South Africa: Parallel Debt Structures In South Africa

Last Updated: 23 November 2017
Article by Michael Denenga


Syndicated loan transactions are a common feature in the South African loan market. As the agreements underlying the transaction are often English law governed, a need arises to reconcile the diverging systems of law (and practices) between the UK, other jurisdictions and South Africa and, where that is not possible, to find alternative means of arriving at the same result so as to ensure consistency, predictability and commercial viability of such transactions. This is particularly true for the provision of security under the loan transaction.

Providing security in other jurisdictions

In the UK, a trust is used to hold security over the assets of a debtor for the benefit of the lenders in a syndicated loan transaction. The lenders (not as named individuals but as a category of persons) are then appointed beneficiaries of the trust. In practice, a specialised trust company is used for this purpose. Often, the security interest held by the security trustee originates from multiple jurisdictions. In jurisdictions where a trust is not commonly used or is wholly a foreign concept, a security agent is appointed to perform the same function as the security trustee. The security agent and security trustee are almost always the same entity.

Providing security to an entity separate from the lenders negates the need to establish and re-establish security every time the lenders change in the syndication. In addition, a trust is relatively simple to establish – and facilitates the commercial pressures associated with this type of loan effectively.

The challenges with the trust/agency structure in South Africa

At the heart of the matter is the fact that the English law security trust structure is not recognised under South African law. Therefore the structure cannot be used without variation. It is widely accepted that, in order for a person to provide security to another, there must be a primary obligation owed by the security provider to the other party – it is unlikely that provision of security to a party other than that which advanced the loans would be recognised as an acceptable arrangement under South African law.

In addition, there are legislative prohibitions to arrangements similar to those found in English law. Section 50(5) of the Deeds Registries Act, 47 of 1937 (Deeds Registries Act) provides that debts or obligations to more than one creditor arising from different causes may not be secured by one mortgage bond or notarial bond. Section 54 of the Deeds Registries Act provides that no mortgage bond or notarial bond shall be passed in favour of any person as the agent of a principal. Therefore, a borrower cannot provide a mortgage bond or notarial bond as security for debt obligations owed to multiple lenders and a borrower cannot provide security to the agent of the lenders – in this case, the security trustee/agent.

Various securitisation structures have been developed which seek to avoid the challenges associated with implementing the security trust/agent structure where a local borrower is involved, but which are still able to maintain the benefits of having an independent security holder.

Special purpose vehicles: patchwork solution

The use of a special purpose vehicle (SPV) as security holder and guarantor of a syndicated loan is common when a South African borrower is involved.

In simple terms, the security is structured as set out below:

  • An SPV and a trust are established.
  • The trust becomes the holder of shares in the SPV.
  • The SPV provides a guarantee to the security agent (acting on behalf of the lenders) for debts owed by the borrower to the lenders.
  • The borrower indemnifies the SPV for any payments which may be made pursuant to enforcement of a claim by the security agent. The borrower provides security to the SPV under the indemnity.
  • The trust would generally pledge its shares in the SPV to the security agent.

The benefit of the SPV structure is that it creates a result similar to that of the English law trust structure – a separate entity from the lenders which holds the security and allows for trading in the syndicated loan without affecting the security. In addition, this structure does not violate any established legal principles.

The SPV structure is not without its problems.

The structure is, relative to its English counterpart, complicated. The introduction of two further entities and a host of other agreements is a convoluted way to achieve securitisation in the transaction.

Setting up a trust and a company takes time – while establishing a company is a straightforward task, often taking approximately two weeks (even less in other circumstances), the establishment of a trust can take between six and eight weeks. Timing becomes crucial when closing looms and there is pressure to establish security.

As this structure takes time to put in place and looks different from the security trust structure, it is unfamiliar to foreign parties participating in the syndicated facility transaction. It may be challenging for the South African borrower to buy in from the foreign participants.

The SPV is a company which is subject to the Companies Act 71 of 2008. Issues such as corporate governance (normal considerations of a company such as the directors being obliged to act in the best interest of the company and not in the best interest of the security holder) must be given due regard. In addition, the SPV must be structured so as to avoid inadvertently incurring tax obligations.

Parallel debt structure

The parallel debt structure resolves the primary concern with the security trust/agent structure, namely the absence of a primary obligation upon which the borrower can validly provide security to the security trust/agent. This is resolved by creating an additional obligation on the borrower owed to the security agent.

The borrower and the security agent agree that the borrower has an additional debt obligation to the security agent, which exists alongside (in parallel to) the original debt owed by the borrower to the lenders. This is not an actual debt arising from an advance in monies by the security agent, but simply an acknowledgement of an obligation to pay the security agent amounts equalling the debts owed to the lenders. As the borrower pays the debt to the lenders, its obligation to the security agent is proportionately decreased, and vice versa.

As a legal obligation (through an acknowledgement of debt) has now been created, it is then possible to provide security in respect of such obligation to the security agent.

The main concern with the parallel debt structure is that it has not been tested by the South African courts. Therefore its validity in law remains uncertain. The structure has been received well in many other jurisdictions (such as France and Poland), where conscious and deliberate steps have been taken towards the recognition of parallel structures in local laws. Devoid of such certainty, there may be the risks that the regulators or courts take a view on the true nature of the structure, which may affect its usability. In South Africa, the general trend is to move towards using this structure, as it is simpler than the SPV structure, is expedient, and suits the commercial requirements of the participants in the transaction.

The author acknowledges and thanks Bontle Bopape for her contribution to the writing of this article.

Originally published October 31, 2017

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions