Negative Pledge and Multilateral Lending Solange M. Martin Counsel ABA Spring Meetings 2009

2 BASIC CLAUSE STRUCTURE A typical negative pledge clause reads as follows: The borrower will not create or permit to exist any security on its property, revenues or other assets, present or future, or those of its subsidiaries. A variation to this basic structure often contains a carve-out to capture a situation in which: The obligations of the borrower under the loan are equally and ratably secured with the obligations of the borrower with respect to other secured indebtedness.

3 RELEVANCE Project Financing Trade Financing Corporate Laws PURPOSE preserve the pari passu payment assumption made at the time of assessment of the financing avoid future subordination in payments arising from the borrower raising future secured financing

4 MAIN ELEMENTS OF THE CLAUSE Types of security or quasi-security arrangements covered by the restriction – tension between lender’s interest in broad coverage and Borrower’s ordinary course of business Entities covered by the contractual restricti on ISSUE: STRUCTURAL SUBORDINATION RELEVANCE: CORPORATE LOANS TO HOLDING COMPANIES EXCLUSIONS: governmental charges, trade activities, asset acquisition, after-acquired subsidiaries.

5 E F F E C T Contractual Undertaking Default : Contractual remedies : May a lender prevent a borrower or its subsidiaries from granting security in breach of a negative pledge? REQUESTS FOR PRELIMINARY INJUNCTION Grupo Mexicano de Desarrollo, S.A., v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999): DENIED AIG Insurance Company v. The Robert Plan Corporation, 851 N.Y.S.2d 56, 2007 N.Y. Misc. LEXIS 6579: DENIED Greylock Global Opportunity Master Fund v. Province of Mendoza, 2005 U.S. Dist. Lexis 1742, aff’d, 2006 U.S. App. LEXIS 1501 (2d Cir., Jan. 18, 2006): DENIED

6 MULTILATERAL FINANCING Developmental Financing Map of institutions providing developmental financin g IFC / MISSION Promote sustainable private sector investment in developing countries, thereby helping to reduce poverty and improve people’s lives

7 IFC’S INVESTMENTS Investments in private sector in emerging markets Diverse types of industries/sectors Diverse types of investment products  loans  equity and quasi-equity  risk management products IFC conducts its investment activities based on international market practices and conditions (i.e. market rates and without any government guarantees) Developmental Impact IFC’s policies on environmental and social standards

8 IFC’S FUNDING IFC funds its investment activities mainly by  Placing long-term debt securities in international financial markets  Making investments in private entities located in members’countries IFC mobilizes resources from international commercial lenders into projects in which IFC invests.

IFC’S B LENDERS PROGRAM Purpose Structure  IFC as lender of record  B lenders have recourse to IFC only under the Participation Agreement Rationale for B lenders:  IFC’s knowledge and experience in investing in emerging markets  IFC’s Aaa-rating (by Moody’s)  Privileges and immunities  Preferred creditor status. 9