Philippines – Mortgage Trust Indenture: To Share Or Not To Share.

10 August 2021
 

Sharing is a virtue taught to us from a young age, for it teaches us to be generous and selfless. From an efficiency or even a business standpoint, it allows one to enjoy the privileges and benefits accorded to others in relation to a finite resource, like the enjoyment of communal spaces in a condominium or the privilege to access the same set of content in a subscription-based content-streaming platform, such as Netflix.
 

In a financial, more sophisticated setting, sharing works, too. A debtor can maximize his pool of assets by getting his/her other creditors to share in the security while being given access to more funding sources.
 

In simple terms, a mortgage trust indenture (MTI) is all about sharing and providing structure to such sharing arrangement. MTI is a mortgage sharing agreement among creditors sharing a common security from a borrower.
 

It is also a service commonly provided by a bank’s trust department where the latter is appointed and acts as a trustee, a “middle man” between the creditors and the company. It commonly includes safekeeping and administration of the security during the lifetime of the loan and seeking additional funding for its client. Usually, this involves the facilitation of a syndication of loan for the client in the form of an MTI on certain identified assets of the borrower, such as land, building and equipment.
 

For the transaction to proceed, any existing secured creditor must express willingness to share the loan collateral which would be part of the collateral for the syndicated loan from the other banks.
 

In the case of Gateway Electronics Corporation vs Land Bank of the Philippines (G.R. Nos. 155217 & 156393, 30 July 2003), the respondent bank granted a loan to petitioners secured by two parcels of land. The bank offered to assist petitioner in securing additional funding for petition through its investment banking services, which offer petitioner accepted. The bank then prepared an Information Memorandum which it disseminated to various banks to attract them into providing additional funding for petitioner. The Information Memorandum stated that the security for the proposed loan syndication secured by the assets of petitioner, and respondent bank document its willingness to share the loan collateral in respondent bank’s favor as part of the collateral for the syndicated loan from the other banks. This was confirmed in a Memorandum of Undertaking among them.
 

But subsequently, respondent bank was unable to agree with petitioner on the valuation of the assets, prompting the creditors to propose that a Joint Real Estate Mortgage (JREM) be executed by the creditors as the new mode to secure petitioner’s respective loans in relation to the common collaterals. Under the proposed JREM, the loan granted by respondent bank will be secured up to 94.42 percent of the loan value, while the loans granted by the other creditors would be secured up to 75.22 percent. This was unacceptable to respondent bank which wanted 100 percent of its loan exposure is secured, pursuant to the Loan Agreement it executed with petitioner.
 

The Supreme Court found that the respondent bank is indeed bound to share the properties mortgaged to it by respondent with the other creditor banks in the loan syndication. The bank is bound by a perfected contract to share petitioner’s collateral with the participating banks in the loan syndication as evident from the exchange of communications among the parties and the execution of a Memorandum of Understanding among them, including the respondent bank.
 

But while the respondent bank can be compelled to comply with its obligation to share with the other participating banks of the loan syndication the properties mortgaged to it by petitioner and to execute the necessary contract that would implement said collateral sharing, it cannot be compelled to accede to the terms of a still non-existent MTI and/or JREM, as the petitioner and the creditors have yet to finalize the same.
 

Since MTI is a multiple-party contract, negotiations can be ardent and tedious. But if done right, an MTI can be a win-win solution for all parties, debtor and creditors alike.