a document that provides lenders security on a predefined asset or property assigned to the loan in case of default.
Security Agreement Details
Businesses and people need money to finance their day-to-day activities. Lenders require more than good words and interest payments to provide a loan to consumers. This is where security agreements enter the picture; these important documents are drawn up between the two parties at the loan disbursement time. Security agreements contain agreements outlining clauses for the progression of funds, a repayment plan, or insurance requirements. Security agreements can also relate to intangible assets such as copyrights or receivables.
When a loan is written the terms and conditions of the agreement are set. Most terms of a security agreement include collateral to pay back the loan in case of default. Property that may be described as collateral under a security agreement consists of the inventory of goods, furniture, equipment used by a company, fixtures, and real estate owned by the company. In default, the borrower is responsible for maintaining the collateral in a good working condition. Property outlined as collateral should not be removed from the premises unless the property is needed during the normal course of business. Most people are familiar with a home mortgage or car loan that requires their new home or new car to be seen as collateral should they fail to meet the loan's set terms.
When a loan is in default, the security agreement begins to protect the lender. The borrower may have limited choices for providing sufficient collateral that will appease the lender. Regardless, the lender liquidates the predefined collateral to unlock its value and compensate for its losses. The most common type of default happens on car and home loans; these collaterals items are quickly repossessed and sold once again to keep the money as liquid as possible for lenders.
Real-Life Example of Security Agreement
Horsehead Holding's share prices fell after the disturbed Robinson Zinc producer claimed that the lenders had given it a financial windfall. This happened when the company was attempting to negotiate a restructuring agreement with board members and find possible funding sources.
PNC Bank and Macquarie Bank informed Horsehead Holding that the company had defaulted on loan agreements based on its securities filing. But the banks have offered to grant the company more time to come up with creative financing. Horsehead Holding said they employed investment banker Lazard Middle Market to improve things during the restructuring. ''The company is unable to determine the outcome of these or any potential discussions and its evaluation of its numerous options," the company said in the filing.
Horsehead Holding revealed a 30-day grace period for a $1.9 million interest payment on convertible notes due on January 4. The grace period officially ended on February 3, the company said. There are reports that the company took advantage of the grace period to reduce Horsehead Holding shares in half. Falling zinc prices and start-up issues marred Horsehead Holding at its zinc smelter in Mooresboro, North Carolina.