Cross border financing and the choice of law
Luis Pedro Fuxet
Lexincorp
San Salvador
Luis Pedro Fuxet (Bio)
The increasing international and local investment activity throughout the Central American region has led local law firms to join forces with international outfits in order to provide clients with the best structures in order to achieve their goals (e.g. cross border acquisitions or international lending). In doing so, Multinational corporations sometimes require a certain level of financial support that is often too much for the local banking market to handle. It is usually in this and other similar situations where international banks come along bringing their financial muscle, and, more importantly, their knowledge and skills on how to design and implement these complex structures.
Historically large international bank syndicating loans with both local and international players were rare. We, as lawyers, were instructed to comment on those never ending loan agreements and the choice of law was never questioned as it was perceived that New York law and the courts provided the most efficient knowledge and expertise on international lending.
However However as our market has opened up to international syndicated lending, these operations have grown and therefore local lawyers have been giving a lot more consideration to this matter. The question of which is the best jurisdiction to use therefore is a common issue.
There is no doubt that there are certain jurisdictions that provide an efficient way to structure syndicated lending. We have seen more parties trusting their affairs to the New York law and courts and there are good reasons, as both provide a safe harbour for parties looking for impartiality, banking knowledge and efficient procedures. The problem arises when a second jurisdiction is involved, particularly in our region where civil law rules and courts have less expertise on complex finance structures in order to perfect the execution of collateral.
Let me give you an example. A company in France is buying a company in Guatemala from its current Brazilian owner. An American bank is willing to lead a syndicate of international banks in order to finance the acquisition. At first sight, everyone might agree that given the complex structure, New York law is the best option for the transaction. The loan documents can be deeply and carefully covered and the collateral can be drawn from the Guatemalan company. However, if after closing something goes wrong with the facility and the syndicate of banks moves to execute the collateral, they realise that any resolution by a New York court on the execution of a collateral will need to be enforced by a local judge in Guatemala. The legal framework here, as in the rest of the Central American region provides the debtor with the chance to look for injunctions, reliefs and whatever remedy is at hand in order to ensure that the due process has been protected. This can result in legal battles that result in a delay in the execution of collateral.