are similar.

(a) Is 'related' or 'exclusive' lending (ie where a corporate borrower and a bank have an established commercial relationship such that only that lender is looked to as the source of borrowing by the corporate borrower) common in this economy?

 

Not as institutionalised as in Japan. Customer and bank relationships are dictated by traditional relationships and increasingly by competitive commercial terms.

(b) If no, what effect does this have if the corporate borrower is in financial difficulty or is insolvent?

 

It is more difficult to put together a standstill agreement and a contractual workout where a borrower is multi-banked because the group of banks are more likely to have divergent interests. This is especially so, for example, in the case of a group of companies where the banks have different exposures at different levels of the group. Thus a bank whose substantial exposure is to the only solvent member of a group has an incentive to block a workout which proposes to use that solvent members' projected cashflow to rescue the group.

(a) Is 'syndicated' lending (ie where a group of banks or financial institutions join together to provide funding for a corporate borrower) common in this economy?

 

Yes. Especially when the loan is substantial or the risk is more than a single bank is willing to take on by itself.

(b) If so:

(i) does a lead bank perform the role of 'agent' on behalf of all the lenders; and/or

 

Yes. It is usual for a lead bank to be the agent for the other banks in the syndicate.

(ii) is the concept of a 'trustee' (or similar) for a syndicate of banks (ie where the 'trustee' holds any security for the syndicated funding on trust for the syndicate of banks) known and/or practised in this economy?

 

Yes. It is not unusual for the lead bank to be the Agent Bank and hold the securities for the benefit of the other banks in the syndicate.

(iii) if the corporate borrower is in financial difficulty or is insolvent what function does the 'agent' or 'trustee' perform?

 

The role and powers of the agent/trustee would be provided in the loan and/or security documents. In most cases, the agent/trustee would enforce the personal and proprietary rights of the lender banks on their instructions, given unanimously or by a majority as provided in the loan documents.

(a) Is the concept known as 'debt subordination' (ie, a contractual arrangement between lenders in which there are 'layers' of 'senior' and 'junior' debt and which has the effect of postponing repayment of the 'junior' debt until payment has been made of the 'senior' debt) recognised and practised in this economy?

 

Yes. Contractual debt subordination is practised by commercial lenders in Singapore and, subject to what is said below, will be recognised by the courts.

(b) If so, is debt subordination recognised and/or enforced under the insolvency regime of this economy?

 

Singapore's statutory insolvency regime under the Companies Act is based very closely on the English regime under the Companies Act 1948 with some provisions derived from the Australian Companies Act 1961. Some provisions in pari materia with the English Insolvency Act 1986 have also been incorporated. As these provisions are either in force in those countries or are the predecessors of the provisions now in force in those countries under the English Insolvency Act 1986 and the Companies Act respectively, Singapore courts tend to adopt the approach to those provisions taken in those countries unless there are compelling reasons not to.

Where there are no binding local authority on a particular issue of insolvency law where Singapore's statutory provisions are in pari materia with those in England and Australia, insolvency practitioners and their legal advisers generally conduct themselves on the basis that English law and Australian law will be followed in Singapore. Generally, therefore, insolvency issues are not litigated in Singapore unless: (a) the local provisions are not in pari materia with those obtaining in those jurisdictions; (b) there is a divergence between the approaches taken in those two jurisdictions; or (c) the subject-matter of the dispute makes it cost effective to argue that Singapore ought to adopt a different approach.

Thus, the Singapore courts have adopted and approved the principle from National Westminster Bank Ltd v Halesowen Presswork and Assemblies Ltd [1972] AC 785 to the effect that the rules for the administration of assets in a winding up embody not merely private rights which creditors are free to vary or waive but rules of public policy which cannot be contracted out of. While this appears to rule out subordination agreements, it was held by the High Court in England in Re Maxwell Communications Corporation plc (No. 2) [1994] 1 All ER 737 that the Halesowen principle struck down only those agreements which tried to give one creditor an advantage denied to other creditors. The Singapore courts have not yet considered Re Maxwell Communications Corporation plc (No. 2), but it is likely that the approach therein will be adopted given that: (a) it accords broadly with the principle in Australia in Horne v Chester & Fein Property Develpments Pty Ltd (1987) 11 ACLR 485; (b) the Singapore courts have generally shown themselves responsive to the legitimate aims of financiers and commercial concerns; and (c) contractual subordination plays an important role in allowing a distressed company to raise new finance and trade through its difficulties.

Re Maxwell Communications Corporation plc concerned the subordination by contract of a particular unsecured obligation to all other unsecured obligations of the borrower. It did not consider the subordination by contract of a particular unsecured obligation to another particular unsecured obligation (turnover subordination) or the validity of trusts declared for the subordination of debt (see British & Commonwealth Holdings plc (No. 3) [1992] 1 WLR 672). The efficacy of such arrangements remain open questions in Singapore, as they do in England, though it is likely that they will be upheld so long as the general body of unsecured creditors is not prejudiced thereby.

(a) Is it permissible for banks to own equity in a corporate borrower?

 

It is permissable for a bank to acquire equity in a corporate borrower. Section 31 of the Banking Act makes express reference to acquiring shareholding in the course of the satisfaction of debts due to the bank. Such shareholding must however be disposed of at the earliest suitable opportunity.

Section 32(1) prohibits a bank from acquiring more than 20% or more of the share capital of a company without first notifying the MAS and seeking its approval to entering into the agreement to acquire.

Section 32(3) however exempts a bank from Section 32(1) if the bank is acquiring 20% or more of the share capital in a company by way of enforcement of security to satisfy debts due to it by the company. The bank upon making the acquisition must obtain the approval of the MAS to retain the shareholdings as an investment. If the MAS does not grant approval, the Bank has to dispose of the shareholdings at the earliest opportunity. In Section 32 of the Banking Act "company" means a company whether incorporated in or outside Singapore.

 

(b) If so, is it permissible for a bank to convert debt to equity?

 

Yes; see (a) above.

(c) Are there instances where this has in fact occurred, particularly in the context of either:

(i) in the context of an 'informal work out' as a result of the insolvency or approaching insolvency of a corporate borrower; or

(ii) in the context of a formal insolvency administration of a corporate borrower?

 

It is not unusual for a bank to accept a conversion of debt to equity, as part of a restructuring or scheme of arrangement.

 

(d) In such a case, is it usual for the bank to be then represented on the management or board of the corporate borrower?

 

It is not usual for banks to appoint directors to represent them on the board. Banks are reluctant to put themselves in a position where they are seen to exercise such direct management control over a company because of the duties imposed by the Companies Act on directors and shadow or de facto directors, and the potential exposure arising therefrom. Where a bank desires some powers of oversight over a debtor in possession, a common approach is to require the company to appoint an independent accountant as a special consultant to oversee the day-to-day running of the company and give the banks some comfort. This is, however, done for relatively short periods and not as a permanent solution.

There has been no proposal for insolvency reform in Singapore equivalent to the Aghion Hart and Moore proposals in the United Kingdom, which proposes an automatic conversion of debt into equity in certain circumstances.

(a) Is there a market for 'debt trading' (ie, where a bank might sell or trade the debt owed to it by a corporate borrower) in this economy?

 

Syndicated loans with transferable loan certificates or sub-participations facilitate debt trading amongst banks.

(b) If so, is debt trading common in this economy, particularly where the corporate borrower is insolvent or near insolvent?

 

Debt trading in insolvency scenarios is unusual.

(a) Is the concept of a third party 'guarantee' (as distinct from a security over property) to support corporate borrowing known and practised in this economy?

 

Third-party guarantees are commonly required by lenders and procured by borrowers to support corporate borrowing. In the case of enterprises where there is an identity of ownership and management in fact, whatever the legal form adopted, it is common for lenders to require guarantees from the owners and managers, for example the directors/shareholders.

It is also common for lenders to require guarantees or letters of comfort from the borrower's parent company or holding companies.

(b) Is there a law which regulates the power to take or give a guarantee?

 

The power to take or give a guarantee is governed in the first instance by the general contractual principles at common law relating to contractual capacity, the intention to create legal relations and vitiating factors such as undue influence, non est factum, duress etc.

The power of a company to give guarantees will normally be governed by its Memorandum of Association. However, the fact that a company is acting ultra vires in the broad sense is of little concern to outsiders who act without notice of that fact because section 25 of the Companies Act provides that no act or purported act of a company, including the entering into of an agreement, shall be invalid by reason only of the fact that the company was without capacity or power to do such act.

Finally, companies other than exempt private companies are prohibited by statute from giving guarantees in certain circumstances. Section 162 of the Companies Act prohibits such a company from guaranteeing a loan made to a director of the company or to a director of a related company. Section 163 of the Companies Act prohibits such a company from giving a guarantee in connection with a loan made to another company if the director or directors of the former is or are together interested in shares of the latter of a nominal value equal to 20% or more of the nominal value of its equity share capital. Further, section 76 of the Companies Act prohibits any company from giving a guarantee where the effect of the guarantee is to give financial assistance to another person in the acquisition of shares in that company or in its holding company.

 

(c) Is it common or usual for corporate borrowing to be supported by guarantee/s?

 

Yes.

(d) If so, are these guarantees usually taken from owners/directors of the corporate borrower; from other corporates associated with the corporate borrower (eg subsidiaries or holding company); or from unrelated third parties?

 

Third-party guarantees are commonly taken from owners/managers of enterprises where there is an identity of ownership and management in fact, whatever the legal form adopted. In other cases it is common for lenders to require guarantees or letters of comfort from the borrower's parent company or holding companies. It is unusual to obtain a guarantee from an unrelated company or from a subsidiary of the borrower because of the uncertain enforceability of such a guarantee arising from the lack of commercial benefit to the guarantor company.

(e) Is there a law which regulates the enforcement of guarantees?

 

Section 6A(b) of the Civil Law Act makes a guarantee unenforceable unless it is in writing. Other than this and the provisions outlined above in the case of corporate guarantees, there are no express statutory provisions which regulate the enforcement of guarantees. Guarantees are enforced in Singapore law as ordinary contracts, subject to the intervention of equitable principles for the protection of sureties.

(f) Is it easy or difficult in practice to enforce guarantee obligations?

 

It is relatively easy to enforce guarantee obligations. In a straightforward case, a creditor is usually able to obtain judgment without a trial within 8 to 10 weeks of commencing proceedings. All that the creditor need show is that the guarantee is valid and that the conditions precedent to the guarantor's liability have been satisfied.

(g) Is it usual to require that a guarantor should give security over the property of the guarantor as an additional comfort to the lender?

 

No.

(h) Does the insolvency of a corporate borrower have any effect on the enforcement of a guarantee?

 

No. A guarantee remains enforceable upon the insolvency of a corporate borrower who is the principal debtor.