4.3. FACTSHEET-CHARGE ON ASSET

A charge on asset may take the form of a charge on premises (i.e. real estate) or other assets owned by an operator.

A charge on premises may take the form of a first ranking mortgage/fixed charge over a specific piece of land or real estate in favour of the regulator. While the land/real estate remains in the possession of the operator, the regulator will have the legal right to enforce their security over the asset and exercise their power of sale in respect of it if the operator fails to meet its obligations to the regulator or there is any other ‘event of default’ under the charge. This could, for example, include operator insolvency or dissolution under domestic law.

A charge on assets may be used as financial provision for an operator’s foreseen liabilities as well as liabilities arising from an unforeseen incident that causes environmental damage.

ADVANTAGES

DISADVANTAGES

✓ As a fixed charge holder in respect of the asset, the regulator will be paid in priority to the operator’s other creditors if the operator is wound up following its having become insolvent. The funds secured by the charge are, therefore, legally ‘secure’ in the event of the operator’s insolvency or dissolution.

✓ A charge has the capacity to release capital from an illiquid asset (i.e. real estate) to use as evidence of financial provision while enabling the operator to continue using the asset.

✓ Does not oblige the operator to set aside funds, so does not tie up capital.

✓ Capacity to ensure that funds will be available to cover liabilities arising in the mid to long term.

✓ It may not be affected by negative changes in the operator’s financial viability.

✓ There is a potential for increase in the value of the asset.

X Where a regulator requires that the asset be unencumbered (that is, it must not have any other interests registered against it, such as a charge in favour of a lender) before it can be utilised as financial provision for known, foreseen liabilities, it is likely that the vast majority of commercial premises, particularly high-value city-centre office premises, will not be suitable for such a charge. Few such premises are likely to be ‘mortgage free’ in the sense that there is no earlier charge registered in favour of a lender.

X The associated asset is not available to the operator for ordinary commercial purposes (e.g. to raise debt finance from a lender).

X Real estate is an illiquid asset, meaning that it may take some time to sell and transfer legal ownership; therefore, delay in realising its value. This will be particularly the case for specialist assets for which the market may be small.

X There is potential for a reduction in the value of the asset due to decline in the overall real estate market and/or the market for that particular asset class/category. The asset could also decline in value due to local/national economic and political conditions.

X Prior charges will reduce the effectiveness of the charge.

Important considerations – financial institution guarantee

Basic considerations	The parent must be authorised to provide that financial provision in the jurisdiction. The parent must have sufficient financial strength for the amount of the potential liability. The parent must have the corporate legal capacity to enter into the agreement. The parent must not be reliant on the financial performance of the operator. Whether the financial provision provides for the estimated environmental liability. Whether the financial provision is payable to the regulator on demand. Whether the financial provision provides protection against insolvency or dissolution of the operator and is protected from inflation.
Documentation	The following documents are generally required: Legally binding financial provision document, details of the amount of cover and the cost profile, evidence of authorisation of the institution or parent to provide the financial provision and evidence of any supplementary cover required to cover gaps in the primary cover, guarantee, evidence of financial strength of the parent. Template documents can help ensure the key aspects are covered.
Documentation specification	Generally, the documents will specify the triggering event, that the regulator may make a demand in the case of a triggering event or insolvency or winding up, requirements in relation to reporting, notifications of cancellation/expiration and replacement and inflationary adjustment and specification that the regulator may require provision of alternative financial provision upon cancellation/expiration, that the regulator may make a demand on the parent and how the guarantee can be drawn down with reference to the cost profile of he operation.
Reporting and monitoring	This will include triggering events, developments that affect ability to ensure provision, withdrawals or demands, performance of the institution/fund/asset, environmental compliance, the level of the liability against the value of the financial provision, and (for foreseen liabilities) restoration progress reports, notification of cancellation, expiration, renewal or non-renewal and expiry dates, annual audited financial statements, notification if the parent is likely to no longer meet specified financial criteria, progress on cost profiles and restoration and expiry dates of the financial provision.
Enforcement	A demand will be made on the financial provision if the triggering event arises. The regulator may need to take enforcement action in the event of declining financial health, value or performance or where the required reporting is not provided. The regulator will need to make sure that the financial provision is maintained/renewed/acceptable or require a replacement financial provision and may need to act in the case of declining financial health of the parent.