A security package is the set of liens, pledges, and control rights a lender takes to secure a loan and steer the outcome if trouble shows up. A guarantee is a promise by affiliates to pay the borrower’s debt, pulling more balance sheets inside the fence. Together, they dictate who gets paid, how fast, and with how much certainty – often more than headline leverage or pricing.
Viewed through the recovery lens, strong collateral plus broad guarantees shrink expected loss and speed time to cash. That is why the best time to secure outcomes is not during a workout, but at term sheet and drafting time when parties can still align on coverage, control, and enforcement paths.
Why Security Packages and Guarantees Decide Recoveries
Security packages and guarantees aim for three things: reliable collateral value, quick enforcement, and a tight grip on cash and asset movements. The package defines the breadth of liens and pledges; guarantees extend recourse across the group and backstop structural leakage. Drafting choices – not term sheets – decide priority, timelines, and recoveries (impact: recovery rates and time-to-cash).
Put simply, structure beats pricing when stress hits. If liens do not cover the valuable assets or guarantees are thin, the waterfall will not deliver the mode-case model. Tight documents keep value inside and shorten the path to monetization.
Core Collateral and Control Building Blocks
- Borrower lien: All present and after-acquired personal property under U.S. UCC categories, agreed real property, and proceeds (impact: broad coverage, lower slippage).
- Equity pledge: 100% of equity in operating subsidiaries, subject to foreign tax carve-outs (impact: faster change-of-control path).
- Subsidiary guarantees: Joint and several guarantees from wholly owned domestic Material Subsidiaries set by revenue or asset tests, with carve-outs for non-wholly owned, immaterial, or regulated entities (impact: reduces structural subordination).
- Cash control: Deposit account control agreements with springing dominion on objective triggers (impact: shortens enforcement runway).
- IP and receivables: Registry filings and notices to perfect and limit anti-assignment friction where law allows (impact: improves collectability).
- Negative pledge and restricted payments: Covenants that block leakage to unrestricted subsidiaries or structurally senior debt baskets (impact: reduces migration risk).
- Intercreditor/AAL: Priority and enforcement rules for unitranche, first or second lien, or split-collateral ABL or term structures (impact: prevents value-destructive timing fights).
What a Security Package Is Not: No True Sale
This is not securitization or true sale. Assets stay on the borrower’s balance sheet. The lender relies on Article 9-style security interests in the U.S., fixed and floating charges in the UK, and local-law pledges in Europe. Packages must fit with existing liens, intercreditor terms, and regulatory lines (impact: enforceability and ranking certainty).
How Sponsors, Lenders, and Agents Align
Sponsors want room to invest and move assets. Lenders price to expected loss and want dominion and clean enforcement paths. The agent wants collateral it can administer with cost recovery for perfection and monitoring. Aligning those aims upfront lowers amendment friction later (impact: lower renegotiation cost and timing risk).
A practical method is to agree objective triggers and measurable coverage tests early, then map precise perfection steps. That approach makes the covenant package and cash controls credible without choking operations.
Jurisdictional Mechanics You Must Get Right
United States: Article 9 and Control Win Priority
Article 9 governs personal property. Perfection is mainly by filing a UCC-1 in the debtor’s state of organization; control is required or superior for deposit accounts, securities accounts, and letter-of-credit rights. Perfection by control outranks filing. UCC-1s run five years and must be continued before lapse (timing: tickler required). UCC sections 9-406 and 9-408 limit the bite of certain anti-assignment clauses for receivables and general intangibles. Real property needs mortgages or deeds of trust under state law (impact: taxes and title cost).
United Kingdom: Fixed Versus Floating Is About Real Control
A debenture grants fixed charges over controllable assets such as shares, IP, and blocked bank accounts, and a floating charge over circulating assets. Charges must be registered at Companies House within 21 days, or you risk priority loss. Fixed charge status hinges on actual control; weak control invites reclassification as floating on insolvency (impact: lower priority and preference exposure). Share charges require original certificates and signed stock transfers held in escrow.
Continental Europe: Local Formalities Drive Timing and Cost
Security is formalistic and asset-specific: share pledges, receivables pledges, account pledges, and assignments by way of security. Many jurisdictions require notarial deeds, registrations, and, sometimes, translations (impact: time and fees). Corporate benefit and financial assistance rules can limit upstream guarantees and share-charge enforcement, particularly in public company contexts. Property law follows lex situs, so engage local counsel asset by asset (impact: enforceability).
Common Exclusions and Practical Limits
Government permits, certain regulated licenses, and contracts barred from assignment may be limited to proceeds-only liens. Motor vehicles, aircraft, and vessels need title or specialized filings. Foreign subsidiary assets often sit out unless they are material and perfection is worth the cost (impact: model lower LGD on excluded pools).
Cash Control Triggers and Waterfalls
At closing, funds move through a controlled disbursement or borrower account with an executed but springing control agreement. Before a dominion trigger, the borrower operates accounts within agreed limits. On a trigger – covenant breach, non-payment, leverage or availability tests – the agent notifies the bank and sweeps cash daily per the waterfall (impact: rapid cash capture).
Waterfalls typically pay: agent fees and expenses, protective advances, accrued interest including PIK, scheduled principal and amortization, mandatory prepayments from asset sales or insurance, then voluntary prepayments and distributions. Intercreditor terms enforce turnover from juniors who receive proceeds outside agreed priority (impact: reduces leakage). In ABL frameworks, link liquidity controls to borrowing base health to preserve going-concern value. For more on borrowing base mechanics, see this overview of asset-based lending advances and reserves Asset-Based Lending: Borrowing Base Calculation.
Perfection Steps That Lock in Priority
United States: Filing, Control, Possession
- Filing: UCC-1 covering filing-perfected collateral in the correct jurisdiction with the exact charter name (impact: priority; errors are fatal).
- Control: DACAs for deposit accounts, control agreements with securities intermediaries, issuer acknowledgments for uncertificated equity, and possession for certificated equity (impact: first-in-line on cash and securities).
- Possession: Originals for notes, certificated securities, and negotiable instruments, and bailee letters for third-party-held goods (impact: priority).
- IP: Short-form recordations with USPTO or USCO; UCC filing still governs perfection but recordation protects against bona fide purchaser arguments (impact: notice).
- Real estate: Record mortgages or deeds of trust where justified and plan for mortgage taxes and title (impact: cost; plan early).
United Kingdom: Debenture and Registration Discipline
- Debenture: Tight controls to preserve fixed charges over cash, including blocked or restricted withdrawal mechanics.
- Registration: File MR01 within 21 days with certified copy and track negative pledge to catch future charges (impact: enforceability).
- Shares: Hold certificates and executed transfers and update company books (impact: speed on enforcement).
Europe: Local Notices and Acknowledgments
- Local perfection: Follow notarization, registration, and notice regimes; deliver debtor notices for receivables where needed (impact: third-party opposability).
- Bank accounts: Use local-law pledges with bank acknowledgments; U.S.-style control may not exist (impact: rely on acknowledgments and operational discipline).
Guarantee Scope, Risks, and Tax Points
Guarantees from wholly owned domestic material subsidiaries are standard, with exclusions for regulatory or tax constraints. Upstream and cross-stream guarantees carry constructive fraudulent transfer risk if value to the guarantor is thin; U.S. law allows avoidance under Bankruptcy Code sections 548 and 544(b) (impact: guarantee haircut risk). Mitigants include solvency reps, board-level corporate benefit findings, and savings clauses capping liability to what keeps the guarantor solvent.
Foreign guarantees and pledges need tax diligence. Legacy practice often limited pledges of CFC voting stock to 65% to address Internal Revenue Code section 956. Since 2019 regulations, many U.S. corporates can avoid adverse inclusions, enabling broader foreign support where tax counsel is comfortable (impact: more collateral, watch shareholder mix). Where corporate benefit or financial assistance rules restrict guarantees, consider keepwells, local limitations language, or springing guarantees tied to changes in law. In regulated sectors, upstream guarantees may be off-limits (impact: plan for share-pledge routes).
Documentation Map: Who Does What
- Credit agreement: Obligations, covenants, baskets, and events of default; collateral and guarantee terms.
- Security agreement or debenture: Grants liens, sets perfection steps, and lists pledged assets.
- Guaranty: Joint and several guarantees with limitations and release mechanics.
- Equity pledges: Borrower and subsidiary equity with delivery mechanics.
- Real estate mortgages: Local forms with title work as needed.
- DACAs or securities control: Establish control and sweep triggers.
- Intercreditor or AAL: Lien and payment priority, standstills, turnover, releases.
- Opinions and certificates: Solvency, officer certificates, filings, and registrations (impact: enforceability proof).
Sequence matters. Close with core perfection in hand, keep post-closing lists short and objective, and use fee ratchets if deadlines are missed (impact: certainty at funding).
Intercreditor Dynamics: Who Controls Enforcement
- First or second lien: First-lien controls collateral and enforcement until discharge; second-lien stands still, turns over proceeds, and has limited block rights (impact: senior control). For market norms, revisit how second-lien loans fit in sponsor deals.
- ABL or term split-lien: ABL holds first on working capital assets while term lenders hold first on fixed assets; borrowing base and dominion rules set liquidity (impact: going-concern preservation). See direct lending in private credit for context on how lenders calibrate these controls.
- Unitranche: An AAL slices first-out and last-out economics and voting inside one agreement. First-out gets priority and tighter consent rights; last-out accepts longer standstills and relies on drag-along (impact: simplicity with embedded complexity). For structures and roles, compare typical unitranche loans.
Clarity in intercreditor agreements prevents timing fights and protects cash capture when it matters.
Economics and Ongoing Costs
- Filings and recordings: U.S. UCC fees are modest; real estate can be costly. New York mortgage taxes can reach roughly 2 to 2.8% of principal in some counties (impact: collateral selection).
- Agents and custody: Annual agent and account bank fees for control and sweeps (impact: recurring).
- Local counsel and notaries: Civil-law steps add time and expense (impact: closing timeline).
- Valuation and monitoring: ABL components require field exams and appraisals (impact: ongoing OpEx). Borrower typically pays; fee letters should cover remediation and intercreditor work, with tax and fee gross-ups to preserve net recoveries.
Accounting, Valuation, and Reporting Signals
Borrowers book secured debt with collateral and guarantee disclosures under U.S. GAAP or IFRS; SEC filers apply the simplified subsidiary guarantee regime under Regulation S-X Rules 13-01 and 13-02. For lenders, strong collateral and control can lower expected loss and discount rate inputs under ASC 820 and CECL or IFRS 9 (impact: fair value and reserves). Covenant reporting should track guarantor coverage, materiality thresholds, and permitted liens (impact: early warning). For a refresher on real-world covenant types, see financial covenants.
Tax Issues That Change the Collateral Math
Price related-party guarantee fees with transfer pricing support; some jurisdictions impose withholding on guarantee fees (impact: cash cost). Security interests and mortgages can trigger stamp or registration taxes; structure share pledges to avoid avoidable stamp duty. Revisit section 956 exposure for foreign pledges or guarantees in light of 2019 regulations, especially where investors include non-corporates (impact: scope of foreign support).
Compliance Checks You Must Clear
Confirm beneficial owners and controllers across borrower and guarantors. U.S. Corporate Transparency Act filings now matter for many entities; lenders increasingly require evidence of timely submissions (impact: closing condition). KYC and AML extend to pledgors and operating subs; screen account banks and securities intermediaries for sanctions. In regulated sectors such as healthcare, defense, telecom, and energy, validate collateral realism and enforcement paths early, including foreign investment and national security reviews (impact: feasibility).
Key Risks and Edge Cases to Underwrite
- Structural subordination: Value outside the guarantor or collateral net reduces recoveries; test guarantor coverage and EBITDA location (impact: LGD).
- Fraudulent transfer and preference: Late-stage liens and thin upstream guarantees face avoidance risk under Bankruptcy Code sections 547, 548, and 544(b) (impact: haircut risk).
- Anti-assignment limits: UCC overrides help, but government receivables, insurance, and certain licenses resist assignment (impact: realizations).
- Cash-control slippage: Weak DACAs, carve-outs, and operational workarounds erode dominion (impact: timing and leakage).
- Priority errors: Misfiled UCCs, missed UK 21-day registrations, or skipped notarizations void or subordinate liens (impact: recoveries).
- Intercreditor leakage: Loose standstills and ambiguous defaults undermine senior control (impact: enforcement timing).
- Asset migration: IP or contract transfers to unrestricted subs if baskets are loose (impact: collateral dilution).
- Digital assets: UCC Article 12 introduces control for controllable electronic records; update forms where tokenized assets matter (impact: priority).
Alternatives and When to Use Them
- ABL-first vs term-first: ABL-first protects liquidity; term-first preserves broad priority (impact: capital structure fit).
- Unitranche vs split-lien: Unitranche streamlines execution; split-lien gives public clarity at higher complexity and cost (impact: documentation load). Read a market overview on unitranche loans.
- Negative pledge only: Quick and cheap but vulnerable to priming; workable only for small holdco pieces or short bridges (impact: recovery risk).
- Share-pledge-only: Useful where operating liens are impractical; relies on change-of-control enforcement (impact: timing and leakage).
- Holdco PIK notes: Consider where operating-company liens are constrained; they sit above senior lenders but require careful intercreditor design (impact: governance). See typical structures for holdco PIK notes.
- Mezzanine debt: Fills capital gaps with subordinated risk, often with warrants; documentation must sync with senior controls (impact: blended cost). Learn how mezzanine debt is structured.
Execution Timeline and Ownership
- Week 0 to 1: Term sheet sets collateral scope, guarantor coverage, cash triggers, and intercreditor frame; flag tax and local constraints.
- Week 1 to 3: Collateral diligence, UCC or judgment searches, IP or real estate schedules, account mapping, anti-assignment review, org charts; scope local counsel.
- Week 2 to 4: Draft and negotiate credit, security, guaranty, intercreditor or AAL, and control agreements; prepare filing packages.
- Week 3 to 5: Execute DACAs and securities control; collect share certificates and transfer forms; ready mortgages and title; board approvals and solvency certificates.
- Week 4 to 6: Sign and fund; file UCC-1s on day one; submit MR01 within 21 days; complete local registrations or notarizations; lock post-closing with short fuses and fee ratchets (impact: close certainty).
Drafting Principles That Age Well
Define Collateral and Excluded Assets precisely. Tie Material Subsidiary tests to GAAP or IFRS metrics and test quarterly. Require new subs to join quickly with clear perfection steps. Make cash dominion triggers objective and specify bank obligations. Align UK fixed-charge procedures to show control. Make guarantee releases symmetrical and automatic on permitted sales or de minimis status. Keep intercreditor terms consistent with collateral mechanics: standstills that allow protective advances and sweeps, self-executing turnover, and senior release rights for permitted sales (impact: fewer amendment fights).
Enforcement Paths That Preserve Value
Speed and value preservation come from collateral selection and control. Article 9 sales require commercial reasonableness; if value sits in the going concern, a share pledge plus management continuity or a prepack often beats piecemeal sales (impact: higher proceeds). In the UK, administrators appointed under a qualifying floating charge are the norm; fixed charge receivers handle discrete assets like real estate. On the continent, court-driven paths are slower; share pledges and consensual restructurings help preserve value (impact: timeline and fees). Map transfer restrictions, change-of-control consents, and local employment consultations at closing; do not discover them during a default (impact: months saved).
A Simple 3C Scorecard for Security Packages
To add discipline, rate each deal on a 10-point scale across three Cs and revisit quarterly:
- Coverage: How much of enterprise value and EBITDA sits inside the collateral and guarantor net? Score 10 if all material assets and subs are covered with narrow exclusions.
- Control: How tight are cash dominion, account mapping, and intercreditor standstills in practice? Score 10 if control reaches operating cash, securities, and receivables from day one with objective triggers.
- Clarity: How clear and self-executing are perfection steps, turnover, releases, and enforcement rights? Score 10 if documents eliminate ambiguity and cut time to cash.
As a rule of thumb, a 24-plus total usually signals low leakage risk. Scores under 18 warn of slow enforcement and haircut risk even at modest leverage.
What Good Looks Like Today
- All-assets lien: Perfected control over cash and securities accounts from the start.
- Broad pledges and guarantees: Equity pledges and guarantees from all material subs, narrow exclusions, and springing joinders for new subs.
- Tight leakage blockers: Objective grower baskets tied to leverage and clear migration guards.
- Predictable intercreditor: Standstills and turnover that match expected enforcement, including consistent AALs in unitranche deals.
- Cross-border plan: Costed local perfection with opinions and realistic steps.
- Administration discipline: Short, enforceable post-closing lists and automated ticklers for UCC continuations and UK 21-day windows.
When cycles turn, cash control and a credible enforcement plan decide outcomes. Get those right, and a quarter turn of leverage either way matters a lot less. For practitioners building programs across markets, understanding private credit market trends helps calibrate where to push for coverage or control in the next deal.
Key Takeaway
Security packages and guarantees drive recoveries more than pricing does. Favor broad coverage, first-priority control over cash, and crisp intercreditor rules. Then test the result with a simple scorecard so you can act early if coverage, control, or clarity drifts.