Lender and shareholder: one decree, two different losses

On one asset and one decree, two policies may exist covering different things, because the insured is not the same. The shareholder insures the value of an interest a state takes from it. The lender insures repayment of a debt the same decree makes improbable. Both undergo the same fact and do not have the same loss, and confusing the two positions is the costliest error in this chapter, because it produces covers that believe themselves complementary and leave a hole between them.

One must start from insurable interest, the notion governing everything else. The shareholder has an interest in the residual value of the business, that is in what remains after debts are paid, and its loss is measured by that value. The lender has an interest in being repaid on a schedule, and its loss is measured by missed instalments and by outstanding principal. On a heavily indebted company those two measures diverge to the point of contradiction: an asset whose going concern value has halved can destroy the value of the shares entirely without compromising debt service, and an intact asset whose currency can no longer leave the country can default to the lender without taking anything from the shareholder.

Attachment differs accordingly, and that is the second thing to hold. The shareholder's policy attaches on a qualified political fact, expropriation, violence, non transfer, with all the classification difficulty one knows. The lender's policy often attaches on a far simpler fact to establish, non payment of an instalment on its date, the political cause intervening only afterwards to check that the default falls within the covered perils. That difference is considerable in practice: establishing that an instalment went unpaid requires a bank statement, establishing that control was lost requires a chronology and months of investigation.

The timetable then creates a difficulty this module means to install, because it does not show on the documents and shows very clearly in cash. Shareholder policies almost always contain a waiting period, several months during which nothing is due, to let the situation unwind. A debt schedule knows no waiting: it falls on its date. On a non recourse financing, where lenders have no debtor but the project company, a default occurring during the shareholder policy's waiting period triggers the loan agreement's machinery, acceleration, enforcement of security, before the indemnity meant to save the business could be paid.

A third difference concerns what becomes of the asset after payment, and it decides who talks to the state. The indemnified lender transfers its claim to the insurer, which becomes a creditor of the project company or beneficiary of the security, and is therefore in a position to negotiate a rescheduling with the authorities. The indemnified shareholder transfers what remains of its rights over the shares, whose value depends on everything ranking ahead. It follows that on one file two subrogated insurers can face the state with opposing interests, one wanting a rapid agreement on the debt, the other a recognition of expropriation, and nothing organises their coordination unless they provided for it.

One must then look at who pays for these policies, because the answer explains behaviour that otherwise seems irrational. The lender's policy is almost always paid for by the borrower, that is by the project itself, as a condition of financing. The shareholder therefore funds cover of which it is not the beneficiary, and has a legitimate interest in it not duplicating its own. The useful discussion then bears on articulation: what the lender covers at first rank, what the shareholder covers beyond, and how to avoid the same euro of loss being insured twice while another is not insured at all.

One lender requirement deserves to be known because it surprises shareholders, that of the named beneficiary. Financiers frequently ask that the shareholder policy's indemnity be assigned to them, by pledge or by beneficiary clause, so that a sum meant to compensate the loss of the shares first repays the debt. The request is coherent from their standpoint and it empties the shareholder policy of its object if accepted without limit. This point is negotiable, it is negotiated badly once the loan agreement is signed, and it is among the rare subjects where the order of signatures decides the outcome.

What must be taken from this is to treat the two policies as one arrangement designed together, rather than as two successive purchases made by two different departments. Check that the two triggers cover the same list of perils, failing which a fact covered on one side will be excluded on the other. Compare the shareholder's waiting period with the lender's schedule, and bridge the gap with a liquidity line rather than hoping it will not appear. And settle in writing, before the financing is signed, how far the shareholder indemnity may be applied to the debt.