Glossary
Parallel debt
Parallel debt is a separate claim of the security agent against the borrower, equal to what the borrower owes the lenders, which allows the agent to hold the security in its own name.
Definition
Parallel debt is a separate claim that the borrower and each guarantor acknowledge owing to the security agent, mirroring each of their obligations to the lenders. The mechanism comes from international syndicated financings governed by English law, New York law or another foreign law, where part of the security covers French assets. Before 1 October 2017, French law offered no reliable framework for an agent to hold security for the benefit of creditors whose claim it does not share. By becoming itself the creditor of the parallel debt, the agent received the French security in its own name. The contract provides that any payment to the lenders reduces the parallel debt by the same amount, and that any payment to the agent reduces the debt owed to the lenders by the same amount. In the Belvédère judgment of 13 September 2011, the Cour de cassation (French Supreme Court) recognised parallel debt created under a foreign law that admits it, and the agent’s right to file its claim in the insolvency proceedings, provided the debtor runs no risk of paying the same debt twice. The mechanism cannot serve as a source of obligations in a credit agreement governed by French law. It exposes the lenders to the insolvency risk of the agent, which holds the parallel claim. Articles 2488-6 to 2488-12 of the French Civil Code now allow the appointment of a security agent that holds the security in a ring-fenced estate, protected from its own insolvency. A French law clause appointing this agent can be included in an intercreditor agreement governed by foreign law.
Worked example
A European group borrows €250m from six funds under an English law agreement. Its French subsidiary pledges its bank accounts. The agreement creates a parallel debt of €250m owed to the agent. The French pledge secures this debt. When the group repays €50m to the funds, the parallel debt falls by €50m. In a financing signed today, a clause appointing the agent under article 2488-6 of the French Civil Code performs the same function for the French security.
Points to check
- Check the law governing the parallel debt: it must admit this mechanism without ambiguity.
- Review the allocation clause that reduces the parallel debt by the amount of each payment to the lenders.
- Ask whether appointing a security agent under article 2488-6 of the French Civil Code replaces the parallel debt for the French security.
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